Government-granted monopoly

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In economics, a government-granted monopoly (also called a "de jure monopoly" or "regulated monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. As a form of coercive monopoly, government-granted monopoly is contrasted with an unregulated monopoly , wherein there is no competition but it is not forcibly excluded. [1]

Contents

Amongst forms of coercive monopoly it is distinguished from government monopoly or state monopoly (in which government agencies hold the legally enforced monopoly rather than private individuals or firms) and from government-sponsored cartels (in which the government forces several independent producers to partially coordinate their decisions through a centralized organization). Advocates for government-granted monopolies often claim that they ensure a degree of public control over essential industries, without having those industries actually run by the state. Opponents often criticize them as political favors to corporations. Government-granted monopolies may be opposed by those who would prefer free markets as well as by those who would prefer to replace private corporations with public ownership.

History

Under mercantilist economic systems, European governments with colonial interests often granted large and extremely lucrative monopolies to companies trading in particular regions, such as the Dutch East India Company. [2]

Today, government-granted monopolies may be found in public utility services such as public roads, mail, water supply, and electric power, as well as certain specialized and highly regulated fields such as education and gambling. In many countries, lucrative natural resources industries, especially the petroleum industry, are controlled by government-granted monopolies. Franchises granted by governments to operate public transit through public roads are another example.

Patent

A patent is a set of exclusive rights granted by a state or national government to an inventor or his/her assignee for a limited period of time in exchange for a public disclosure of an invention.

The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must be new, inventive, and useful or industrially applicable. In many countries, certain subject areas are excluded from patents, such as business methods and mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission. [3]

Copyright is a legal right created by the law of a country that grants the creator of an original work exclusive rights for its use and distribution. This is usually only for a limited time. The exclusive rights are not absolute but subject to limitations and exceptions to copyright law, including fair use. A major limitation on copyright is that it protects only the original expression of ideas, and not the underlying ideas themselves.

Trademark

A trademark or trade mark [note 1] is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

Trademarks can act as a form of consumer protection that lowers the transaction costs between a buyer and seller who are not personally acquainted. [4]

Directly mandated

Governments have granted monopolies to forms of copy prevention. In the Digital Millennium Copyright Act, for example, the proprietary Macrovision copy prevention technology is required for analog video recorders. [5] Though other forms of copy prevention aren't prohibited, legally requiring Macrovision effectively grants it a monopoly and prevents other, potentially more effective copy prevention methods from being developed.

Background of the role of government

Rent-seeking behavior can be incentivized by monopolies, foreign trade restrictions and state subsidies. [6] Governments can also create monopolies in an attempt to reduce inefficiency in markets.

Companies can also exhibit rent-seeking behavior even if not explicitly incentivized to do so. For example, a manufacturer that has no direct competitors can limit its output, thereby producing artificial scarcity. This scarcity, in turn, is used as justification for increased prices.

Monopoly creation is not always a strict market phenomenon. Voters, government officials, and government employees can be persuaded to allow the creation or protection of monopolies due to various incentives, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued. Government granted monopolies constitute a fair portion of monopolized industries. [7]

Natural monopolies

A natural monopoly occurs when a single company dominates the market by having the lowest prices or the products most in demand by consumers. Fixed costs and variable costs can both be factors. If the fixed costs associated with providing a service or product are very high, it may not make economic sense for new competitors to enter the market. For example, it is rarely worthwhile to build second or third tram networks in cities where tram infrastructure already exists. Because the fixed cost of construction is too high, the expected return is not worth the investment.

According to economist Arnold Harberger, the loss of deadweight from monopolies in the US manufacturing industry is only 0.1% of GNP, so the real problem is not the existence of monopolies. [8] The real problems are the social and opportunity costs. These include time and resources expended by lobbyists, consumers, and producers who might otherwise redirect those resources to other, more productive activities. [9]

In the case of natural monopolies in private hands, regulation can be introduced to dissolve or restructure monopolies. The government can also regulate prices in certain sectors where natural monopolies develop. This can be done directly by setting the price (for example, the price of rail or gas) or by regulating the return (for example, in the case of telephone services). Whatever method is used, the goal is to lower prices to cost levels. Some economists, such as Thomas Sowell, Walter Williams, and Wayne Winegarden argue that price controls have disastrous economic effects or are otherwise immoral. [10] [11] [12]

Alternative interpretation

Dennis Thompson notes, "Corruption is bad not because money and benefits change hands, and not because of the motives of participants, but because it privatizes valuable aspects of public life, bypassing processes of representation, debate, and choice." [13]

Criticism

Opponents of government-granted monopoly often point out that such a firm is able to set its pricing and production policies without fear of breeding potential competition. They[ who? ] argue that this causes inefficiencies in the market place, such as unnecessarily high prices to consumers for the good or service being supplied. It has been argued[ by whom? ] that government-imposed price caps might avert this problem.

