Monopolies Arise in the Absence of Free Markets

Many of the monopolies today are state-owned entities, which are highly susceptible to political interference. Politicians may use them as tools to achieve personal or political goals, such as rewarding loyal supporters with management positions or contracts, regardless of their qualifications. This can lead to a lack of accountability and poor decision-making. The close relationship between the state and the company also creates opportunities for corruption, as state officials may use their power to extract bribes or direct contracts to cronies, as seen in scandals like the massive Petrobras scandal in Brazil, where the state-owned oil company was used as a vehicle for a widespread corruption scheme involving political parties and executives.

Apart from these evils, monopolies eventually hurt the consumer by leading to market inefficiencies, lower product quality, higher prices, and a lack of innovation.

A free market means there are no barriers to the entry of competition. This is a formidable force that works against monopolies, drives prices lower and ensures better quality for the customer.  Monopolies tend to emerge where markets are not truly free. Monopolies are more likely to be created and sustained by the absence of a free market, usually through government intervention.

Barriers to Entry Create Monopolies

A key reason why monopolies arise is due to barriers to entry. Monopolies, or single-seller markets, emerge when barriers to competition prevent other businesses from entering the market. They allow a single firm to act as a price maker rather than being subject to market forces.

A government can decide to create and protect a particular company by granting it the exclusive right to operate in a certain market. An example of this is a local municipality granting a monopoly to a single utility provider for water, gas, or electricity.

Government can also create artificial barriers like tariffs or bans. Tariffs make it more difficult for foreign companies to compete on price and allow domestic companies to charge a higher price from customers. Bans are harsher, where a company or an industry is given a safe haven by banning competing products. For instance, several countries banned cryptocurrencies to preserve the monopolistic control of central banks over money supply.

Sometimes governments nationalize an industry, creating a state-run monopoly. For example, the US Postal Service has a legal monopoly over certain types of mail delivery. The UAE’s Abu Dhabi National Oil Company (ADNOC) and State Bank of India are other examples of government-owned entities.

Complex and costly regulations can act as a major barrier to entry, discouraging entrepreneurs and cementing the market position of certain corporations.

How Free Markets Naturally Prevent Monopolies

In a free market, the high profits of a dominant company will attract competitors. These companies will want a share of the market.

Competition drives innovation. For a company to enjoy a monopoly or retain the lion’s share of the market, it must constantly innovate and improve to stay ahead of potential new entrants. A powerful but stagnant company risks having its market share eroded or destroyed by new technology. A prime example of a monopoly being destroyed by competition is the downfall of Blockbuster at the hands of Netflix. For a long time, Blockbuster dominated the video rental market with its vast network of physical stores. It had a near-monopoly on how people rented movies. Then came streaming services and OTT platforms, ending the era of video rentals. Gen Z has possibly never seen a VHS tape.

Monopolies are harmful to market efficiency and consumer welfare. When we move away from free market principles, we are likely to stagnate. A handful of corporations will dominate and determine pricing and quality of products and services. Progress will be stifled.