Monopolies and Oligopolies

A great example of an anti competitive business practice, and a major reason for the enactment of the Sherman Antitrust Act over a century ago, is a firm that controls a monopoly on the product it sells. In short, this basically means that the firm is the only provider of a certain product or service, and therefore can control the price of the product or service as it wishes free from price competition with other firms. Oligopolies, which consist of a small number of large competing firms that control prices, present essentially the same problem to competitive markets. The existence of a monopoly or oligopoly is not in itself a violation of the Sherman Act. How the monopoly or oligopoly was formed, however, has often been the basis of successful criminal antitrust prosecutions.

Monopolies are not inherently illegal. This is because there are many ways in which a firm can grow and expand legitimately to become the dominating force in a given industry. Basically, it is not a firm’s fault that they have no competition unless they caused that result by means of anti competitive behavior. If the market dominance results merely from superior product offering or cost structure, then no violation will be found. If, however, the monopoly is the result of collusive or anti competitive business practices such as market allocation, then the existence of the monopoly will provide a solid basis for prosecution of the alleged violation of the Sherman Antitrust Act.

For example, Microsoft Corporation long controlled an effective monopoly on computer operating systems. However, they have successfully defended against allegations of antitrust violations on numerous occasions in the company’s history. Their defense, time after time, can be characterized as the “innocent monopoly” defense. This is to say that their monopoly on computer operating systems results from their successful innovations in the market, which no competitor has been able to match or top. If, however, the monopoly was the result of Microsoft paying rival firms for their trade secrets, or simply paying them to stay out of the market in general, then an antitrust violation could easily be found.

Oligopolies are much more common than monopolies. A few large firms tend to dominate almost any given industry, and the reasons are most often perfectly legitimate. A successful firm that is running a profitable operation will grow and expand over time, acquiring smaller rival firms and innovating on its product design to lower costs and make it harder and harder for new market entrants to compete with them.

Oligopolies are ripe with opportunities for anti competitive business practices, however. For example, if a few large firms collectively control the copper industry, this means that through their independent pricing strategies they effectively set the price of copper for the market. If they collude and conspire to set a fixed price, reduce total industry output, or divide up their market amongst themselves, then they violate the Sherman Antitrust Act. Their customers, in need of copper, would have nowhere else to turn to fill their demand even if they doubled the price of copper. In the absence of market competition, the suppliers can name their price. By teaming up with their competitors, they are able to eliminate competition. And because this is an extremely illegal thing to do, they are likely to take steps to ensure that the industry figures appear normal and consistent with free market competition. This could include any number of practices, such as taking turns being the low cost provider, or staggering the pricing to make one firm the manufacturer of “cheap” copper and the other the manufacturer of “premium” copper. Any time rival firms collude to reduce the competition they have to deal with in the market, an antitrust violation can be found. In the case of an oligopoly, the elimination of competition is almost total, and therefore much more effective and damaging to consumers.