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Legal Monopoly

Updated on January 29, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

A legal monopoly occurs when government instructs a company to become the sole seller in a particular industry. So, the government order makes the company a monopoly, and the company gets legal protection from competition.

It is also known as a statutory monopoly or de jure monopoly. It can be independently-run, government-run, or partially dependent on government; however, in both cases, government regulation is inevitable. The opposite concept is the de facto or natural monopoly the government does not create. Natural monopolies face more barriers than statutory monopolies or de jure monopolies.

Key Takeaways

  • A legal monopoly occurs when a company becomes the exclusive provider of a specific product or service with a government order. It is also known as a statutory monopoly.
  • These companies face strong government intervention and get legal protection from competition.
  • The main types are government licenses, public franchises, patents, and trademarks. It protects consumer interests, price regulations, and overall affordability.
  • It can result in a lack of innovations and poor quality.

A legal monopoly is a mandate provided by the government to a single company to operate in a particular sector or industry with absolute power to manufacture and render goods and services along with the assurance that no other company will take part in the business apart from them. Moreover, it helps government regulate prices in that sector. Hence explains how government action of creating legal monopolies creates a balance of price and controls supply and demand forces.

The government uses mandates to let an organization enter and operate in a certain industry alone and prohibit others from entering the industry. It may help companies generate more revenue, reach out to a wide scope of consumers, and enjoy a sense of market leadership but have followed and abide by government regulations and policies, so in a way, loses a partial sense of decision making.

One of the critical problems with legal monopolies is that once a company receives a mandate or license to operate in a certain market or industry, it eliminates consumers’ choices and alternatives. Simultaneously, it may diminish the firms in legal monopolies’ drive to innovate and provide better products and services to consumers. Furthermore, it can also worsen gender inequality.

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Video Explanation of Monopoly Examples

 
Legal monopoly

A patent, copyright, or trademark gives the inventor the right to the sole production of their product, thereby rewarding invention and restricting competition from emerging for years. In other words, the inventor gets exclusionary rights and excludes third parties from making, using, selling, etc., inventions protected by patent. It is also known as a monopoly right and a method to incentivize innovation. In the United States, it is granted by the United States Patent and Trademark Office (USPTO), enabling a firm to manufacture a product assuring no competition against it.

Government License

A company receives and operates on a license to work in a market, becoming the sole and exclusive provider of goods and services. Government permits the license to only one entity. Hence, there is no competition allowed. It can be awarded to a company to operate at the national, state, district, or city-based level.

Public Franchise

It is a state-sponsored monopoly where the company restricts the entry of firms and provides and regulates all the business of a market through a single firm. Some good examples are the US postal service and the drinking water supply. Due to lack of competition, the price variation is reduced to the minimum. Also, it does not depend on the supply and demand rule. Public franchise firms have assurance and security backed by the government.

Examples

Let’s look into some of the legal monopoly examples:

Arthur runs a pharmaceutical company; he started the business only two years ago and has earned quite a name and reputation for his business and himself; though the company is doing good, there is a lot of competition in the market. Arthur received a license from the government for his company to manufacture a specific vaccine.

Arthur started manufacturing the vaccine. The company has no competition in that specific vaccine market, as the government has given the company the sole right to manufacture and sell the vaccine. The authority prohibits the other companies in the market from manufacturing the specific vaccine, and therefore Arthur’s company enjoys a legal monopoly in that specific vaccine segment.

Mail service is one of the most common legal monopolies observed in the US and Europe. Being a legal monopoly, the United States Postal Service (USPS) in America maintains reduced costs and high-quality services. UPSC delivers more than 100 million delivery points across the United States six days per week.

Frequently Asked Questions (FAQs)

What is the legal definition of monopoly?

The legal definition portrays it as a market system containing only a single seller dealing with a particular good or service. As the only seller of the goods or services with no viable alternatives, the seller in a monopoly market has no rivals.

What is an illegal monopoly?

An illegal monopoly results when the leading market participant engages in exploitative or exclusive practices. Illegal monopolies strengthen their position as the dominant player in the market by utilizing exclusive deals, price discrimination, and tying contracts.

What are the laws against monopolies?

State antitrust laws, such as the Cartwright Act in California and federal antitrust law, most notably the Sherman Antitrust Act, forbid anticompetitive monopolization. Private parties (companies or consumers) affected by anticompetitive behavior may file antitrust lawsuits under federal and state statutes, seeking damages and injunctive remedies.

This is a Guide to legal monopoly and its definition. We explain its examples, laws, types like patents, copyright, & what is an illegal monopoly. You can learn more from the following articles –

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