Andrew Carnegie. J.P. Morgan. Cornelius Vanderbilt. John Rockefeller.

These titans of industry rank among the wealthiest and most influential men in American history, and the mere mention of their names conjures up images of power and grandeur. Not coincidentally, these business barons are also all tied to enterprises that were at one time considered to be monopolies.

Rockefeller, for example, founded Standard Oil in 1870, and quickly began building an empire. In one six-week stretch, he acquired 22 of his 26 closest rivals in the refinery-heavy Cleveland region -- absorbing their operations into his own highly efficient network. By the turn of the century, the company controlled a dominant 90% share of the market for refined petroleum products.

Thanks to this monopoly, Rockefeller would eventually stockpile a colossal fortune of $1.4 billion, equivalent to more than $300 billion in today's dollars -- roughly five times richer than Bill Gates.

Of course, the odds are decidedly against any of us amassing that type of wealth. However, there is certainly a lesson to be learned here, and investors who take note will have taken a big first step -- as they say, the first million is the hardest.

From Textbook to Pocketbook
An economics textbook might describe a monopoly as a situation where one company exerts dominant control over a specific good or service -- meaning the firm is essentially the lone supplier and can dictate availability and pricing as it sees fit.

Today, the term is broadly used to refer to any case where a company has stifled the competition and somehow restricted fair trade. But interpretations for what constitutes a monopoly can differ greatly from person to person and from jurisdiction to jurisdiction. For example, regulatory officials from the European Commission have recently leveled monopoly charges at software giant Microsoft (Nasdaq: MSFT) -- hitting the company with an exorbitant $1.35 billion fine for allegedly violating antitrust violations.

Spotting a Monopoly in the Making
The list of firms that enjoy monopoly-like control over their market is thin. Over the years, the federal government has broken up a number of existing monopolies and blocked mergers that might have created new ones. And those that do exist, such as regional utility operators, are watched closely by regulatory agencies. However, that's not to say that all companies are either closely regulated or have to grapple with dozens upon dozens of rivals for market share. Others enjoy a tight hold over their market and aren't really threatened by new competitors -- either because a potential player is prevented from entering the game or simply has little reason to.

These "barriers to entry" can take many forms, and below I'll examine five of the most common that can help create monopoly-like conditions for specific firms.

Emerging Industries:  It's easy to assume that almost everything worth having has already been invented, but innovative companies can and do develop new products and/or disruptive technologies all the time. In effect, these firms have created a brand new market, and until someone comes along with a better mousetrap, they have it all to themselves.

Strict Regulatory Oversight:  Typically, the government goes to great lengths to avoid a monopoly environment, but in some rare cases it all but promotes one. For example, not just any company can set up shop as a credit ratings agency. The SEC has made it extremely tough for new companies to attain the "Nationally Recognized Statistical Ratings Organization" (NRSRO) designation that would allow them to compete.

Massive Capital Requirements:  It doesn't take a whole lot of start-up money to open a neighborhood pizzeria. By contrast, it requires hundreds of millions to buy a single ocean liner, let alone an entire fleet that would be needed to run a cruise line and ferry passengers around the globe.

Technical Expertise/Patents:  Many companies can run retail chains, but developing a treatment for B-cell non-Hodgkin's Lymphoma, that's a whole other ballgame. And just think of what it takes to enter the Pharmaceutical industry in the first place -- a multi-billion dollar research & development (R&D) budget and an army of Ph.D.-carrying scientists.

Brute Force:  Anti-trust statutes warn against coercive or manipulative business practices, but they don't say anything about simply steamrolling the competition and exploiting economies of scale and supply chain efficiencies to undercut rivals and muscle out smaller companies in their path. Adroit serial acquirers that expand their own reach by swallowing competitors and assimilating their assets can also occasionally climb to the top.

Your Turn to Spin
Pure monopolies are rare, but investors can always seek out the next best thing: powerful market share leaders in highly concentrated industries with daunting barriers to entry. Such firms might not fit the classical textbook definition of a monopoly, but their size, brand names and dominance alone are more than enough to scare away most would-be rivals.

Important Note: In the remainder of this article, Half-Priced Stocks editor Nathan Slaughter reveals two companies that benefit from several characteristics of a "legal monopoly."  Both of these special firms have +15%-plus five-year estimated EPS growth and the potential to appreciate more than +20% before reaching their fair value estimates. Best of all, due to their dominant positions in their respective industries, these firms should be solid winning investments for years to come. However, in order to view the remainder of this article, you'll need to subscribe to our premium income-investing newsletter -- Half-Priced Stocks. After you subscribe, you'll receive immediate access to this full article, as well as our monthly Half-Priced Stocks newsletter and a host of additional premium content. Please visit one of the following links to continue.
 

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