What is a Legal Monopoly in simple terms ?-How it works, advantages and disadvantages?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is Legal Monopoly?
  2. How do Legal Monopolies work?
  3. Disadvantage of Monopoly
  4. Example

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. A legal monopoly is also known as a statutory monopoly. They can be either run independently and government regulated, or both run and regulated by the government. Legal monopolies can be established through the following ways:

  • Public franchise
  • Government license
  • Patent or Copyright

How do Legal Monopolies work?

A legal monopoly 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 legal monopolies 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. 

 

Example

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.

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