Here Is Why Monopolies Can Harm Consumers

Antitrust lawsuits have emerged against many major companies in the last few years. The purpose of antitrust laws is to prevent some of the more harmful effects of monopolies. Monopolies involve a single seller having exclusive control over a commodity or service.

Monopolies do not have to be nefarious, but they do open the door to potentially harmful practices that ultimately harm consumers. Becoming the sole provider of a good or service can have a negative impact on consumers’ wallets, quality, innovation, accountability, and can lead to exploitation. To that end, it’s helpful to understand what monopolies are and how they work.

Early History of Monopolies

In early United States history, there were no regulations around monopolies even though devastating effects had been seen across the world from other monopolies.

Standard Oil and American Tobacco became some of the first companies in the U.S. that prompted a need to create antitrust policies.

In the 1880s, Standard Oil controlled 90% of American oil refineries. From 1901-1905, the company also gained control of railroads on the east coast. Standard Oil was later broken up after public opinion turned against them because the company was revealed to be engaging in aggressive anti-competitive tactics against rivals, railroad companies and others.

American Tobacco was the result of a merger between five major players in 1890 and the acquisition of over 250 additional firms from 1890-1907. Following this, American Tobacco was able to set a higher market price and made untruthful claims about the health benefits of tobacco products. They were eventually forced to be broken up.

Prices

As we saw with American Tobacco, one company controlling a marketplace allows them to set prices. Without competition to keep price levels fair, a company can charge as much as they’d like.

Price manipulation can also happen to edge competitors out. A large company with many resources can afford incredibly slim margins or even losses until their competitors are forced to fold. Once they are the last ones standing, they can increase their price to whatever level they’d like because people do not have another option.

Let’s say there are two businesses that sell apples. The cost of apple production is the same for each producer at 50 cents per apple. Business A and B would like to profit from their sales so they both charge $1 per apple. Business B realizes that they could make a lot more money if Business A weren’t in the marketplace. Business B decides to charge 51 cents per apple, barely making any money per transaction. Business A loses all their customers and eventually must drop their price to stay competitive. Unfortunately, Business A can’t pay their bills with those margins and eventually must sell their orchards to Business B. Now, Business B owns all the orchards and has nobody to compete with. They set the price at $3 per apple and consumers must pay that price if they want apples.

Quality

Once we get down to an environment without competition, the incentives to continue to offer a high-quality product or service go down. The company with the monopoly can make more money by charging the same amount and using cheaper materials, outsourcing, or automating services altogether.

Innovation

Competition encourages innovation. Let’s say we only had one single company that was researching diseases and coming up with cures. The company culture and sheer size may end up preventing the best and the brightest from joining their ranks. The company’s leader could be single-minded and dedicate all their resources to cancer and completely ignoring all other ailments. Having competition allows for many people from different backgrounds to set their minds to creative new ways of solving problems.

Exploitation

When a company has enough resources, it can use those resources to strong-arm competitors or force businesses into unfavorable deals as we saw with the Standard Oil monopoly. Exploitation is one of the big arguments in some of the most recent antitrust cases in favor of breaking up modern companies.

Accountability

When there is no competition, company accountability to customers can diminish. In a competitive environment, companies want to make sure their customers are happy and that their concerns are being addressed. Let’s say you are the head of one of two firms providing criminal defense. You may want to distinguish yourself by being respectful to your clients, having a great track record, and keeping great records. If the other firm goes out of business, you get business no matter if you distinguish yourself or not. You can overcharge, be rude to clients, be disorganized, and lose half your cases and you will likely still have clients because of the need for criminal defense.

Conclusion

While a monopoly itself is not inherently harmful, controlling a marketplace can result in unsavory behaviors, including price gauging, deteriorating the quality of goods and services, blocking innovation, exploiting market power to engage in anti-competitive practices, and lack of accountability to consumers. Competitors can be a natural check to some of these problems.

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Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified.  Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC).  AGE-6657847.1 (6/24)(Exp. 6/26)