A holder of a monopoly (from the Latin monopolium, meaning the exclusive seller of something) is a single seller who has exclusive control of the supply and marketing of some product or service. This exclusivity frequently enables the monopolist to set a selling price that is likely to be higher than it would be if competition with other sellers of the same product existed. A telephone company serving a community is an example of a monopolist. In the United States, however, because every telephone company is treated as a \Tpublic utility\t, the prices it charges are fixed by state and federal regulatory agencies (see \Tgovernment regulation\t). \Lcopyright\ls and \Lpatent\ls are forms of monopolies granted by the government. COMPETITION AND MARKET POWER Economists have coined the term perfect competition to describe the situation in which so many sellers compete that no one of them can influence the selling price. Few examples exist of perfect competition as defined by economists. Wheat farmers perhaps come closest to it. Such sellers are sometimes referred to as "price takers" rather than "price makers," and they theoretically have free entry and exit from markets, are independent, and have a homogeneous product to sell. Market power is the term economists use to describe the ability to hold control over prices and profits. A monopoly has the greatest market power, and the seller under perfect competition has no market power at all. In the United States most businesses operate in industries falling between the polar extremes of monopoly and perfect competition. To explain the behavior of firms in the broad spectrum of markets between these extremes, economists have developed theories about the differences in market power in various industries. The most widely held theory assumes that the extent of a firm's market power depends on certain characteristics existing in the market where it operates. Three characteristics are believed to be especially important: (1) the share of an industry's sales held by its leading firms; (2) the ease with which new firms can enter an industry; and (3) the extent to which the products of a seller are differentiated from those of other sellers of similar products. According to this theory, originating in the works of the American economists Edward H. Chamberlin and Joe S. Bain, a firm's power will be greatest if it shares an industry with few competitors, if it is shielded almost completely from the threat of entry by new competitors, and if it sells a highly differentiated product that is distinct from all similar products. When a "big three" or "big four" dominates an industry, that situation is called a shared monopoly, because such firms are believed to behave almost like a single-firm monopoly. If these firms act together to control the supply and marketing of goods, they are known as an oligopoly or \Tcartel\t. INDUSTRIAL CONCENTRATION Much of the present competitive structure of U.S. industry evolved from events beginning in the last decades of the 19th century. Until then, nearly all businesses were small proprietorships or partnerships--therefore the control of industry was dispersed among many hands. With the relaxation of state incorporation laws, the industrial \Tcorporation\t burst on the scene. The Growth of Large Firms An enormous \Tmerger\t and consolidation movement began around 1900. In the two decades from 1890 to 1910, swift and irreversible changes occurred in many leading industries. In 1901 the United States Steel Corporation became the largest corporation in the world through the consolidation of most existing steel companies in the United States; it controlled about 75% of the country's steel output in 785 plants with a total of about $1.4 billion in assets. What happened in steel was repeated elsewhere. The most familiar consolidations involved tobacco (American Tobacco), petroleum (Standard Oil), explosives and chemicals (Du Pont), and tin cans (American Can). Although some of the great trusts of that day were later partially broken up, the pattern had been set. Although considered big business in their day, most of the early trusts were pygmies compared with today's large industrial complexes. Some comparisons will illustrate the difference. In 1985 the two largest U.S. industrial corporations, General Motors and Exxon, had combined sales of about $183 billion. This figure was greater (after adjustment for inflation) than America's gross national product at the time of the Civil War, more than the combined sales of the over 200,000 manufacturing establishments in 1900, and larger than the gross national output of all but 13 (Brazil, Canada, China, France, India, Italy, Japan, Poland, Spain, United States, \TUSSR\t, United Kingdom, West Germany) of the approximately 180 nations of the world. With each passing year, more of the financial, distribution, and industrial sectors of the economy are run by large corporations. In 1909 only one and in 1929 only two manufacturing corporations had assets exceeding $1 billion. By 1985, 291 billion-dollar corporations held 67% of total manufacturing assets. (Price inflation accounts for only a small part of the increasing number of billion-dollar corporations. For example, expressed in 1985 dollars, only about ten corporations in 1909 had assets over $1 billion.) Despite the increase in monopolistic concentration, small business has not disappeared from the industrial scene. On the contrary, the absolute number of small businesses has actually increased. Even in the manufacturing sector, the total number of businesses has grown through the years; today there are about 272,000 manufacturing companies in existence. Thus the galaxy of a few large corporations is expanding its share in a universe that is itself expanding. Some economists describe the present economy as a dual economy--one part consists of a large number of small- and modest-size businesses, and another part is becoming increasingly centralized among a few hundred huge corporations. Levels of Concentration In many industries sales have become concentrated among a relatively few corporations. Table 1 shows the percentage of total sales accruing to the four largest U.S. companies in each of 165 comparable manufacturing industries for the period 