Coercive Monopoly - Government Monopolies

Government Monopolies

Undisputed examples of coercive monopolies are those that are enforced by law. In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the coercive 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 coercive monopoly created through laws that ban potential competitors such as UPS or FedEx from offering competing services (in this case, first-class and standard (formerly called "third-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 coercive 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. Intellectual property such as copyrights and patents are government-granted monopolies. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton by the State of New York in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional because of a conflicting inter-state grant to Thomas Gibbons by the federal Congress. 2

Economist Lawrence W. Reed says that a government can cause a coercive monopoly without explicitly banning competition but by "simply privileges, immunities, or subsidies on one firm while imposing costly requirements on all others." For example, Alan Greenspan, in his essay Antitrust argues that land subsidies to railroad companies in the western portion of the U.S. in 19th century created a coercive monopoly position. He says that "with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East." In addition, some claim that regulations can be established that place burdens on smaller firms that attempt to compete with an industry leader.