Around a year after Fredrik Idestam started Nokia’s journey as a wood pulp mill, the Finnish company transitioned into a pioneering force in wireless telephony, establishing itself as a virtual monopoly in the handset industry for a quarter-century, despite the rapid obsolescence of technology. In contrast, the Life Insurance Corporation of India (LIC) enjoyed an even longer tenure as a monopoly in the world’s second-most populous country, dominating an industry constrained for over four decades.
This government-owned giant emerged from a context of internal conflict and unsustainable competition. In 1956, the government amalgamated 256 insurers to provide scale, stability, and reliability to what is essentially an unattractive business—safeguarding against mortality. Trust is the paramount currency for success in the insurance sector.
Even 18 years post-deregulation, which liberated the industry and enabled numerous private insurers to offer policies to an underinsured populace, LIC appears to possess this crucial element in abundance. In the fiscal year 2017-18, LIC recorded an 8% growth in total new business, amounting to Rs 1.35 lakh crore. It still commands a 69% share of the overall market, although private insurers are making strides, particularly in the individual segment.
With its monopolistic market structures, LIC controlled nearly India’s entire life insurance business for four decades (1956-1991).
A monopolistic market is one in which only one supplier provides many consumers a specific product or service. This gives that supplier the power to determine both the price and availability of that product or service. Finding purely monopolistic markets is rare, and without complete barriers to entry, like a ban on competition or exclusive access to all natural resources, it might even be impossible. In these markets, only one seller typically controls the production and distribution of the product or service. Other companies can’t enter the market because they’re at a disadvantage. The monopoly already has a head start and lower prices to outcompete potential newcomers, keeping them from gaining any significant market share.
The common objection to monopolistic markets revolves around the idea that when there’s only one provider for a product or service, they can charge whatever they want because consumers have no other options. This objection mainly focuses on the issue of high prices rather than the actual behaviour of the monopolist.
On the other hand, the typical economic argument against monopolies is based on the belief that they limit production, leading to a decrease in overall social income. This viewpoint, rooted in neoclassical analysis, doesn’t solely emphasise monopolists’ ability to raise prices for their benefit.
Even if monopolies do exist, like the U.S. Postal Service’s exclusive right to deliver first-class mail, consumers often have alternatives like FedEx, UPS, or email. Because of this, monopolistic markets usually can’t sustainably limit production or reap unusually high profits in the long term.
Monopolistic markets occur when there’s only one supplier in a given market, granting them considerable control over pricing because there are no competitors. Operating as price makers, they can dictate both the cost and availability of goods, resulting in maximized profits, inflated prices, and limited consumer options. Such markets have been prevalent throughout India’s history, especially in industries like paint and life insurance, where substantial infrastructure costs and significant entry barriers contribute to their dominance.
