A horizontal monopoly is a business structure where a single company achieves near-total control over a specific market by consolidating direct competitors. This consolidation occurs between firms operating at the same level within the supply chain, eliminating rivalry. Understanding this concept is central to modern economic regulation, as it addresses how market power can be concentrated to the detriment of the broader economy.
Defining the Horizontal Monopoly
A horizontal monopoly is the outcome of horizontal integration, where a company increases its market share by merging with or acquiring rivals in the same industry. This structure is characterized by a single firm possessing a vast majority of the market for a product or service, operating at a common stage of production or distribution. The dominant firm must have the ability to dictate market conditions, such as prices and output, without fear of competitive response.
Dominance is typically assessed by the firm’s market share, often exceeding 60%, which is a common benchmark for inferring substantial monopoly power. This high concentration means a buyer has no viable alternative to the monopolist’s offering, eliminating the fundamental mechanism of price and quality control provided by a competitive market. The structure is defined by the direct overlap of the combining companies’ business activities, as both entities were previously competitors selling similar products to the same customers.
How Horizontal Monopolies Are Formed
The primary mechanism for creating a horizontal monopoly is through Mergers and Acquisitions (M&A) involving direct competitors. A horizontal merger joins two or more firms operating at the same stage of the supply chain into a single entity. Combining two major manufacturers of a single product is a clear example of a horizontal merger that reduces the number of players.
The intent behind such transactions is often achieving economies of scale. However, when the resulting entity commands significant market share, it also gains substantial market power. Regulators examine whether the transaction is designed to unlawfully reduce competition or to gain market dominance through superior efficiency. This formation method is distinct from a company achieving a dominant position solely through internal growth, which is generally not viewed as an antitrust violation.
Economic Consequences for Markets and Consumers
The primary negative consequence of a horizontal monopoly is the reduction of competitive pressure, which directly impacts consumers through higher prices. Without rivals, the monopolistic firm can consistently set prices above the marginal cost of production, leading to a substantial transfer of wealth. This results in allocative inefficiency, as resources are not distributed optimally because the monopolist intentionally restricts output to keep prices elevated.
Market concentration also stifles innovation, as the dominant firm faces little incentive to invest in research and development or improve product quality. Since consumers have no alternative, the monopolist can allow the quality of its goods or services to decline without suffering a loss of business. A monopoly also limits consumer choice by removing alternative products and services from the market, leaving buyers stuck with the single provider’s offerings.
Horizontal Versus Other Monopoly Structures
To understand the specific nature of a horizontal monopoly, it is helpful to distinguish it from other types of market structures. A horizontal monopoly involves companies at the same level, such as two competing commercial airlines merging to control passenger routes. This consolidation focuses on eliminating direct competition within a specific product market.
A vertical monopoly, conversely, involves a single company controlling different stages of the supply chain. This occurs when a firm integrates backward (e.g., a car manufacturer acquiring a raw materials supplier) or forward (e.g., purchasing a chain of dealerships). In this structure, the company gains efficiencies and control over its production process but does not necessarily eliminate a direct competitor.
A conglomerate monopoly involves the merger of firms in completely unrelated industries, such as a large food company acquiring a media technology firm. The goal is diversification rather than market dominance in a single product space.
How Governments Regulate and Prevent Horizontal Monopolies
Governments prevent and regulate the formation of horizontal monopolies through federal antitrust legislation. The core of this framework in the United States is the Sherman Antitrust Act of 1890, which prohibits contracts, combinations, and conspiracies that unreasonably restrain trade, including monopolization. This was followed by the Clayton Antitrust Act of 1914, which restricts mergers and acquisitions that substantially lessen competition or tend to create a monopoly.
The Department of Justice (DOJ) and the Federal Trade Commission (FTC) enforce these laws by reviewing proposed mergers before they are finalized. Under the Hart-Scott-Rodino Act, companies must notify these agencies of large transactions, allowing regulators to analyze the potential anticompetitive effects before the deal closes. This pre-emptive review determines whether a proposed horizontal merger would grant the combined entity undue unilateral power, such as the ability to profitably raise prices or reduce output. If a monopoly is found to exist unlawfully, the government can prosecute and even break up the company into smaller, competing entities.
Notable Examples of Horizontal Monopoly Cases
Historical cases illustrate the government’s efforts to address the economic harm caused by horizontal consolidation.
Standard Oil Company
In 1911, the Supreme Court ordered the dissolution of the Standard Oil Company, which had used horizontal integration to dominate the oil refining industry. Its control over the market allowed it to suppress competition and control prices, leading to its breakup into thirty-four separate companies.
American Tobacco Company
Another landmark case from the same year involved the American Tobacco Company, which had acquired over 250 brands and growers to control over 80% of all tobacco products in the United States. Regulatory action resulted in the company being broken up into several competing firms, including R. J. Reynolds and Liggett & Myers.
Contemporary Examples
In more contemporary times, the merger of Exxon and Mobil in 1999 created ExxonMobil, a massive horizontal consolidation in the oil and gas sector that was scrutinized by regulators before approval. The government’s ongoing scrutiny of large technology companies for acquiring nascent competitors, such as Facebook’s purchase of Instagram, demonstrates the regulatory focus on horizontal integration that eliminates rivals.