Coercive monopoly

From Academic Kids

In economics, a coercive monopoly is a form of monopoly in which a firm maintains its status as the sole provider of a good or service by using coercion (either legal or illegal) to prohibit competition.

Coercive monopolies are distinguished from other forms of monopoly in that they maintain their monopoly status via coercive barriers to entry. Whereas in natural monopolies, potential competitors are commonly said to be deterred from entering the market due to the "cost structure" of the industry, in coercive monopolies potential competitors do not enter the marketplace because of the existence of a use or threat of physical force that deters or prohibits them from doing so. This coercion may be initiated by the government, by the firm itself, or by a third party. Coercive monopolies can be divided into three broad categories, based on who holds the monopoly and who enforces it:

  • Rackets, in which a private firm gains monopoly status by forcing competitors out of the market using extortion or other criminal means
  • Government-granted monopolies, in which a private firm is granted monopoly status by the government and competitors are prohibited from entering the market by law
  • Government monopolies (also known as state monopolies), in which a government agency is given monopoly status and competitors are prohibited from entering the market by law

Types of Coercive Monopoly

A corporation which successfully engages in coercion to prevent competitors entering the market operates a coercive monopoly. A firm may use illegal or non-economic methods, such as extortion, to achieve and retain monopoly status. A company which has become the sole supplier of a commodity through non-coercive means (such as by simply outcompeting all other firms), may exploit its position to maintain a monopoly --typically, engaging in activities that result in what are commonly referred to as "barriers to entry", although it is a matter of debate whether particular barriers to entry are coercive in nature. For example, some say high costs required to compete are a barrier to entry, but free market advocates would say that the market is still free since competition is allowed to anyone that can raise the funds to compete, and that hence it cannot rightfully by called a "coercive monopoly."

In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and monopoly status is sustained by the enforcement of laws or regulations that ban competition, or reserve exclusive control over factors of production for the government. The state-owned petroleum companies that are common in oil-rich developing countries (such as Aramco in Saudi Arabia or PDVSA in Venezuela) are examples of government monopolies created through nationalization of resources and existing firms; the United States Postal Service is an example of a government monopoly created through laws that ban potential competitors such as UPS or FedEx from offering competing services (in this case, first-class mail delivery).1

Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In government monopoly, the holder of the monopoly is formally the government itself and the group of people who make business decisions is an agency under the government's direct authority. In government-granted monopoly, on the other hand, the monopoly is enforced through law, but the holder of the monopoly is formally a private firm, or a subsidiary division of a private firm, which makes its own business decisions. Examples of government-granted monopolies include cable television and water providers in many municipalities in the United States, exclusive petroleum exploration grants to companies such as Standard Oil in many countries, and historically, lucrative colonial "joint stock" companies such as the Dutch East India Company, which were granted exclusive trading privileges with colonial possessions under mercantilist economic policy.

Political Debates

In ordinary language, describing a practice as coercive usually entails a condemnation of that practice. But it should be remembered that "coercive monopoly" is a technical term within economics which describes a particular form of monopoly without necessarily making any claims about whether such a monopoly should or should not exist. Thus, there are at least two distinct questions involved in political debates over coercive monopolies:

  1. Whether or not the methods through which a particular monopoly is established are, in fact, coercive
  2. Whether or not a coercive monopoly in a particular market is justified

Debates on the first question are usually tied to debates over the nature of property; since coercion (in the economic sense) is tied to force used against person or property, it is sometimes a matter of controversy over whether a particular use of government enforcement is or is not coercive because it is a matter of controversy whether what is being restricted by the enforcement is or is not the legitimate property of the person trying to use it. For example, anarchists who hold a possession theory of property sometimes allege that free market capitalism as a whole is itself a form of coercive monopoly, because it depends on the enforcement of titles to land and capital that (on their theory of just ownership) are not actually the legitimate property of the capitalists who claim them. (Advocates of capitalism, of course, typically hold a different theory of ownership and regard the titles to land and capital as legitimately enforceable.) Similarly, debates over the legitimacy of legal protections for copyrights and patents often revolve around the legitimacy of intellectual property claims -- that is, whether or not intellectual objects such as creative works and techniques can be proper candidates for exclusive ownership. If they can, then the government is simply enforcing property claims when it imposes restrictions on unauthorized copying or use of a technique; if they cannot, then the government is enforcing a coercive monopoly.

But as we have mentioned, in either case, you might accept that something is a coercive monopoly but still defend it. Debates on the second question typically focus whether or not state monopolies or government-granted monopolies are morally or legally justifiable. (There are relatively few explicit defenders of private rackets.) Advocates of laissez-faire economic policy usually oppose all government-enforced monopolies on principle, as restraints on the free market (which they condemn either as a violation of natural rights, or as inefficient on utilitarian grounds, or both). Defenders of economic intervention often claim that without government intervention, big business is able to dominate economic activity to the detriment of workers and consumers--possibly by forming private cartels or monopolies--and that state monopolies or government-granted monopolies are one tool — along with others, such as anti-trust legislation — by which a democratically accountable government might be able to exert popular control over big business and promote the people's legitimate interests.

Some free market advocates argue that these fears are misguided, in part, because coercive monopolies are the only form of monopoly that can remain economically stable in the long run: they point out that many of the usual examples of damaging natural monopolies--such as Standard Oil or AT&T--weren't actually natural monopolies at all, but rather gained much of their profits and their dominant market position from lucrative government-granted monopolies. They argue that under free market competition, any firm that tries to exercise monopoly power will thereby create economic incentives for competitors, and thus undermine its own monopoly status. Advocates of this line often reject the concept of a natural monopoly as a myth used to justify what they regard as irrational intervention into the free market.


1. Lysander Spooner started the commercially successful American Letter Mail Company in order to compete with the United States Post Office by providing lower rates. He was successfully challenged by the U.S. government and exhausted his resources trying to defend what he believed to be his right to compete.

See also

Free market, Government-granted monopoly, Government monopoly, Natural monopoly

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