When a firm is the only seller or supplier of a good or a service for which there is no close substitute, it is referred to as a monopoly. Broadly speaking, every firm would naturally like to have a monopoly given that monopolies do not face competition. However, monopolists can only succeed in a market situation where the barriers to entry are very high (Brue & McConnell, 2007; Baumo & Blinder, 2008; Miller, 2011; Hubbard & O'Brien, 2008). As was reported in Hubbard & O'Brien (2008), there are four instances where the barriers to entry can be high enough to keep out competing firms:
The entry of more than one firm into a market is blocked by the government;
One firm has a natural monopoly due to the fact that the economies of scale are very large;
The key resources needed to produce a good or a service are under the control of one firm; and
The supply of a good or a service requires important network externalities.
In the following sections I will present and discuss the legislations and policies that regulate monopolies. In addition, I will critically examine the electronic media sector in the United States, which is a sector that was dominated by the monopolists. I will also discuss the disadvantages and the effects of monopolistic competition on the welfare of the consumers by using AT & T/T-Mobile proposed merger as a case study.
Policies and Legislations for Regulating Monopolies
Broadly speaking, it is only when the market is closed to entry in some way that any amount of monopoly power can continue to exist in the long run. In some situations, the government may come into the picture with the intention of regulating monopolies (Brue & McConnell, 2007; Baumo & Blinder, 2008). Some of the strategies the use in this regard include patents, antitrust policies, licenses, franchises, and certificates of convenience.
Patent is a way of providing protection to an inventor's work to ensure that such inventions are not copied or stolen by others (Miller, 2011). Usually a patent last for a period of 20 years. To better understand how a patent work, it is useful to provide a hypothetical example.
If the engineers working in an automotive firm ( say, General Motors) builds an engine that does not only require half the parts of the regular engine but also weighs only half as much, the company may obtain a patent on this discovery in order to prevent their competitors from copying them. If the company succeeds in obtaining a patent, it will become monopoly privileges. However, defending this patent is the responsibility of the patent holder -- which, in this case, is General Motors. The implication of this is that, General Motors must prevent other competitors from imitating its invention by expending resources. It is sufficient to note at this juncture that the patent may not bestow any monopoly power to General Motors if the costs of enforcing the patent are greater than the benefits.
Antitrust Laws and Antitrust Enforcement
In the United States, the first important law regulating monopolies is the Sherman Act of 1890. The aim of the Sherman Act is to promote competition in addition to prevent the formation of monopolies. Just how effective this act can be in regulating monopoly is illustrated by the provision of section 2 of the act. According to this section, a person will be guilty of a felony when s/he monopolize or attempt to monopolize any part of trade or commerce (Hubbard & O'Brien, 2008; Miller, 2011).
It may be stated here that firms in several industries who combined together during the 1870s and 1880s to form trusts were the main target of the Sherman Act. Broadly speaking, even though in such trusts the participating firms operate independently, they normally give voting control to a board of trustees. Under this arrangement, the main responsibility of the board is to enforce agreement for the firms -- an agreement that ensures that they not only charge the same price but also are discouraged from competing for each other's customers. The Standard Oil Trust, which was organized by John D. Rockefeller, was one of the most notorious trusts in U.S. history. It is important to state here that trusts disappeared after the Sherman Act was passed even though the term antitrust laws is still being used to describe those laws whose goals are to eliminate collusion and promote competition among firms (Brue & McConnell, 2007; Baumo & Blinder, 2008; Miller, 2011; Hubbard & O'Brien, 2008).
The Sherman Act, however, have some shortcomings. For instance, the act left several loopholes even though it prohibited trusts and collusive agreements. To provide a more direct insight into this issue, it will be necessary to mention one practical instance. When two or more firms merge to form new, larger firms, they can have substantial market power. However, it is not clear whether or not such a merger arrangement is legal under the Sherman Act. Hence in the turn of the 20th century, there was a wave of mergers because a series of Supreme Court decisions interpreted the Sherman Act narrowly. The U.S. Steel Corporation was one of the mergers that were formed from dozens of smaller companies. This corporation alone controlled as much as 67% of steel production in United States (Hubbard & O'Brien, 2008).
The Federal Trade Commission Act and the Clayton Act were passed by the Congress in 1914 to address the loopholes in the Sherman Act. Under the Clayton Act, any merger that has the potential effect of creating a monopoly or lessening competition substantially is illegal. A Federal Trade Commission (FTC) was set up under the Federal Trade Commission Act. The main role of this commission is to police unfair business practices. It is sufficient to note that, currently, the FTC and the Antitrust Division of the U.S. Department of Justice shares the responsibility of implementing merger policy in the United States (Brue & McConnell, 2007; Baumo & Blinder, 2008; Miller, 2011; Hubbard & O'Brien, 2008).
Licenses, Franchises, and Certificates of Convenience.
Entering many industries without a government license or a "certificate of convenience and public necessity" is illegal in many countries. For example, in some states that already have an electrical utility operating in their domain, it is not only impossible but also illegal to form a new electrical utility to compete with that utility. In other states, obtaining a certificate of convenience and public necessity from the state's utility commission is the first requirement for establishing such a utility company. Unfortunately, since most states already have an electrical utility operating within their domain, their public utility commission rarely issues such licenses or certificates to new group of investors who want to compete directly in the same geographic area as the existing utility. The message from this analysis is clear: long-run monopoly profits will be earned by the electrical utility existing in such states because entry into the industry is prohibited by the state utility commission.
Broadly speaking, it is often necessary to obtain similar permits whenever investors want to enter interstate markets for pipelines, transmission of natural gas, television and radio broadcasting, and so on. The basic insight here is that those firms already in such industry within the affected states will be earning long-run profits because these permits or franchises (or even licenses) are usually restricted by the state.
In the above sections, I have succeeded in presenting those policies and legislations that regulate monopolies. In the following section, I will examine one of the industries that are dominated by the monopolists -- namely, the U.S. Electronic Media Sector.
An Overview of Monopoly in the U.S. Electronic Media Sector
The U.S. electronic media industry evolved through three main stages, namely, the stage of limited media, the multichannel media, and the cyber media. Monopolies or oligopolies dominated the sector during the limited media era. For instance, the CBS, ABC, and NBC collectively controlled 92% of TV viewership in the early 1980s. During the same era, IBM accounted for 77% of the computer market, while AT&T controlled as much as 80% of local telephone service as well as 100% of the long-distance market ( Noam, n.d.).
The sector entered the multichannel era in the middle to late 1980s. This is the era when the media was released from restrictiveness on several fronts. For instance, the telecommunication monopolist AT&T was split up, cable TV was deregulated, and the antitrust suit against IBM was dropped by the government because of the company's loss of market domination. More changes came within the following decade: almost all the computer manufacturers controls less than 12% of the vital computer market, and the three major TV networks controlled only about 53% of TV viewership (Noam, n.d.).
Currently, U.S. is in the third stage of electronic media evolution, namely, the cyber-media stage. This stage is characterized by convergence of the delivery platforms for telecommunications, computer and media data distribution…