A variety of abusive non-market tactics, often referred to as predatory tactics, are typically used by monopolies in order to retain and expand their monopoly positions1 and by companies that are attempting to become monopolies.
Monopoly is a term used by economists to refer to the situation in which there is a single, dominant producer or seller of a product (i.e., a good or service) for which there are no good substitutes. Monopoly is a matter of degree, and there may be some small amount of competition, although the competitors will have relatively tiny market shares and their products may not be particularly close substitutes for those of the monopolist.
Non-market tactics for maintaining or expanding market share are those other than competing on the basis of price and quality, inclusive of the quality of services associated with a product. Economists widely agree that the maintenance of free competition among firms on the basis of price and quality generally results in the most efficient operation of an economy2, and thus it is common for countries to enact laws that are designed to help establish or preserve such competition. A typical example is antitrust laws3, which are aimed at discouraging the formation of monopolies and at breaking up existing monopolies, or at least at forcing them to stop their predatory tactics.
The various non-market tactics used by monopolists are not always obvious, and monopolists often go to great lengths to keep them from the public view. However, it is important to be aware of such tactics because of the substantial damage that monopolies can cause to economies and societies, as has long been recognized by economists. This damage includes (1) forcing consumers paying far higher prices than they would otherwise pay, (2) providing inferior quality, both of the products themselves and of services associated with the products, (3) slowing the rate of technological advance and (4) increasing corruption of the political system4.
Major monopoly predatory tactics that have been used throughout history, although sometimes with new modifications and guises, include the following:
(1) Temporarily lowering prices, or even offering a product for free, to drive competition out of business. Once the competitors have given up, the monopolist raises prices to their profit-maximizing level (which is usually substantially higher than the level that competitors charged). The variation of this in which a monopolist supplies a new product for which it does not yet have a monopoly along with a product for which it is already a monopolist is referred to as bundling.
(2) Buying out competitors. This can be done either directly or through the use of subsidiaries or other friendly companies to make it less obvious and reduce the risk of complaints from the public and politicians. In addition to buying out existing competitors, it is important for a monopolist to also acquire, or otherwise destroy, potential competitors with promising new technologies. Although the monopolist may obtain and use some such technologies, others may be lost to the society, thereby setting back the pace of technological advance.
(3) Persuading suppliers to boycott competitors, to charge them higher prices and/or to provide them with inferior service. This can also be accomplished by taking control of suppliers (i.e., vertical integration), either by buying them out directly or acquiring them through subsidiaries. Monopolists typically have much leverage with suppliers because of their large purchases and their consequent ability to reward cooperating suppliers and punish uncooperative ones.(4) Getting suppliers to give secret rebates on the suppliers' products (e.g., raw materials or transportation)5. Such rebates can make it look like the monopolist has a lower cost structure than its competitors and thus help drive them out of business. Because of the hidden nature of this practice, it can be difficult for competitors to understand what is really going on and to make timely complaints to government regulatory authorities.
(5) Getting major customers to boycott competitors. There are various ways to accomplish this, including forcing customers to sign exclusivity contracts, giving them secret rebates and using the influence of related companies.
(6) Buying up, renting or otherwise hoarding all of the inputs for the competitor's region until the competitor goes out of business. An example is newspaper advertising, which can be considered an input for many businesses, particularly retail businesses. The buying up of all newspaper advertisement space in a region is a tactic that has been used extensively by large retail chains to help drive small, independent stores in the region out of business.
(7) Lobbying and paying government officials to (a) not pass stricter antitrust legislation or other legislation unfavorable to the monopoly, (b) not enforce existing legislation (or to make only token enforcement), (c) pass legislation that is disadvantageous for competitors, (d) use the monopolist's products exclusively and (e) require that government subcontractors use the monopolist's products or conform to standards controlled by the monopolist. Monopolists are in an ideal position to influence the political process (a) directly because of the large amount of funds that they typically have at their disposal from their monopoly profits and (b) indirectly through their ability to put pressure on their suppliers, customers and related companies to support their efforts.
(8) Paying (or otherwise influencing) existing or potential competitors to drop complaints to government agencies about their illegal tactics.
(9) Physical violence or threats thereof. This was once an important tool in the monopolist's arsenal of tactics, but it is no longer common, at least in most industrialized countries.
(10) Hoarding patents. This is used to discourage potential competitors from developing and deploying new technologies. Even if the monopolist's patents are not relevant to a new technology, a monopolist will often use them to intimidate competitors with the threat of prolonged and costly legal proceedings that smaller companies usually cannot afford.
(11) Controlling standards. One way that this is done is to develop a standard for a product that becomes the de facto standard for the industry and to then use copyrights, patents and other techniques to prevent competitors from being able to fully conform to the standard. Another is to participate in industry-wide standards setting organizations and manipulate them by such techniques as paying other members to support its proposals and using stalling techniques to block unfavorable proposals. A third way is to weaken an existing industry standard by developing products that work with slightly modified versions of it.
(12) User lock-in. This is accomplished by developing products such that it is difficult for users to switch to those of competitors even if competitors come up with less expensive and/or higher quality products. It is closely related to controlling standards.
(13) Announcing a new product far in advance to discourage potential developers of similar products and to discourage users from switching to competitors. In some cases the new product is not actually developed; this is referred to as vaporware in the computer software industry, where it is alleged to be fairly common.
