What is Legal Monopoly?
A legal monopoly refers to a company that operates as a monopoly under a government mandate and is protected by law from competitors. Also, it is s also known as a statutory monopoly. They can be either run independently and government regulated, or both run and regulated by the government.Also it can be established through the following ways:
- Public franchise
- Government license
- Patent or Copyright
How do Legal Monopolies work?
So it is ordered when it is beneficial for both the citizens and the government. For e.g., in the U.S., AT&T operated as a legal monopoly until 1982 because it was very cheap and had reliable service that was easily available to everyone. Real roads and airlines have also operated as this structure throughout different periods in history. The idea behind implementing legal monopolies is that if too many competitors invest in their own delivery infrastructure, prices across the board would climb to very high levels. As technologies advances and economies evolve, playing fields level out, all on their own. In other words: competition ultimately benefits consumers, more-so than legal monopolies do.
Disadvantages of Legal Monopolies
Legal monopolies rectify a number of disadvantages in a monopoly. The biggest disadvantage behind such a monopoly is the lack of incentive to improve the product or service offered and a potential limitation of innovation. Monopolies do not need to innovate on their products/services or provide exceptional customer service as there are no competitors in the market.
As mentioned above, AT&T is the best example of a legal monopoly. It was in effect up until 1982. The firm inventor formed and established the company in 1907. With the company’s service used by all citizens of the United States, many believed that the government would step in and take over AT&T to prevent the firm from gaining too much power. In 1913, the justice department reached a settlement with AT&T and the firm was allowed to operate as a monopoly for the next 7 decades. In 1970, The Federal Communications Commission allowed limited competition. Some distance providers filed an antitrust lawsuit against AT&T in 1974. This required AT&T to divest its operating companies by reaching a settlement in 1982. Due to this, the government felt no need for AT&T to maintain its monopoly status, and the monopoly came to an end in 1982.
Case Studies:US Postal service
One well-known example of a legal monopoly is the United States Postal Service (USPS). The USPS is a government-owned corporation that has been granted a legal monopoly on the delivery of letters and other mail within the United States. This means that no other company or organization is legally allowed to deliver mail within the US, and the USPS has exclusive rights to this market.
This legal monopoly has allowed the USPS to build a nationwide network of post offices and mail delivery routes, which is difficult for a private company to replicate. However, the USPS has faced criticism for poor service, high prices, and lack of innovation. In recent years, the USPS has struggled financially, due to decreased mail volume, increased competition from digital alternatives, and a lack of funding from the government.
Case Study: De Beers
Another example of legal monopoly, is the case of De Beers, a South African company, that was a legal monopoly in the diamond market. They controlled around 80-90% of the diamond trade by controlling the supply of rough diamonds that were being mined, and then controlling the distribution of those diamonds through its diamond cutting and trading arm, the Diamond Trading Company.
This monopoly allowed De Beers to maintain control over prices and keep them artificially high. Critics have argued that this led to a lack of competition, which stifled innovation and kept prices higher than they would have been otherwise. Nevertheless, their monopoly was ended due to the discovery of diamond mines in Russia and Canada, which broke their control on the supply and prices of diamond.
Both examples demonstrate how legal monopoly can have both benefits and drawbacks and how the market, laws and regulations can change over time.
Legal monopolies can be beneficial in certain situations, as they can allow a company to invest in expensive infrastructure or research and development without the risk of competition. However, they can also lead to high prices, poor service, and lack of innovation. Some legal monopolies are regulated by government bodies to ensure that they do not abuse their power, and to protect the consumers.