Thus far, we have been considering what happens when businesses compete freely with one another in the marketplace. But this is not always the case. Sometimes one company produces the total output of a given good or service. For many years, each local telephone company was a monopoly in its region of the country. For about half a century before World War II, the Aluminum Company of America (Alcoa) produced all the virgin ingot aluminum in the United States. Such situations are unusual, but they are important enough to deserve some serious attention.
Most big businesses are not monopolies and not all monopolies are big business. Nor is this distinction a technicality. Many policies designed to deal with monopolistic behavior end up restricting the competitive advantages of large-scale enterprises and thereby restricting consumers' ability to benefit from economies of scale that produce lower prices.
Just as we can understand the function of prices better after we have seen what happens when they are not allowed to function, so we can understand the role of competition in the economy better after we contrast what happens in competitive markets with what happens in markets that are not competitive.
Thus far, we have considered prices as they emerge in a free market with many competing businesses. Such markets tend to cause goods and services to be produced at the lowest costs pos-