Is a monopoly a good thing? From the standpoint of economists, monopolies are anything but good. Economists believe that the perfect economy would be one that has many competitors with significantly low barriers to entry. Such an economy would greatly benefit the consumer due to the lower prices of the products. From a businessmans standpoint though, a monopoly is not so bad. The biggest threat to a company or firm is competition. Competition drives prices down resulting in less profit. The main goal of a businessman is to make a profit, which is hindered by competition. Generally, economists and businessmen do not see eye to eye on the subject of monopolies for this reason. The question is, is a monopoly a good thing? The answer to this question will be attempted through the outcome of this paper.
Before exploring the qualities of a monopoly, it must first be defined. A monopoly is simply a market structure characterized by a single seller of a well-defined product for which there are no good substitutes and there are high barriers to entry for any other firm into the market for that product.In other words, a monopoly exists when only one firm in the market is selling a product, and entry into the market by other competitors is difficult. For this reason, a monopoly is not the best form of structure according to an economists standpoint.
Can a monopoly be good? The answer to this question has been widely negotiated. In some instances, a monopoly is essential. The post office and utilities companies are two examples of when a monopoly is necessary. Some argue that the long-distance phone company, should also be a monopoly as well.
AT&T (American Telephone and Telegraph) is the largest telecommunications company in the United states, and a worldwide leader in communications services.It was the parent company of the Bell System until January 1, 1984.The deregulation of AT&T was primarily based on the principle that low-volume, local exchange service is a natural monopoly;
while, high-volume long-distance service fit the competitive model.Because of the technological change from micro-wave to fiber optic technology, the phone service would be better served as a monopoly.Microwave technology dominated the long-distance industry between the years 1950 to the early 1980s.
The base component of the micro-wave technology is a transceiver that can hold up to 12 voice phone calls. The demand for long-distance calls at any one time was clearly greater than 12 calls, which means that multiple links would have to exist. Under this technology, the transmission cost increases with the volume of calls and the average cost per call was generally constant as volume increased. Sub-additivity cannot hold in an industry with constant average costs, so the industry was naturally competitive
Due to the nature of microwave technology, competition was essential in the market structure. For this reason AT&T, accused of being a monopoly, was forced into deregulation. The Bell monopoly was forced to break up to make room for competition in the micro-wave technology. While the government was tending to the micro-wave technology, fiber optic technology started to emerge and take over as the means of long-distance transmission. This great technological change proved government intervention in regulating micro-wave technology futile.
As the market of telecommunications was undergoing a face-lift, so was the telephone giant AT&T. An anti-trust suit was filed against the company in 1974, and settled in January of 1982.AT&T then entered the divestiture stage on January 1, 1984. The company agreed to the guidelines set by the Federal Communications Commission (FCC), to remove itself from the Bell companies completely, and have nothing to do with local telephone service.This move to divestiture may look like a downfall for AT&T, but do not be fooled. Divestiture could be more of a blessing than a curse.
When looking at just the surface layer of the outcome of AT&Ts divestiture, it may looking alarmingly like the company suffered a loss. Further investigation shows that the company actually experienced gains due to divestiture. At the time of the divestiture in 1984, AT&T had 96% of the business; by 1994 that share had fallen to 61%.Prices appeared to be falling, but the overall value of long distance service rose dramatically. Long-distance service rose from $34 billion in 1984 to $64 billion in 1994.As demonstrated by the figures provided, business took off after divestiture for AT&T.While profits for long-distance services were rising profits for local service was also rising. The seven Regional Bell Operating Companies (RBOCs) that formed from the BOCs at divestiture still controlled 98% of all local serviceTherefore, divestiture seemed to be a win-win situation for everyone.
Not only did profits increase, but jobs also increased. As a result of divestiture, the demand for installers, manager, linespersons, and operators rose.In other words, not only did the company benefit from divestiture, but the employees also benefited. If employees benefit from divestiture, then would the converse of this statement also be true? Would no regulation actually hurt the firm? Not necessarily, though divestiture does seem to display increased gaining. Extensive studies have predicted that regulation of a firm will increase profit by almost $300 billion in real GDP and create almost 3.6 million new jobs by the year 2005.
The future looks much better for AT&T since deregulation in 1984. The company could look at its deregulation as an opportunity to expand. After deregulation, AT&T was faced with the dilemma of transforming itself. It was during this time of transition that the company developed a partnership with Y&R Inc.This partnership has proven to be successful for AT&T. Along with Y&R Inc., the team has cooperated in promoting AT&Ts growth in several businesses including: AT&T Wireless Services, AT&T Worldnet Service, and other personal on-line services as well. It cannot be totally believed that divestiture will automatically lead to such vast improvements of a company, but in the case of AT&T, divestiture proved to be advantageous.
The 1984 divestiture proved to be a turning point for the telecommunications giant, AT&T. Profits increased during post-divestiture, more jobs were available, and company expansion became an opportunity. All of these factors proved to be great advantages for the company. Therefore, in AT&Ts case, a monopoly is not the best form of market structure.