Monopolies usually use a number of these tactics, with the exact combination being determined by the type of industry and the relative ease, risk and effectiveness of each. For example, some tactics might be illegal, depending on the country, or run the risk of provoking an unfavorable public response even if not illegal. Often the criteria are not whether an action is illegal or not, but the extent to which the law will be enforced, if at all, and weighing the possible penalties against the potential gains.
Monopolists usually must pay at least some attention to public opinion. Thus it is commonly the case that their predatory tactics are used in ways that attract as little attention as possible and/or that it appears that the monopolist is actually doing something to benefit its users, the economy and society as a whole. That is, it is often crucial that the predatory techniques used to maintain or extend a monopoly be accompanied by a large and coordinated propaganda effort.
Fortunately for them, monopolists are also in an excellent position to conduct a massive propaganda campaign because of their great profits and the leverage that they typically have with the media (e.g., newspapers and television)6. It is also fortunate for them that most members of the public, and perhaps most politicians as well, are not very familiar with the concept of monopoly, the tactics that monopolies use and the damage that they can cause. Common propaganda tactics that a monopoly will use include:
(1) Claiming that it is not a monopoly. Some monopolies have actually been careful to ensure that small, token competitors survive in order to provide evidence for this assertion.
(2) Claiming that the large market share is the result of customer preference for its products and denying that any alleged abusive practices play a role. Closely related to this is the claim that its larger size makes possible lower cost, better service and more innovation.
(3) Claiming that the dominant market share allows standardization in what would otherwise be a very fragmented industry, thereby creating network effects7 among users. For example, it could be claimed that the only way to ensure that all users of computers could freely exchange word processing documents among themselves would be to have a single word processing program instead of multiple, competing programs with different file formats. This assertion, of course, overlooks that fact that industry-wide standards could achieve the same result.
(4) Claiming that its large size or acquisition of a competitor will benefit consumers and the economy by eliminating wasteful duplication or by allowing the competitor's technology to become available to a wider range of users.
(5) Claiming that its larger size makes it more innovative, and citing token improvements of products and/or the large number of patents that it acquires as evidence of this.
(6) Engaging in charitable activities. Such activities, although they may be genuine, are often used to deflect attention from the unethical and/or illegal activities (e.g., violation of antitrust laws). There is also an implication that such charitable activities would could not occur in the absence of the monopoly. Such activities can include giving funds to unrelated causes and donating relatively small amounts of the monopolist's products to low income people.
One of the most effective tools that monopolists can use in their efforts to maximize the efficiency of the above-mentioned predatory and propaganda tactics is interlocking directorships. This consists of high officials of a monopoly or their family members or close friends sitting on the board of directors of other corporations, including those in very different types of industries, thereby providing strong allies.
One way that interlocking directorships can benefit monopolists is to make it easier for them to put pressure on uncooperative suppliers and customers to boycott existing or potential competitors. Another is to influence companies that are not currently customers to become customers. Interlocking directorships also can provide considerable leverage for a monopolist to obtain greater influence in its lobbying efforts with regard to government agencies, and they can facilitate gaining more control over the media.
For example, by having a family member serve as a director of a leading newspaper or newspaper chain, the monopolist can influence the paper's editorial policy to include favorable articles about the monopolist, tone down or eliminate unfavorable articles about the monopolist, include unfavorable articles about potential competitors, include favorable coverage of friendly politicians and print embarrassing information about uncooperative politicians.
It is clear that monopolists can use a wide arrays of tactics outside of competition on the basis of price and quality in order to maintain and extend their economic and political power. It can also be seen that these tactics can make monopolists so intertwined in the economic and political structure of a country that it can be extremely difficult for not only competitors, but even for non-corrupted officials in the government to restrain them and to force them to adhere to the rules of a market economy8.
2The exception to this is when market failure occurs, such as when there are externalities or natural monopolies. Examples of externalities are air pollution and noise pollution. Natural monopolies are firms that become monopolies without trying because the cost structure of the industry is such that one firm can produce more cheaply than multiple firms. Economists typically advocate some sort of government intervention in the case of market failure.
3The first antitrust law at the federal level in the U.S., and still the most important in many ways, is the Sherman Antitrust Act. It was enacted by Congress in 1890 in response to the growing public revulsion at the widespread and blatant abuses by monopolies that had gained control of almost every major industry as well as of much of the government. The most notorious of these monopolies was The Standard Oil Trust, which became the first to be successfully dismantled under the Sherman Act.
4For a more extensive discussion of this damage, see Monopoly: A Brief Introduction, The Linux Information Project, January 2005.
5Pehaps the most notorious and successful example of this was Standard Oil's widespread use of such rebates from the railroads in order to undercut the shipping costs of its competitors.
6This leverage with the media can result from several factors including that the monopolist (1) might own some of the media either directly or through subsidiaries, (2) might control some of the media through interlocking directorships, (3) might be a major advertiser in the media and (4) can pressure its suppliers, customers and related companies to restrain from advertising in specific media companies that do not cooperate with the monopolist.
7A network effect is a type of externality in which the value of a product to an existing or potential owner or user of it depends on the number of people already owning or using that product. An example is the telephone, because the more people that own telephones, the greater the number of people that each owner can call.
8For example, it took more than two decades of effort before the U.S. government was finally able to bring a halt to the abusive practices of the Standard Oil monopoly. Monopolists are well aware of how long it can take because governments that are prosecuting monopolists must, unlike monopolists, follow the rule of law. Thus delaying tactics are generally a major part of the overall strategy of monopolists for retaining their power.
Created January 4, 2006. Updated February 13, 2007.