What are monopolies?

Diamonds are forever, but monopolies, not so much. The year is 2000 and after almost a century of unchallenged rule, the world's largest diamond company, the South African De Beers Group, is giving up its global monopoly on diamond mining and trading. Until then, the company controlled the largest part of the world's diamond mines and dominated the supply of rough diamonds to all the world's diamond merchants and cutting shops. This enabled De Beers to control the market for many decades, setting prices and avoiding price fluctuations by keeping them at a high level. At its peak, the South African giant even managed to hold more than 85% of the world's diamonds, thanks to exclusive agreements with its suppliers.

De Beers is not the only company that’s managed to control a large part of the industry it operates in. Monopolies, duopolies and all sorts of other -opolies exist even today. Are they just a byproduct of commercial success? Or a sign of a broken system? Let's take a closer look.

What are the different types of monopoly?

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Let's start by defining what a monopoly is. In short, in a monopoly there is only one supplier and therefore no competition. That means that the company or entity selling something is the only one selling that particular good or service, and there is no possibility of substituting the good or service with something similar. So if I’m the only shop in the world selling tables that are a very specific colour of yellow, I might not be a monopoly, since people can just buy other tables. 

There are several types of monopolies.

• Natural monopoly

Some activities have very high fixed investment costs, such as electricity networks or railways. In these cases, it is common for one company to be able to supply the whole market and still be more competitive than its competitors. A good example of a natural monopoly would be the company operating the Channel Tunnel, the French national railway company SNCF or its German equivalent: the Deutsche Bahn.

• Legal monopoly

In some cases, laws or regulatory measures allow a state to grant exclusive rights to a private or public company to operate a public service or deliver goods and services. Examples of companies with a legal monopoly include the post office in many countries. But there are also many entities with a legal monopoly in the field of sport. American sports associations such as the NBA or the NFL or FIFA in the world of football are perfect examples of legal monopolies.

• Innovation monopoly

Sometimes a company innovates so much that it actually creates a market and finds itself alone in it. This is called an innovation monopoly. Of course, this situation cannot last forever as it tends to attract competition. Think of Apple when it released the iPhone in 2007. While the Californian firm found itself in a quasi-monopoly situation for a short time in the nascent smartphone market, many other firms were quick to join and challenge it.

• Local monopoly

A local monopoly situation occurs when a company has a dominant position in a particular area. For example, a petrol station or a supermarket in a relatively isolated area will have a local monopoly.

Monopolies that are not really monopolies

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Sometimes a company has a dominant share of a market, but it has to share it with a small number of competitors. This is a situation close to a monopoly. And again, there are several types of near-monopoly situations.

• Oligopoly

It is a situation where there are only a few suppliers but a large number of buyers. For example, the pharmaceutical, mobile phone or aeronautics sectors are considered oligopolies. There is also a special case of oligopoly: the duopoly. In this case, you have two suppliers for a multitude of buyers. This applies, for example, to online advertising, where Meta and Alphabet (Facebook and Google) together hold almost two-thirds of the market, leaving only crumbs for the competition.

• Cartel

A cartel is a kind of mixture between an oligopoly and a monopoly. There are only a few companies in the market. Still, because they collude, they act as if they were in a monopoly situation and set prices as they please. OPEC, the organisation of oil-producing countries, is a perfect example of a cartel in which many producers of the same product come together to set the price.

• Monopolistic competition

When you face competition in your market, entering a price war is not always the best idea. It is sometimes wiser to have a product which, if it is unique, will create a kind of monopoly for the producer. We could give the example of Coca-Cola and Pepsi: of course, these two compete with each other. But for some buyers, it is as if there is only Coca or Pepsi.

The problem with monopolies

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So what is the point of all this vocabulary? To discuss, because monopolies often raise tensions. If a company is the only one offering a product, it can sell it at any price: those who really need it will have to buy it. And if the product in question is a medicine or access to water, this can cause many problems... Besides, a company with no competitors can afford to offer lower quality products and innovate less.

To ensure that companies do not abuse their bargaining power too much and continue to provide quality goods and services, rules exist to limit their power.

To do this, states rely on a body of antitrust law. These are a set of laws that encourage competition by limiting the power of any particular firm in a given market. This often involves ensuring that mergers and acquisitions by companies do not create a situation where one firm becomes too big or turns into a monopoly.

Fighting monopolies

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In the US, regulators are increasingly scrutinising the growing power of the largest technology companies, particularly those of the FANGs. Amazon's $8.45 billion takeover of MGM announced last year is still on hold as the Federal Trade Commission (FTC) continues to examine it for antitrust concerns.

The deal has raised antitrust concerns because of the vast library of content held by MGM - including not only the James Bond film franchise but also Rocky and The Pink Panther, as well as some 17,000 TV shows. Opponents of the deal point out that an Amazon Prime Video library of more than 55,000 titles would, for example, far outstrip Netflix's library of nearly 20,000 titles and thus give the online retail giant too much power in the area of content creation.

The same applies to Microsoft's purchase of the video game studio Activision for a record $68.7 billion. The deal has caught the eye of the FTC, which is looking into whether it complies with competition law.

In Europe, too, legislators are raising their voices against the FANGs, who they believe have too much power, particularly in the area of personal data processing. Last November, the Italian competition authorities fined Google and Apple 20 million euros, divided equally between the two companies, for improper commercial practices. The Italian antitrust decision "established that the two companies each violated the Consumer Code twice, the first by not providing sufficient information (to its customers), the second for aggressive practices in the use of consumer data for commercial purposes," a statement said.

Although monopolies have almost always been a part of the capitalist economy, their merits have always been contested. Too powerful, not sufficiently concerned with the consumers’ well-being, monopolies generally do not please and legislators fight them when they think the companies are no longer playing by the rules of the game.

In recent years we have seen a new form of quasi-monopolistic companies with the emergence of FANGs in the global economy. Will the various legislators be strong enough to win the arm wrestle with the Big Tech companies, or will they be able to impose their will? The next few years will be decisive in answering this question.