1947-82. The overall average of concentration for all industries changed little over this 35-year period. These averages, however, conceal more than they tell. Some industries are well above the average and others are below it. A variety of complex, interacting forces determine the level of concentration in industry. On the one hand, the growth of the economy creates opportunities for more firms to enter an industry and to grow to efficient size. On the other hand, the number of firms can be limited by the requirements of large-scale production, the necessity to be large enough to support research laboratories and to finance new products and new methods of production, and the advantages enjoyed by large firms in distribution and advertising. Market concentration is also influenced by various business practices and the general institutional environment in which businesses operate. These include such factors as federal antitrust laws and the way these laws are enforced. Economists have not determined the precise impact of these various influences. Research studies show, however, that the level of concentration existing in many industries exceeds that necessary to achieve efficient production. Although the requirements of large-scale production make it impractical to have numerous small companies, they do not necessarily dictate that industries be dominated by only a few firms. Because the U.S. market is large, to have a fairly large number of firms of efficient size in the great majority of industries would be possible. It is not inevitable that markets should become highly concentrated. Therefore researchers seek other causes to explain industrial concentration. Two factors are especially significant. The most important single force promoting concentration in many industries is advertising, which plays an important role in the marketing process. The advent of television as a preferred medium of advertising for many products has been a major factor in promoting concentration. For various reasons, television advertising has favored large companies in many consumer product industries; the result is a persistent trend toward increased centralization of business among a few corporations. This concentration can be seen in Table 2, which shows that concentration in consumer-goods industries increased by more than 7 percentage points during the years 1947-82. Consumer-goods industries produce goods for final consumption, such as processed foods, detergents, beer, automobiles, and clothing. Although average concentration in all of these industries taken together rose significantly, the greatest increases were in the highly differentiated consumer-goods industries. These are industries such as prepared cereals, beer, and household detergents that are most dependent on advertising. Another factor promoting concentration is mergers among business firms. Extensive merger activity occurred in the 1960s--when about one-tenth of the manufacturing companies with assets over $10 million were acquired by other firms--and again beginning about 1980. During the course of the 1980s, merger activity accelerated; as it reached new heights, commentators dubbed the phenomenon "merger mania." The merger movement created enormous conglomerate enterprises that have subsidiaries in many industries. A prominent example is International Telephone and Telegraph Corporation (ITT), which acquired numerous domestic and foreign firms, ranging from the country's largest baker, Continental Baking, to the multibillion-dollar Hartford Fire Insurance Company. ITT is also a vast multinational organization that, according to one of its annual reports, "is constantly at work around the clock--in 67 nations on six continents" in activities extending "from the Arctic to the Antarctic and quite literally from the bottom of the sea to the moon." Economists do not agree about the effect of industrial conglomeration on the competitive process. Especially when small companies are involved, mergers may increase efficiency and heighten competition. Mergers among large firms, however, clearly work to centralize control over the economy in ever fewer hands. Huge enterprises, straddling many industries and nations, possess a great deal of potential power over smaller firms and lead to further industrial concentration. The Effects of Concentration According to economic theory, when sellers are few they have more control over their output and price decisions than when they are many. Numerous studies have been made of the relationship between market power and prices. Economists use complicated statistical procedures to isolate the role of market power from other factors influencing prices and profits. They seek to estimate the net effect of market power when other influences are also taken into account. A group of researchers in the mid-1970s made a statistical analysis of various factors, including market concentration, that influenced the relative level of food prices charged by large retail food chains in different metropolitan areas in 1974. The statistical analysis took into account many factors that might affect prices, such as the size of the city in which a chain was located and average wage rates in the area. The study concluded that, when all factors were taken into account, prices were 5.3% higher in areas where four retail food chains controlled 70% of sales than in areas where they controlled 40% (Table 3). This study indicates that the degree of competition is of importance to consumers. Because total grocery store sales exceed $150 billion annually, each 1% increase in prices increases grocery costs for consumers by $1.5 million annually. (Although there are no precisely similar follow-up data, available evidence suggests that the same relationship prevailed a decade later.) Estimates of the total costs of market power in the U.S. economy are hazardous at best. The best evidence suggests that costs are substantial. One authority on the subject, F. M. Scherer, estimates the wastes and inefficiencies resulting from monopoly power at 6.2% of gross national product, or about $250 billion in 1985 (by some accounts, a conservative estimate). Other effects exist as well. Market power also redistributes income from consumers to the owners of the firms