Sheltered monopoly

A sheltered monopoly refers to a market situation where a single company dominates the market for a product or service and is protected from competition due to regulatory, legal, or other barriers.
Updated: Jun 7, 2024

3 key takeaways

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Sheltered monopolies exist due to barriers that protect a single company from competition, which can lead to higher prices and reduced innovation.

  • A sheltered monopoly is protected from competition by barriers such as regulations, patents, or high entry costs.
  • These monopolies can lead to inefficiencies in the market, including higher prices and reduced innovation.
  • Understanding and addressing sheltered monopolies is crucial for promoting fair competition and consumer welfare.

What is a sheltered monopoly?

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A sheltered monopoly occurs when a single firm has exclusive control over a market or industry and is protected from potential competitors by various barriers. These barriers can include government regulations, legal protections like patents, high startup costs, or exclusive access to essential resources. As a result, the monopoly can set prices and control the market without the threat of new entrants challenging its position.

Causes of sheltered monopolies

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Sheltered monopolies can arise from several sources:

  • Regulatory barriers: Governments may grant exclusive rights to a single company to operate in a specific industry, such as utilities or public transportation, to ensure consistent service and quality.
  • Patents and intellectual property: Legal protections can give a company exclusive rights to produce and sell a particular product or technology, preventing others from entering the market.
  • High entry costs: Significant startup costs, such as infrastructure investments or research and development expenses, can deter new competitors from entering the market.
  • Exclusive access to resources: A company may control essential resources or supply chains that are necessary for production, making it difficult for other firms to compete.

Examples of sheltered monopolies

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  1. Public utilities: In many regions, public utilities like electricity, water, and natural gas are provided by a single company protected by government regulations. These monopolies are intended to ensure reliable service but can also lead to higher prices and less innovation.
  2. Pharmaceutical industry: Companies that hold patents for new drugs have a sheltered monopoly on those medications for the duration of the patent. This exclusivity allows them to set higher prices without competition but is intended to incentivize innovation and recoup research costs.
  3. Telecommunications: In some areas, telecommunications companies have exclusive rights to provide certain services, protected by regulatory barriers. This can limit competition and lead to higher costs for consumers.

Impacts of sheltered monopolies

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Sheltered monopolies can have several negative impacts on the market and consumers:

  • Higher prices: Without competition, monopolies can set higher prices, leading to increased costs for consumers.
  • Reduced innovation: The lack of competitive pressure can result in less innovation and slower technological advancement.
  • Inefficiencies: Monopolies may become complacent, leading to inefficiencies in production and service delivery.
  • Consumer choice: Limited competition can reduce the variety of products and services available to consumers.

Addressing sheltered monopolies

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Governments and regulatory bodies can take several steps to address the issues posed by sheltered monopolies:

  • Regulation and oversight: Implementing regulations to control prices and ensure fair practices can help mitigate the negative effects of monopolies.
  • Encouraging competition: Reducing barriers to entry, such as easing regulatory restrictions or providing incentives for new firms, can foster competition.
  • Antitrust actions: Governments can use antitrust laws to break up monopolies or prevent anti-competitive practices.
  • Innovation incentives: Encouraging research and development through grants or tax incentives can promote innovation and competition, even in markets with high entry costs.

Understanding and managing sheltered monopolies is crucial for promoting a competitive market environment that benefits consumers through lower prices, increased innovation, and greater choice.

Addressing the challenges posed by these monopolies requires a balanced approach that considers the reasons for their existence while fostering a competitive and dynamic market.

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AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the knowledge base, understands over 100,000... read more.