Some economists, such as Lenoard Read, argue that government-granted monopolies are immoral, whereas con-coercive monopolies are not necessarily so. [14]

Examples of government-granted monopolies

See also

Notes

  1. ↑ The styling of trademark as a single word is predominantly used in the United States and Philippines only, while the two-word styling trade mark is used in many other countries around the world, including the European Union and Commonwealth and ex-Commonwealth jurisdictions (although Canada officially uses trade-mark pursuant to the Trade-mark Act, trade mark and trademark are also commonly used).

Related Research Articles

<span class="mw-page-title-main">Intellectual property</span> Ownership of creative expressions and processes

Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, copyrights, trademarks, and trade secrets. The modern concept of intellectual property developed in England in the 17th and 18th centuries. The term "intellectual property" began to be used in the 19th century, though it was not until the late 20th century that intellectual property became commonplace in the majority of the world's legal systems.

A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

<span class="mw-page-title-main">Monopolistic competition</span> Imperfect competition of differentiated products that are not perfect substitutes

Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a company takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other companies. If this happens in the presence of a coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the company maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereals, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition. Further work on monopolistic competition was undertaken by Dixit and Stiglitz who created the Dixit-Stiglitz model which has proved applicable used in the sub fields of international trade theory, macroeconomics and economic geography.

<span class="mw-page-title-main">Natural monopoly</span> Concept in economics

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Specifically, an industry is a natural monopoly if the total cost of one firm, producing the total output, is lower than the total cost of two or more firms producing the entire production. In that case, it is very probable that a company (monopoly) or minimal number of companies (oligopoly) will form, providing all or most relevant products and/or services. This frequently occurs in industries where capital costs predominate, creating large economies of scale about the size of the market; examples include public utilities such as water services, electricity, telecommunications, mail, etc. Natural monopolies were recognized as potential sources of market failure as early as the 19th century; John Stuart Mill advocated government regulation to make them serve the public good.

<span class="mw-page-title-main">Deadweight loss</span> Measure of lost economic efficiency

In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced relative to the amount consumed differs in regards to the optimal concentration of surplus. This difference in the amount reflects the quantity that is not being utilized or consumed and thus resulting in a loss. This "deadweight loss" is therefore attributed to both, producers and consumers because neither one of them benefits from the surplus of the overall production.

In economics, economic rent is any payment to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment made or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities. In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" exclusivity, such as labor guilds and unofficial corruption.

A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.

Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, reduced wealth creation, lost government revenue, heightened income inequality, risk of growing political bribery, and potential national decline.

Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws differ among state and federal laws to ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.

In economics and business ethics, a coercive monopoly is a firm that is able to raise prices and make production decisions without the risk that competition will arise to draw away their customers. A coercive monopoly is not merely a sole supplier of a particular kind of good or service : It is a monopoly wherein there is no opportunity to compete with it because entry into the field is legally closed. It is a case of a non-contestable market. A coercive monopoly has few or no incentives to keep prices low and may deliberately price gouge consumers by curtailing production. Furthermore, this highlights that the law of supply and demand is negligible, as those in control behave independently from the market and set arbitrary production policies for their personal benefit

Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise.

Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law.

In economics, a government monopoly or public monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law. It is a monopoly created, owned, and operated by the government. It is usually distinguished from a government-granted monopoly, where the government grants a monopoly to a private individual or company.

Industrial property is one of two subsets of intellectual property, it takes a range of forms, including patents for inventions, industrial designs, trademarks, service marks, layout-designs of integrated circuits, commercial names and designations, geographical indications and protection against unfair competition. In some cases, aspects of an intellectual creation, although present, are less clearly defined. The object of industrial property consists of signs conveying information, in particular to consumers, regarding products and services offered on the market. Protection is directed against unauthorized use of such signs that could mislead consumers, and against misleading practices in general.

A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. Parallel imports are often referred to as grey product and are implicated in issues of international trade, and intellectual property.

