What Makes Something a Monopoly?

Is Google a monopoly? No. What about the National Association of Realtors—does it deserve this moniker? Certainly not. Did monopoly status ever fit Rockefeller’s Standard Oil of New Jersey? Not at all. How about IBM during its years-long antitrust case? Fuhgeddaboudit. Is monogamous marriage a monopoly? You’ve got to be kidding.

Is the US Post Office a monopoly? Yes. Is the American Medical Association a monopoly? You bet your boots it is. Is the New York City yellow cab taxi medallion system a monopoly? This cannot be denied. When the British ran India, they prohibited anyone else from mining salt from the ocean. Was that a monopoly? Of course it was.

What is going on here? What is going on here is that there are two very, very different types of businesses taking place. They are both characterized in the same manner—as monopolies—despite these gigantic differences. They are as alike as chalk and cheese, as fish and bicycles, as oil and water. We do exceedingly well to distinguish between them. One description is entirely legitimate; the other is a snare and a delusion.

Let us start with the sensible, accurate, historical definition. Traditionally, a monopoly was a grant of special privilege, given by the ruler of the country. It allowed one and only one person, or company, to provide a given product in a limited geographical area. The Duke of London fought the good fight in the battle, and was awarded the monopoly of candle making in that city by the King of England. Or the Count of Monte Cristo did something similar, and the King of France decreed that no one but this nobleman could legally produce wine in that area of the country. Any other person who provided these goods in those areas was headed toward the hoosegow (unless he first purchased permission from the owner of the monopoly).

These are made-up examples of course, but they help answer the question of why the list in the first paragraph are not monopolies, while any of those mentioned afterward are. Will anyone competing with Google, IBM, Standard Oil, etc. be imprisoned? Don’t be silly, of course not. So none of these is a monopolist. However, if you drive a cab in the Big Apple or practice medicine without a license or deliver First-Class Mail for a fee, that will be your fate. The prison walls will be opening to accept you as a guest.

What about marriage? Will you be jailed if you seek and obtain a divorce? Not at all. Thus, there is no real monopoly herein. Move along, there is nothing to see here, monopoly-wise.

A second type of “monopoly” is very different. Here, we look not to legal prohibitions but rather at concentration ratios. IBM at one time was responsible for virtually all computers (strictly speaking, that was an oligopoly, since the 100% level was not attained); ditto for Standard Oil for almost all of this product; Google is now in a similar position, it is claimed. So they are all “monopolists” in this misleading sense of the word.

Right now, McDonald’s is very successful, but merely one of many purveyors of fast food. But suppose that one day this company beats out all of its competitors such as Burger King, Wendy’s, Sonic, Jack in the Box, Carl’s, Steak ’n Shake, etc. with lower prices, a better-tasting burger, and cleaner restrooms. Ronald McDonald is certainly not a monopolist, in the anti-market sense. No one would go to jail for continuing to compete with this now-colossus of burgers. But this company is certainly a “monopoly” in the sense that is compatible with free enterprise. They account for 100% of this industry. Ronald, more accurately, should be called a single-seller, not a monopolist.

There is more wrong with misusing the word monopoly than you can shake a stick at. What, pray tell, is an “industry”? Fast food competes with groceries and upscale restaurants. It also vies for the consumer dollar with the sellers of motorcycles, violins, sailboats, and shoes. The consumer can spend his money on anything under the sun that is for sale.

Monogamous marriage would also have to be characterized as a “monopoly” if we follow the “logic” of this definition to its ultimate end. For each spouse relies on the other to a 100% degree for certain limited “services.” Let us sic the antitrust authorities on such folk. They have been thus far derelict in their duty to promote “competition” in this regard. If these bureaucrats can prohibit mergers—can punish companies for successfully satisfying consumers—they should ban all such marriages too.

There is good and sufficient reason to end all monopolies that are special grants of government privilege. There is no case for not allowing competition in postal, sanitation, taxi, and fire protection services. Milton Friedman in his Capitalism and Freedom demonstrates that this applies even to physicians: they should be certified, like CPAs, not monopoly-licensed.

Further, antitrust is exceedingly expensive. There are numerous highly paid and thus very productive lawyers, accountants, economists—on both sides of every such lawsuit—who could be far better employed producing actual goods and services.

But what about the “deadweight loss” of the economist? This is a figment of his imagination. It is an exercise in dreaming about invalid interpersonal comparisons of utility. Tell it to happily married monogamous spouses that they would be economically better off if they spread their wings a bit.

Then, there is the critique concerning collusion. Here is a response. First of all, “I’m firm, you’re stubborn, he’s a pig-headed fool” can describe the identical substantive behavior, but places three widely dispersed evaluations on it (this is known as Russell Conjugation). Similarly, I cooperate, you plot, he colludes; this, in like manner, merely engages in name-calling. There is nothing substantive gained in calling cooperation collusion. Secondly, the legitimacy of the collusion/cooperation all depends upon what the goal is of all this planning. Is it to try to become a monopolist by legislatively banning competition? Then, yes, the collusion is illicit.

Or is it to increase the plotter’s concentration ratio within the “industry” by becoming more efficient and wooing away competitors’ customers via lower prices, a better product, and more reliability? Then matters are well and good, and this goes for all the “collusion” in the world.

This piece originally was published by the Foundation for Economic Education.