Economies need competition to work. Almost all basic economic theories, including supply and demand itself, rely on the assumption that companies lower prices to undercut the competition whenever possible. If sellers can set whatever prices they like, that’s a monopoly. And as any good Econ 101 class will teach you, monopolies hold production below its economically efficient level, in order to extract extra profits. Monopolies replace the magic of the invisible hand with a distorting visible one, and the economy shrinks as a result.
In the real world, absolute monopolies are very rare. But even if there is more than one company in a given industry, there can be monopoly-like effects if the number of companies is small enough. This is called “oligopoly,” “market concentration,” or “market power.” And it’s something that can be measured fairly easily. From a recent report by the Council of Economic Advisors, here is a look at how some major sectors of the U.S. economy have become more concentrated in recent years:
