Two Theories of Monopoly and Competition: Implications and Applications

This paper addresses the claim that monopolies arise naturally out of the free market. I show by comparing and contrasting two theories of monopoly—economic and political monopoly—that this is not true. This paper also demonstrates that the two theories of monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry. I show that only one of these theories of competition accurately describes the nature of competition in an economy. In addition, I show how these different theories of competition and monopoly are derived from diametrically opposed political philosophies: collectivism and individualism. I illustrate how perfect competition and economic monopoly have undermined economists’ understanding of the actual nature of both competition and monopoly. As a part of my investigation of these very different theories of competition and monopoly, I apply them to show how, depending on which theories one accepts, one will come to very different conclusions about when monopoly power does or does not exist.