The monopolistic nature of businesses

Throughout much of economic history, monopoly existed. In ancient times, limited resources affected the lives of human being and their activities. And when resources are very scarce, there is lesser array of products and services that could be offered.

During the Renaissance Era, monopoly was a practical strategy for sovereigns since communities needed income to support basic needs like electricity, water supply and other development projects. At that time, those that were given exclusive operation rights were companies involved in manufacturing and trading basic needs such as salt and tobacco, and in the process receives share of the profits for the mentioned projects (MSN Encarta, 2008).

In the Industrial era there was a reversal of monopoly into a competitive economic situation since numerous and small industries emerged. However, by late 19th century, in the course of a free competitive economic order, big businesses surfaced and dominated some industries (MSN Encarta, 2008).

To this day, monopolies still exist. But the government, as protector of the rights and privileges of every sector of society, puts a hand on this economic condition to safeguard competitive business ventures and public interest. This paper will discuss some of the kinds of monopolies and cite examples of economic situations wherein they are evident.

Monopoly

A monopoly is an economic situation in which one supplier dominates and sets price and quantity of goods or services. The assumption in monopoly is that there are no substitutes and the firm is thus a price-maker. The firm may be motivated by profit maximization, and restrictive barriers to entry of the market prevent competition. Output is set at the point at which marginal revenue equals marginal cost (MSN Encarta, 2008).

Monopoly power can be seen nowadays through multinational companies around the world, especially in developing countries. Where given free trade, it is usually the big corporations that are favored by government, customers and job seekers as well. Therefore, these big corporations control production, price and the market segments. Another thing is that globalization has made it easier for these companies to create empires where they exploit monopoly powers.

Microsoft Corporation’s Monopoly Case

The United States Department of Justice (DOJ) in 1996 alleged that Microsoft Corporation monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly, that it attempted to monopolize the market for internet browsers because such browsers would create competition for operating systems, and that it bundled its browser (Internet Explorer) with Windows (Economides, 2001).

Since the introduction of personal computers, it has been known that the software installed in each unit is from Microsoft and that’s the reason why they became the standard.

And isn’t it that we get the programs free with the computers we buy? Microsoft became a monopoly because of the fact that its founder, Bill Gates, has created operating systems that can be run with compatible machines and other applications. Since Microsoft’s product is universally useful, it gained support from the practical consumers. Thus, this strategy has driven competitors away, and being the standard, Microsoft became the price maker in the industry.

Looking at the business strategy, Microsoft’s is one that is effective and definitely a big profit maker. But as said, government sees this as public interest that’s why the DOJ investigated evidences to prove Microsoft’s antitrust acts. Government considers business acts of Microsoft as harmful to competitors and consumers. One act that could be cited for such prohibition is the Clayton Antitrust

Act which supplements US antitrust laws to protect against discrimination in economic competition and exclusive selling or leasing or price fixing. This legislation was passed by the US Congress in 1914 to prevent monopolistic practices that were common in finance, trade and industry. This was also an amendment to the Sherman Antitrust Act (MSN Encarta, 2008).

Wal-Mart’s Winning Strategy

Wal-Mart was launched in 1962 with a single store in Rogers, Arkansas. Today, Wal-Mart is known to be the world’s largest and leader in discount retailing. In the 1980’s, Wal-Mart’s founder, Sam Walton, was ranked as the richest man in the United States. To date, as of 2006 data, the company ended that year with $349 billion in sales, nearly 2 million in employees and 6,775 stores worldwide (Wailgum, 2007).

Much to be credited for Wal-Mart’s success is Walton’s benevolent vision of creating a superstore that caters to the needs and budget of its customers. Its strategy was putting on an everyday “on-sale” business. With this, customers are trilled to shop as they get the best bargain in town as compared to visiting Wal-Mart’s competing retail stores. Wal-Mart has been really a one-stop shop with excellent customer relations.

Walking through Wal-Mart’s history, one sees the growth of the stores along with the development in technology. Innovation is one key characteristic that brought the company to the top. By the 1970’s, it is the first in the industry to have electronic cash register to record daily sales for efficient inventory, and built computer networks as well as ordering systems of merchandise from suppliers.

Sticking to its customer-oriented values, service with a smile was practiced and customer satisfaction was always put on priority, even accepting defective items after a month from cash out. By 1996 onwards, with the aid of internet connectivity, Wal-Mart has grown with the technology with the Retail Link and EDI availability and the launch of online stores of Wal-Mart and Sam’s Club. Its website also has undergone modifications with coordination contracts with Oracle and Hewlett-Packard in the use of price-optimization and retail applications. And currently, it launched Site to Store service where customers using online services are able to pick up merchandise in stores (Wailgum, 2007).

