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Others Others. Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". Another type of natural monopoly occurs when a company has control of a scarce physical resource.
In the U. Back in the s, when ALCOA controlled most of the bauxite, other firms were simply unable to produce enough aluminum to compete. As another example, the majority of global diamond production is controlled by DeBeers, a multi-national company that has mining and production operations in South Africa, Botswana, Namibia, and Canada.
It also has exploration activities on four continents, while directing a worldwide distribution network of rough cut diamonds. Although in recent years they have experienced growing competition, their impact on the rough diamond market is still considerable.
For some products, the government erects barriers to entry by prohibiting or limiting competition. Under U. Postal Service is legally allowed to deliver first-class mail. Many states or cities have laws or regulations that allow households a choice of only one electric company, one water company, and one company to pick up the garbage. Most legal monopolies are utilities—products necessary for everyday life—that are socially beneficial.
As a consequence, the government allows producers to become regulated monopolies, to insure that customers have access to an appropriate amount of these products or services.
Additionally, legal monopolies are often subject to economies of scale, so it makes sense to allow only one provider. Innovation takes time and resources to achieve. Suppose a company invests in research and development and finds the cure for the common cold.
Given this possibility, many firms would choose not to invest in research and development, and as a result, the world would have less innovation. Patent and Trademark Office, as well as the U. Copyright Office. A patent gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time. In the United States, exclusive patent rights last for 20 years. Roughly 1. A firm can renew a trademark repeatedly, as long as it remains in active use.
A copyright , according to the U. Copyright protection ordinarily lasts for the life of the author plus 70 years. Roughly speaking, patent law covers inventions and copyright protects books, songs, and art. However, in certain areas, like the invention of new software, it has been unclear whether patent or copyright protection should apply.
There is also a body of law known as trade secrets. Even if a company does not have a patent on an invention, competing firms are not allowed to steal their secrets.
One famous trade secret is the formula for Coca-Cola, which is not protected under copyright or patent law, but is simply kept secret by the company. Taken together, we call this combination of patents, trademarks, copyrights, and trade secret law intellectual property , because it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car.
Countries around the world have enacted laws to protect intellectual property, although the time periods and exact provisions of such laws vary across countries.
There are ongoing negotiations, both through the World Intellectual Property Organization WIPO and through international treaties, to bring greater harmony to the intellectual property laws of different countries to determine the extent to which those in other countries will respect patents and copyrights of those in other countries.
Government limitations on competition used to be more common in the United States. From the s to the s, one set of federal regulations limited which destinations airlines could choose to fly to and what fares they could charge. Another set of regulations limited the interest rates that banks could pay to depositors; yet another specified how much trucking firms could charge customers. What products we consider utilities depends, in part, on the available technology.
Fifty years ago, telephone companies provided local and long distance service over wires. It did not make much sense to have many companies building multiple wiring systems across towns and the entire country. The same thing happened to local service, especially in recent years, with the growth in cellular phone systems. The combination of improvements in production technologies and a general sense that the markets could provide services adequately led to a wave of deregulation , starting in the late s and continuing into the s.
This wave eliminated or reduced government restrictions on the firms that could enter, the prices that they could charge, and the quantities that many industries could produce, including telecommunications, airlines, trucking, banking, and electricity.
Around the world, from Europe to Latin America to Africa and Asia, many governments continue to control and limit competition in what those governments perceive to be key industries, including airlines, banks, steel companies, oil companies, and telephone companies.
Vist this website for examples of some pretty bizarre patents. Businesses have developed a number of schemes for creating barriers to entry by deterring potential competitors from entering the market. One method is known as predatory pricing , in which a firm uses the threat of sharp price cuts to discourage competition.
Predatory pricing is a violation of U. Consider a large airline that provides most of the flights between two particular cities. A new, small start-up airline decides to offer service between these two cities. The large airline immediately slashes prices on this route to the bone, so that the new entrant cannot make any money.
After the new entrant has gone out of business, the incumbent firm can raise prices again. After the company repeats this pattern once or twice, potential new entrants may decide that it is not wise to try to compete. Companies in a monopolistic market can earn very high profits in the short run, profits that are higher than normal market returns. In a perfect competition situation, companies cannot earn high profits in the short run, as they are price takers, not makers.
While monopolies created by government or government policies are often designed to protect consumers and innovative companies, monopolies created by private enterprises are designed to eliminate the competition and maximize profits. If one company completely controls a product or service, that company can charge any price it wants. For reasons both good and bad, the desire and conditions that create monopolies will continue to exist.
Accordingly, the battle to properly regulate them to give consumers some degree of choice and competing businesses the ability to function will also be part of the landscape for decades to come. Constitutional Rights Foundation. Company Profiles. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Antitrust Laws and Enforcement. Types of Antitrust Violations. Economics Macroeconomics. Table of Contents Expand. How to Create a Monopoly. Why Monopolies Are Created. The Downside of Monopolies. Monopolies FAQs. The Bottom Line. Key Takeaways A monopoly is a company that exists in a market with little to no competition and can therefore set its own terms and prices when facing consumers, making them highly profitable.
While monopolies are both frowned upon as well as legally suspect, there are several routes that a company can take to monopolize its industry or sector. Using intellectual property rights, buying up the competition, or hoarding a scarce resource, among others, are ways to monopolize the market. The easiest way to become a monopoly is by the government granting a company exclusive rights to provide goods or services.
Government-created monopolies are intended to result in economies of scale that benefit consumers by keeping costs down. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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