with power. The amount of this redistribution has been estimated at 3% of the gross national product, or about $115 billion in 1985. These are only the most obvious costs of excessive market power. Some observers claim that market power prevents the economy from achieving full employment with stable prices. In economic theory, perfect competition leads to full employment of people and resources without inflation. Limitations on competition lead to less employment and higher prices. Each 1% rise in the unemployment rate reduces the gross national product by about $100 billion. To the extent that market power forces the country to accept higher unemployment in an effort to keep down inflation, it causes an enormous loss in national income. Critics of industrial concentration charge that it also leads to the corruption and misuse of political institutions. They point to the enormous political pressures brought to bear on legislators in Washington and the state capitals by \Llobbyist\ls and \Tspecial-interest groups\t, many of them financed by industrialists. Indeed, many monopolies could not exist if they did not have the backing and protection of the government. EFFORTS TO COMBAT MONOPOLY A great debate over the monopoly question began around the turn of the 20th century; the debate has waxed and waned ever since. Three alternative approaches have been tried to limit monopolies: (1) antitrust legislation designed to prevent monopoly or foster competition; (2) the regulation of holders of market power through state and federal public-utility laws; and (3) the public ownership of large enterprises (advocated by \Tsocialism\t). In the United States the least-used approach has been that of publicly owned enterprise. In Europe and in developing countries, this approach has been a much more common device. Americans have relied mainly on public utility regulation and the antitrust laws to police business behavior. The first federal legislation to deal with the monopoly problem created the \TInterstate Commerce Commission\t in 1887 to regulate the railroads. The \TSherman Anti-Trust Act\t of 1890 was intended to prevent monopoly from developing and to strengthen competition. Under the Sherman Act the federal government brought a number of legal actions in the early 1900s that resulted in the breaking up of several large corporations, or trusts as they were then called, including Standard Oil of New Jersey, American Tobacco, and Du Pont. The most far-reaching antitrust settlement in recent years was the 1982 decision that divests the American Telephone and Telegraph Corporation (AT&T) of its 22 local operating companies, although the huge corporation received in exchange the right to enter the field of electronic communications. The Sherman Act also prohibits conspiracies among competitors to fix prices and limit competition. Hundreds of price-fixing cases have been brought to court through the years, sometimes resulting in mild prison sentences and fines. An important case (1961) involved executives of General Electric, Westinghouse, and other leading electrical equipment manufacturers, who pleaded guilty to an elaborate price-fixing scheme. The companies were required to pay damage awards of about $500 million to other companies that brought suits against them under the law. Although the Sherman Anti-Trust Act and subsequent antitrust laws such as the \TClayton Anti-Trust Act\t and the \TRobinson-Patman Act\t have attempted to strengthen competition, many industries remain highly concentrated, others are becoming increasingly concentrated, and most are likely to remain so unless further public action is taken. In the 1970s a number of legislative proposals were advanced to deal with the shared-monopoly problem in highly concentrated industries. The most ambitious effort was the Industrial Reorganization Act, proposed by Senator Philip A. Hart. It and most other bills failed to gain the support needed for passage. In 1976 a mild reform, the Hart-Scott-Rodino Act, also known as the Concentrated Industries Act, strengthened some provisions of the antitrust laws; among other things, it required corporations to notify the \TFederal Trade Commission\t before consummating mergers above a certain size. Another key provision authorized state attorneys general to bring antitrust suits on behalf of citizens. Other countries have also adopted forms of antitrust legislation, although none are as extensive as the U.S. laws. After World War II the Japanese proceeded to break up some of their large family-owned combines, the \Tzaibatsu\t. Japan also established a Fair Trade Commission, but it has been much less active than its U.S. counterparts, the Federal Trade Commission and the Antitrust Division of the Department of Justice. When Western European nations formed the \TEuropean Economic Community\t in 1958, they also adopted a common antitrust law. The law has been generally effective in preventing the reemergence of cartels, or formal agreements to limit competition, that were common in Europe before World War II. It does little, however, to prevent mergers, which have been widespread among European companies in recent years. Some other nations, including Korea and Pakistan, also have antitrust laws. These laws are usually aimed particularly at price-fixing cartels. In recent years state-controlled cartels have reappeared on the international scene, most notably, the \TOrganization of Petroleum Exporting Countries\t (\TOPEC\t). Willard F. Mueller Bibliography: Adams, Walter, The Structure of American Industry, 7th ed. (1985); Blair, John, Economic Concentration (1972); Chamberlin, Edward H., Theory of Monopolistic Competition, 8th ed. (1962); Greer, Douglas F., Industrial Organization and Public Policy, 2d ed. (1984); Herman, Edward S., Corporate Control, Corporate Power (1982); Kefauver, Estes, In a Few Hands: Monopoly Power in America, ed. by Irene Till (1965); Mueller, Willard F., Primer on Monopoly and Competition (1970); Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance (1985); Rhoades, Stephen A., Power, Empire Building, and Mergers (1983); Shepherd, William G., The Economics of Industrial Organization, 2d ed. (1985); Stocking, George W., and Watkins, Myron W., Monopoly and Free Enterprise (1951; repr. 1968).