Franchised Monopoly

Key Takeaways

• A franchised monopoly is protected from competition by a government-granted exclusive license or patent.
• These monopolies are often present in essential sectors like transportation, electricity, and water supply.
• Critics argue that franchised monopolies lack efficiency and innovation due to the absence of competition.
• Government regulation of prices aims to keep goods affordable for consumers.
• Examples include utility companies and the U.S. Postal Service in the United States.

What Is a Franchised Monopoly?

A franchised monopoly is a company or individual shielded from competition through an exclusive license or patent granted by the government. It often appears in utilities, transportation, and other essential services to support stable, accessible pricing. Critics argue it can slow innovation and invite favoritism, as seen with regulated power providers or municipal transit operators.

How Franchised Monopolies Operate and Impact the Market

In the United States, antitrust laws and regulations are put in place to discourage monopolistic operations.1 Historically, the U.S. government has broken up many companies it deemed to be monopolies. However, franchised monopolies are perfectly legal, since the government grants a company the right to be the sole producer or provider of a good or service.

Government-issued franchised monopolies are typically established because they are believed to be the best option for supplying a good or service from the perspective of both the producers and the consumers of that good or service.

Given government intervention and sometimes outright subsidies, franchised monopolies allow producers to operate in markets where they must sink considerable sums of capital to produce a good or service.

Likewise, because governments that grant monopolies often regulate the price that can be charged by the supplier of the good or service, consumers gain access to a good or service that in a free market may be unaffordable

The Downside of Monopolies: Why They Are Often Discouraged

A monopoly refers to a situation where a given sector or industry is dominated by one firm or entity that has become large enough to own all, or nearly all, of the market for a particular type of product or service. Generally speaking, monopolies are discouraged.

Empirical evidence suggests that monopolized industries have led to non-competitive, closed marketplaces that are not in the best interest of consumers, as they are forced to transact with only one supplier, which can lead to high prices and low quality. In addition to higher prices and lower quality products, monopolies are seen to contribute to a loss of innovation.

For these reasons, the U.S. has focused on maintaining open markets and competition. Competition forces a company to create better products at lower prices through the use of innovation to attract customers to their products over their competitors' products.

Challenges and Criticisms of Franchised Monopolies

While one argument in favor of franchised monopolies is that they ensure that the control over essential industries remains in the hands of the public and they help control the cost of capital-intensive output, opponents of such monopolies claim that they promote favoritism and introduce market distortions.

Critics also stress that a franchised monopoly does not promote efficiency. Because a franchised monopoly has no competitor, it has no incentive to become innovative and efficient because there is no threat to its losing its market share. As long as it is able to deliver its product at the price determined by the government, it can continue to stay in business.

Examples of Franchised Monopolies

Franchised monopolies can be found in essential sectors of an economy, such as transportation, electricity, water supply, and power. In the United States, for example, utility companies and the U.S. Postal Service are examples of franchised monopolies.2

Another example would be the telecommunications firm AT&T (T), which until 1984 was a franchised monopoly sanctioned by the government to provide affordable and reliable phone service to U.S. consumers.3

In many countries, primarily developing nations, natural resources, such as oil, gas, metals, and minerals are also controlled by government-sanctioned monopolies.