It’s difficult to decide what is the most misunderstood concept of economics.  Almost all of them are misunderstood or misused, intentionally, confusing the masses.  Inflation is badly misunderstood, but monopoly has to be one of the most misunderstood concepts too.  Inflation can be discussed another day.  The task here today will be to elucidate monopoly.

Monopoly is incorrectly used as a large market share.  If a firm has ¾ of a market, they are said, by politicians and the masses, to have a monopoly.  Actually, the masses are just repeating what their politician says, with little or no thought.   Is it a monopoly to have a large market share?  What if it’s the entire market?  No!

A local sandwich shop can be the only shop to make a particular sandwich.  They would then have 100 percent of the market.  After all, many restaurants do put a unique spin on meals.  By the political definition, every restaurant would have a monopoly.  This doesn’t stop with restaurants.  The same logic can be applied to every good.

A monopoly is the grant of a government privilege.  It’s not a large market share.  This government privilege keeps all sellers of the same product from entering the market.  What is more common today are quasi-monopolies.  These state a company can’t sell a particular good until they meet a certain criterion.  Quasi-monopolies usually come in the form of regulations.

The regulations are made up by the initial firm that can afford the criterion.  This prevents the upstart company from entering the market.  New companies will create competition in a certain market.  This will improve quality and reduce price.  Monopolies and quasi-monopolies reduce competition, in turn, reduces quality and increases price.  Let’s not forget, taxes pay for bureaucrats to write legislation and regulation.  So, not only does the quality decrease and the price increase, but taxes increase.

Monopolies and quasi-monopolies do not exist on the free market.  I know this is contrary to the nonsense peddled before, but that’s factually correct.  There are only two ways to decide what the price of a good will be.  One is intervening in the free market, the other is the free market.  Nobody knows the optimum quality and price of a good.

As stated above, monopolies and quasi-monopolies do not exist on the free market.  Any company may own 100 percent of the market.  That is not a monopoly.  It may be priced high, this will encourage new entrants.  This is just the free market price, nothing more.  The emperor wants you to believe he does have a fine set of clothes.

Not only does nobody know the optimum price and quality.  Nobody knows the optimum number of firms or the size of the firm.  Should it be 4 firms, 5, or something else?  100 people, 200, or something else?  Entrepreneurs will try things out and the ones who satisfy customer demands will stay in business.  If anyone shows at chart that has perfect competition, perfect company size, etc., they’re blowing smoke.

Reference

Murray Rothbard; Man, Economy, and State