Page 176 - Business Principles and Management

Chapter 7 • Legal Aspects of Business

NATURAL MONOPOLIES
In some situations, a natural monopoly may be better for consumers than compe-
tition because of the large cost involved in developing or supplying a product or
service. These situations usually involve providing public services, such as public
utilities, which have a fairly stable demand and which are costly to create.
A natural gas company, for example, must build hundreds of miles of pipeline
along streets and roads in order to deliver gas to homes and industries to fuel
furnaces and stoves. If two or three gas companies incurred
these same costs to sell gas to a relatively fixed number of
customers, the price of gas would be higher than if only one
company existed. Also, installing and maintaining so many business note
pipelines would create nuisance problems along crowded
streets and highways. In these types of situations, the govern-
ment grants a monopoly to one company, regulates the prices
that the company can charge, and influences other company At one time the telecommunications (tele-
policies. phone) industry was viewed as a natural
Until recently, the federal government had approved monopoly. American Telephone & Telegraph
of closely regulated monopolies, such as the postal system, (AT&T) was given the public monopoly. In
utility companies, railroads, and communication firms. 1984, competitor lawsuits forced AT&T to
However, the trend has shifted from allowing monopolies be broken into seven Baby Bells. The rise of
to weakening or eliminating them in order to encourage independent cellular phone companies has
competition. No longer, for example, are passenger fares on created enough competition to allow some
commercial airlines regulated. As a result, fares have gener- Baby Bells to merge back into larger compa-
ally dropped. Even telephone service, the trucking industry, nies, even forming a new AT&T. How has
and railroads have been deregulated. Today utilities are un- the breakup of AT&T affected communica-
dergoing deregulation. Firms such as Cingular and Sprint tion in the United States?
offer communication services at competitive prices and com-
pete fiercely. The result overall has been that consumers pay
lower prices and have more services from which to select.

CHECKPOINT

Describe the reasons that society may want to allow
a natural monopoly.

Promoting Fair Competition

One way to promote competition is to limit the number of monopolies created
and controlled by government. Monopoly conditions can also arise when busi-
nesses compete too harshly or unfairly. A large, powerful business can lower its
prices deliberately to drive out competitors, thereby discouraging competition.
Thus, the federal government supports business practices that encourage compe-
tition and discourage monopolies. To achieve this goal, government has passed
important laws and created agencies to enforce the laws.

SHERMAN ACT
The first major law promoting competition was the Sherman Antitrust Act of
1890. One of its primary purposes is to discourage monopolies by outlawing
business agreements among competitors that might tend to promote monopolies.

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