Monopolies – More Than Just a Board Game?

What Really is a Monopoly?

You may have played the board game Monopoly, in which you buy properties, charge rent and make your friends bankrupt. However, in the real world of business and law, a monopoly is something a lot more serious, it is when one firm or company dominates a market, and can potentially charge higher prices, reduce choice and influence society.

In this article we'll use the board-game metaphor to make sense of the concept, explore why monopolies can be dangerous, and also consider other market structures to understand the alternatives of perfect competition, monopolistic competition and oligopoly.

The Monopoly Metaphor:

Imagine on the Monopoly board game you are the player who owns all the railroads, utilities and key properties. Your friends have nowhere else they can invest in, they have limited options, and with your power over the board and high rent they are trapped. In economic terms:

• A monopoly exists when one firm is the sole seller of a product or service with no close competition

• There are high barriers for entry as new firms cannot easily enter the market and challenge the monopolist firm

• The monopolist can act as a price-maker, increasing their revenue

  
  

So, returning to our board-game, by controlling the board, your friends have little choice but to land on your properties, you can raise rent as you like and there is no real competition against you.

The Dangers of a Monopoly:

Some may argue that if a monopolistic firm is being efficient then why worry about it, but the risks are much more significant [1]:

• Higher prices - As there isn't any competition in the market, a monopolist can raise prices above what would exist in a competitive market. This is because monopolies face inelastic demand, and can therefore increase their prices, which leaves consumers with no alternative.

• A decline in consumer surplus - As the price increases, fewer consumers can afford to buy the product or service, leading to allocative inefficiency because the price is greater than marginal cost.

• Lower efficiency - Without competition monopolies have fewer incentives to be efficient, as they can still make a profit with less effort.

• Monopsony power - when there is one buyer and many sellers, for example supermarkets paying lower prices to farmers or an employer paying lower wages.

• Political power - Monopolies can gain political power and the ability to shape society in an undemocratic and unaccountable way, in particular tech giants such as Meta and Google due to their influence on the diffusion of information.

  
  

In short, in a board-game it may be the ideal way to win against your friends by taking their money, but for the economy and consumers it means fewer choices, concentrated power and potential harm.

Monopoly On a Graph Not a Board:

Here is an image explaining the concept of a monopoly with price on the Y-axis and quantity on the X-axis [2]

• The Demand (D) curve slopes down: higher price -> lower quantity demanded

• The Marginal Revenue (MR) curve lies below demand for a linear demand -> MR falls faster because to sell extra units a monopolist must lower price on all units

• The Marginal Cost (MC) is shown as a horizontal line (constant cost per extra unit)

• The firm’s profit-maximising quantity (Qₘ) is where MR = MC (the vertical dotted line)

• The monopoly price (Pₘ) is read up from Qₘ to the Demand curve (horizontal dotted line).

• The shaded rectangle shows the markup per unit (Pₘ − MC) × Qₘ -> the extra price the monopolist can charge over marginal cost for each unit.

The Four Market Structures:

Below is a table that clearly describes the different market structures. Take a look and consider the differences or similarities each market structure has compared to a monopoly [3].

	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of firms	Many	Many	Few	One
Freedom of entry	Not restricted	Not restricted	Some barriers	High barriers for entry
Firm’s influence over the price	None	Some	Some	Price maker, subject to the demand curve
Nature of product	Homogoneous (identical)	Differentiated	Varied	No close substitutes or competitors
Examples	Vegetables	Travel agents, supermarkets	Mobile phone companies	Local water supply

Perfect Competition - in this market structure there are many buyers and many sellers, the products are homogenous (identical) and there are no barriers to entry or exit. In this model all firms are price-takers, meaning that they must accept the market price. In this market structure there is no reason to prefer one seller over another based on the product itself and both the buyers and sellers have complete and instantaneous knowledge of the market prices, product quality, production methods etc.

Monopolistic Competition - this is a market structure with many firms that produce similar but differentiated products, there are low barriers for entry, and where competition is based on factors like brand name, quality, and marketing rather than just price. Each firm has a small degree of market power over its product but faces a relatively elastic demand curve, which means it cannot raise prices too high without losing customers to competitors. 

Oligopoly - in this form of market structure there is a small number of large firms that dominate the industry. This allows them to have a significant control over the prices of the products or services as well as the output onto the market. Due to the nature of there being few competitors the actions of each individual firm has a direct impact on the others, this means that there is a higher level of interdependence. Other key features of this market structure include higher barriers to entry, which can be high costs or patents, and most importantly a market concentration ratio in which the largest few firms hold more than 50% of the market share. 

The Impact of Monopolies for Lawyers:

This information and concepts of market structures may seem to be somewhat irrelevant for those in the legal profession, yet in reality it is something that is key to understand especially for those interested in commercial law, business law and competition law. But why does it matter?

Many jurisdictions have regulatory bodies to manage and regulate monopolistic behaviour, which in turn requires legal experts to aid with the restrictions to the abuse of dominance with antitrust law. Therefore it is essential to understand market structure to prevent mergers that create too much concentration.

Smaller companies will need representatives when entering commercial contracts with much larger firms who are in positions of monopolistic or near monopolistic power, meaning that they have greater bargaining power when it comes to negotiations. Hence, other firms need support to mitigate business risks. This leads to the protection of consumers as well, because if one firm dominates an essential service or product then there may need to be some legal intervention in order to regulate the quality or set price caps. 

Final Thoughts:

It is clear to see that monopolies are way more than just a board-game problem. In the real market they can present a problem which can have detrimental consequences for consumers, competitors and society. By comparing a monopoly to other market structures it is possible to see how a lack of competition changes behaviour, pricing and other aspects of the market. For law students these are key concepts to get a better understanding in order to sharpen commercial awareness, for an improved insight into business situations, risks and regulations.