IV.

Kinds of Monopolies

Among the various kinds of economic monopolies are natural monopolies, trust companies, cartels, and industrial mergers.

A.

Natural Monopoly

Pure monopolies—only a single firm in an industry—are rare in most economies, except among the public utilities. These industries produce goods and provide services vital to the public well-being, including such essentials as water, power, transport, and communications. Although such monopolies often seem to be the most effective way to supply vital public services, they must be regulated when privately owned or else be owned and operated by a public body. In Great Britain, statutory regulators have been established for all the major utility industries, for example, the Office of Water Services (OFWAT), the Office of Electricity Regulation (OFFER), and the Office of Telecommunications (OFTEL). In addition, in cases of dispute between utility and regulator, the Monopolies and Mergers Commission can intervene to dictate prices, profits, etc.

B.

Trusts

History is replete with attempts by producers either to organize or to engage in practices that give them, in effect, monopoly power, although competition may still appear to exist. One of the earliest means used by producers to create an effective monopoly while retaining some semblance of competition was the trust. This is a device by which the real control of a company is transferred to an individual or small group by an exchange of shares of stock for trust certificates, which are issued by the individuals seeking control. The widespread abuse of this technique in the United States after the American Civil War eventually led to passage of the Sherman Antitrust Act (1890), a law designed to make illegal all trusts and other combinations that aimed to create monopolies in restraint of interstate commerce. A similar device is the holding company, which issues its own stock shares for sale to the public and “holds” or controls other companies by owning their shares. Such an arrangement is not necessarily illegal, unless created specifically to monopolize commerce in trade.

C.

Cartels

Today perhaps the best known form of combination is the cartel, because of the widespread attention given to the activities of the Organization of the Petroleum Exporting Countries, or OPEC. A cartel is an organization formed by producers whose purpose is to allocate market shares, control production, and regulate prices. OPEC does all these things, but its most highly publicized acts have been to set the world price for petroleum.

D.

Mergers

Efforts to organize an industry in order to achieve practical monopoly control take different forms. Any combination of firms that reduces competition may be of a vertical, horizontal, or conglomerate character. A vertical combination involves merging firms at different stages of the production process into a single unit. Some of the oil companies, for example, own oil fields, refineries, transport systems, and retail outlets. A horizontal combination involves bringing together firms in the same industry and at the same level in the production chain. A conglomerate merger combines firms from several unrelated industries into a single organization. All mergers and combinations have the potential for eliminating competition and creating monopoly. Mergers are scrutinized by the competition authorities in individual countries and also, within the European Union, the European Commission. Any merger which creates monopoly power and acts against the public interest is unlikely to be permitted.