Policy toward monopoly depends crucially on whether or not the industry in question is a natural monopoly, one in which increasing returns to scale ensure that a bigger producer has lower average total cost. If the industry is not a natural monopoly, the best policy is to prevent monopoly from arising or break it up if it already exists. Let’s focus on that case first, then turn to the more difficult problem of dealing with natural monopoly.

The De Beers monopoly on diamonds didn’t have to happen. Diamond production is not a natural monopoly: the industry’s costs would be no higher if it consisted of a number of independent, competing producers (as is the case, for example, in gold production).

So if the South African government had been worried about how a monopoly would have affected consumers, it could have blocked Cecil Rhodes in his drive to dominate the industry or broken up his monopoly after the fact. Today, governments often try to prevent monopolies from forming and break up existing ones.

De Beers is a rather unique case. For complicated historical reasons, it was allowed to remain a monopoly. But over the last century, most similar monopolies have been broken up. The most celebrated example in the United States is Standard Oil, founded by John D. Rockefeller in 1870. By 1878 Standard Oil controlled almost all U.S. oil refining; but in 1911 a court order broke the company into a number of smaller units, including the companies that later became Exxon and Mobil (and more recently merged to become ExxonMobil).

The government policies used to prevent or eliminate monopolies are known as antitrust policies, which we will discuss in the next chapter.