Economic versus Political Monopoly

There are two concepts of monopoly that exist and one provides a good understanding of monopoly while the other provides a poor understanding of monopoly. The concept accepted by most people today is the one that is deficient, and it is the acceptance of this invalid concept of monopoly that leads people to (incorrectly) believe that monopolies arise out of the free market. The concept of monopoly accepted by most people today is known as the economic concept of monopoly. This concept says a monopoly exists when there is only one supplier of a good in a given geographic region. The concept that provides a sound understanding of monopoly is known as the political concept of monopoly. This says that monopolies arise when the government initiates physical force to reserve a market or a portion of a market to one or more sellers.

The economic concept of monopoly focuses on the number and size of firms in an industry. It says the smaller the number of firms in an industry, and the larger those firms are, the more monopoly power that exists in that industry. It says monopoly power can arise naturally out of the market simply by firms becoming big. The political concept focuses on the restriction of competition by the government and says monopoly power can be held by many small producers against just one or a few large producers, or can be held by one large producer against other, smaller producers. It says as long as a firm is being helped by the government in some way--no matter what its size--then that firm has monopoly power.

The problem with the economic concept is that it leads to confusion because it can be used to say that no firm is a monopoly or all firms are monopolies, depending on how broadly or narrowly one defines a good. It can also be used to say a firm both is and is not a monopoly. It other words, the economic concept of monopoly leads to blatant contradictions. Based on this concept, it is arbitrary whether a firm is a monopoly or not.

--Brian P. Simpson, Markets Don't Fail! (Lanham, MD: Lexington Books, 2005), Adobe Digital Editions, 31-32.