Patents are legal instruments intended to encourage innovation by providing a limited monopoly to the inventor in return for the disclosure of the invention. The underlying assumption is that innovation is encouraged because an inventor can secure exclusive rights and, therefore, a higher probability of financial rewards for their product in the marketplace or the opportunity to profit from licensing the rights to others. The publication of the invention is mandatory to get a patent. Keeping the same invention as a trade secret rather than disclosing it in a patent publication, for some inventions, could prove valuable well beyond the limited time of any patent term but at the risk of unpermitted disclosure or congenial invention by a third party.

Arnold Carl Harberger is an American economist. His approach to the teaching and practice of economics is to emphasize the use of analytical tools that are directly applicable to real-world issues. His influence on academic economics is reflected in part by the widespread use of the term "Harberger triangle" to refer to the standard graphical depiction of the efficiency cost of distortions of competitive equilibrium. His influence on the practice of economic policy is manifested by the high positions attained by his followers in national agencies such as central banks and ministries of finance, and in international agencies such as the World Bank.

<span class="mw-page-title-main">Profit (economics)</span> Concept in economics

In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs.

Legal scholars, economists, activists, policymakers, industries, and trade organizations have held differing views on patents and engaged in contentious debates on the subject. Critical perspectives emerged in the nineteenth century that were especially based on the principles of free trade. Contemporary criticisms have echoed those arguments, claiming that patents block innovation and waste resources that could otherwise be used productively, and also block access to an increasingly important "commons" of enabling technologies, apply a "one size fits all" model to industries with differing needs, that is especially unproductive for industries other than chemicals and pharmaceuticals and especially unproductive for the software industry. Enforcement by patent trolls of poor quality patents has led to criticism of the patent office as well as the system itself. Patents on pharmaceuticals have also been a particular focus of criticism, as the high prices they enable puts life-saving drugs out of reach of many people. Alternatives to patents have been proposed, such Joseph Stiglitz's suggestion of providing "prize money" as a substitute for the lost profits associated with abstaining from the monopoly given by a patent.

References

  1. ↑ Cabral, Carrie (7 February 2021). "Different Types of Monopolies and How They Work". Shortform Books. Retrieved 3 March 2022.
  2. ↑ Roos, Dave. "How the East India Company Became the World's Most Powerful Monopoly". HISTORY. Retrieved 3 March 2022.
  3. ↑ Patents: Frequently Asked Questions Archived 25 February 2013 at the Wayback Machine , World Intellectual Property Organization, Retrieved on 22 February 2009
  4. ↑ Landes, William; Posner, Richard (2003). "7". The economic structure of intellectual property law. p. 442. ISBN   978-0-674-01204-2 . Retrieved 18 August 2009. - Subheading: The Economic Function of Trademarks p 166
  5. ↑ "The Digital Millennium Copyright Act of 1998" (PDF). Copyright.gov. Retrieved 3 March 2022.
  6. ↑ Tullock, Gordon (2001), "Efficient Rent Seeking", Efficient Rent-Seeking, Springer US, pp. 3–16, doi:10.1007/978-1-4757-5055-3_2, ISBN   9781441948663
  7. ↑ PURNANANDAM, AMIYATOSH; WEAGLEY, DANIEL (14 January 2016). "Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market". The Journal of Finance. 71 (1): 303–334. doi:10.1111/jofi.12366. ISSN   0022-1082.
  8. ↑ Harberger, A. C. (1995), "Monopoly and Resource Allocation", Essential Readings in Economics, Macmillan Education UK, pp. 77–90, doi:10.1007/978-1-349-24002-9_5, ISBN   9780333594520
  9. ↑ Newman, Peter, ed. (1998). The New Palgrave Dictionary of Economics and the Law. doi:10.1007/978-1-349-14286-6. ISBN   978-1-349-14288-0.
  10. ↑ Sowell, Thomas (16 November 2005). "Price Controls by Thomas Sowell | Capitalism Magazine". Capitalism Magazine. Retrieved 3 March 2022.
  11. ↑ Williams, Walter (26 September 2012). "Markets, Not Mandates, Set Prices". Orange County Register. Retrieved 3 March 2022.
  12. ↑ Winegarden, Wayne. "Price Controls Are Not The Answer To Expensive Drugs". Forbes. Retrieved 3 March 2022.
  13. ↑ Thompson, Dennis F. (June 1993). "Mediated Corruption: The Case of the Keating Five". American Political Science Review. 87 (2): 369–381. doi:10.2307/2939047. ISSN   0003-0554. JSTOR   2939047.
  14. ↑ Read, Leonard E. (1 September 1960). "Good and Bad Monopoly | Leonard E. Read". fee.org. Retrieved 3 March 2022.
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