In economics and business ethics, a coercive monopoly is a firm that is able to raise prices, and make production decisions, without the risk that competition would arise to draw away their customers.[1] A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete with it through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from the possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production.[2]
Whether coercive monopolies can arise in free market, or whether they require government intervention to institute them is a point of some disagreement. Advocates of free markets argue that the only feasible way that a business could close entry to a field and therefore be able to raise prices free of competitive forces, i.e. be a coercive monopoly, is with the aid of government in restricting competition. It is argued that without government preventing competition, the firm must keep prices low because if they sustain unreasonably high prices, they will attract others to enter the field to compete. In other words, if the monopoly is not protected from competition by government intervention, it still faces potential competition, so that there is an incentive to keep prices low and a disincentive to price gouge (i.e., competitive pressures still exist in a non-coercive monopoly situation). Others, such as some business ethicists, believe that a free market can produce coercive monopolies.[3]
Exclusive control of electricity supply due to government imposed "utility" status is a coercive monopoly, because users have no choice but to pay the price that the monopolist demands. Consumers do not have an alternative to purchase electricity from a cheaper competitor, because the wires running into their homes belong to the monopolist. Exclusive control of Coca-Cola is not a coercive monopoly because consumers have a choice to drink another cola brand and the Coca-Cola company is subject to competitive forces. Consequently, there is an upper limit to which the company can raise its prices before profits begin to erode because of the presence of viable substitute goods.
By contrast, to maintain a non-coercive monopoly, a monopolist must make pricing and production decisions knowing that if prices are too high or quality is too low competition may arise from another firm that can better serve the market. If it is successful, it is called an efficiency monopoly, because it has been able to keep production and supply costs lower than any other possible competitor so that it can charge a lower price than others and still be profitable. Since potential competitors are not able to be so efficient, they are not able to charge a lower, or comparable, price and still be profitable. Hence, competing in a non-coercive monopoly is possible but would not be profitable, whereas for a coercive monopoly competition would be profitable but is not possible.
According to business ethicist, John Hasnas, "most [contemporary business ethicists] take for granted that a free market produces coercive monopolies."[3] However, some people, including Alan Greenspan and Nathaniel Branden, argue that such independence from competitive forces "can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises."[4][5] Some point out that a monopolist themselves may "employ violence" to create or maintain a coercive monopoly.[6]