In this Wal-Mart case, its monopolistic nature is manifested in the company’s dominance in the retail industry throughout its existence. This takes the form of a merger monopoly, a horizontal arrangement wherein it collectively encompasses firms belonging in the same industry at equivalent levels in production chain (Encarta, 2007). The superstores that Walton has envisioned were total haven for customers looking for branded or non-branded products as long as it suits their shopping budget. With this strategy, Wal-Mart does not necessarily eliminate competition, but puts premium on maintaining good rapport with customers and suppliers.

Thus maintains customer and supplier loyalty. Although it has experienced bad publicity due to its labor cases on employees’ off-the-clock suits, cases on low employee welfare and benefits, Wal-Mart remains a profit maker and leader in the retail business. It’s just that the monopolistic tendency of having created such a big retail empire is the inefficiency in aspects of human resources, political issues in location countries and maybe lapses in technology.

Cartel Monopoly

Monopoly takes different forms in creating industries. One of the best known combinations is the cartel, and the popularly known cartel worldwide is the Organization of the Petroleum Exporting Countries (OPEC). It is a permanent inter-government organization, currently consisting of 13 oil producing and exporting countries, spread across three continents: America, Asia and Africa (www.opec.org, 2008). A list of full members is shown on the next page with their respective crude oil production, from biggest to the least producer.

A cartel is an economic combination wherein the objective is to limit competition in one industry. A number of firms organize a group with the purpose of regulating the price of their commodity in the market as well as setting production quotas for each firm for market allocation. OPEC exhibits all these practices but mostly known for their publicized acts of setting the world price of petroleum (MSN Encarta, 2008). For these member countries, oil is the main commodity for income generation especially as their export product.

Being part of the cartel assures members of stable market for their product and proper allocation and pricing. The bad side is that non-member countries may set petroleum prices that are lower that the cartel. This kind of monopoly is somehow self-regulating yet on the other hand, exhibits monopoly power in terms of being allies in safeguarding social, political and economic interests compared to non-member oil producing countries.

Table 1. List of OPEC full members in order of their respective crude oil production.

OPEC Full Members Year Joined Location Crude Oil Production (1,000 barrel per day) 1. Saudi Arabia* 1960 Middle East 9,208 2. Iran* 1960 Middle East 4,073 3. Venezuela* 1960 South America 3,107 4. Kuwait* 1960 Middle East 2,665 5. United Arab Emirates 1967 Middle East 2,568 6. Nigeria 1971 Africa 2,234 7. Iraq* 1960 Middle East 2,020 8. Libya 1962 Africa 1,751 9. Angola 2007 Africa 1,392 10. Algeria 1969 Africa 1,369 11. Indonesia 1962 Asia 883 12. Qatar 1961 Middle East 803 13. Ecuador** rejoined 2007 South America 537 *Founder Members **Ecuador joined in 1973 , suspended its membership from Dec. 1992 to Oct. 2007 Conclusion

As the popular board game of Monopoly’s ultimate goal is to finish the game with the most money at hand and the biggest assets, so as the operations of big businesses. This monopolistic nature has been the inevitable consequence of being big in the industry that any firm belongs. For multinational corporations, it is perceived that they use monopoly power to strategically eliminate competition, especially for domestic firms, to control the world economy. With government’s intervention on existence of monopolies, controlled economic situations are being prevented and at the same time, give opportunities for other players in the market to compete in terms of quality and price of goods and services.

One thing that is beneficial from monopolies is that they set the standard or trend in the market. But as we are in a global village were distance and other economic gaps are virtually diminishing, new forms of monopoly are emerging and gaining dominance in the world economy. But as long as there are government policies to safeguard public interest, hopefully monopolies could be regulated in the creation of a free market.

References

Economides, N. (2001). The Microsoft Antitrust Case. Journal of Industry, Competition and Trade, Volume 1, Number 1, March 2001 , pp. 7-39

Frank, T.A. (2006). A Brief History of Wal-Mart. Retrieved May 27, 2008, from http://www.reclaimdemocracy.org/walmart/2006/history.php

Monopoly. (1993-2008). Retrieved May 27, 2008, from http://encarta.msn.com/encyclopedia_761567422/monopoly.html

Organization of the Petroleum Exporting Countries. (2008). What is OPEC? Retrieved May 27, 2008, from http://www.opec.org/library/what%20is%20OPEC/WhatisOPEC.pdf

Wailgum, T. (2007). 45 Years of Wal-Mart History: A Technology Time Line. Retrieved May 27, 2008, from http://www.cio.com/article/147005