Monopoly

The De Beers monopoly of South Africa was created in the 1880s by Cecil Rhodes, a British businessman. By 1880, mines in South Africa already dominated the world’s supply of diamonds. There were, however, many mining companies, all competing with each other. During the 1880s Rhodes bought the great majority of those mines and consolidated them into a single company, De Beers. By 1889, De Beers controlled almost all of the world’s diamond production.

De Beers, in other words, became a monopolist. But what does it mean to be a monopolist? And what do monopolists do?

Defining Monopoly

As we mentioned earlier, the supply and demand model of a market is not universally valid. Instead, it’s a model of perfect competition, which is only one of several types of market structure. A market will be perfectly competitive only if there are many firms, all of which produce the same good. Monopoly is the most extreme departure from perfect competition.

A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

In practice, true monopolies are hard to find in the modern American economy, partly because of legal obstacles. A contemporary entrepreneur who tried to consolidate all the firms in an industry the way Rhodes did would soon find himself in court, accused of breaking antitrust laws, which are intended to prevent monopolies from emerging. Monopolies do, however, play an important role in some sectors of the economy.

What is a monopoly, and what effect does it have on a market?