166 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

MONOPOLY PROHIBITION ACCORDING TO ISLAMIC LAW: A LAW AND

ECONOMICS APPROACH
Arvie Johan*

Department of Civil Law, Faculty of Law Universitas Muhammadiyah Surakarta, Surakarta

Jalan A. Yani Tromol Pabelan Kartasura Tromol Pos 1, Surakarta, Jawa Tengah 57162

Abstract
Islamic law prohibits monopoly. The issue had arose since the advent of Islam, whereby it’s used as a
strategy to maximize profit, has experienced rapid developments. This article assess the extent of Islamic
law in prohibiting monopoly using law and economics approach. The result is that the exercise of caution
shall apply in prohibiting monopoly. There are three steps needed in exercising the rule of caution: (1)
defining monopoly as the absence of competition and lack of pricing options; (2) providing criteria of
what causes monopoly in form of agreements between business competitors who can go against allocative
efficiency effectively; and (3) direct the prohibition on monopoly towards agreement on explicit horizontal
mergers and very large horizontal mergers which disregards quick mergers.
Keywords: monopoly, islamic law, law and economics

Intisari
Hukum Islam melarang monopoli. Isunya adalah sejak kedatangan Islam strategi pelaku usaha untuk
memaksimalkan keuntungan telah berkembang pesat. Tulisan ini menentukan jangkauan hukum Islam
untuk melarang monopoli dengan pendekatan hukum dan ekonomi. Hasilnya kehati-hatian dalam
melarang monopoli. Tulisan menguraikan tiga langkah yang dibutuhkan: (1) memaknai monopoli
sebagai ketidakhadiran persaingan dan ketiadaan pilihan harga; (2) memberikan kriteria monopoli berupa
kesepakatan antar pelaku usaha pesaing yang mampu melawan efisiensi alokasi secara efektif; dan (3)
mengarahkan larangan monopoli pada perjanjian horisontal eksplisit dan penggabungan berukuran besar.
Kata Kunci: monopoli, hukum islam, hukum dan ekonomi

Pokok Muatan
A. Introduction........................................................................................................................................ 167
B. Discussion ......................................................................................................................................... 167
1. Islamic Law Prohibits Monopoly ................................................................................................ 167
2. The Economic Rationale for Monopoly ...................................................................................... 170
3. Matters that Need to be Paid Attention to in Carrying Out the Islamic Law Prohibition on
Monopoly ..................................................................................................................................... 173
C. Conclusion ........................................................................................................................................ 176

*
Correspondence address: arviejohan@gmail.com
 Johan, Monopoly Prohibition According to Islamic Law: A Law and Economics Approach 167

A. Introduction of the Fire on the Day of Resurrection

Around 500 C.E. the communities of (HR. at-Tabrani).7
merchants in the city of Mecca were already In looking at the development on the
familiar with the concept of monopoly. At that time prohibition of monopoly, we cannot disregard
however, the vast economic development in Mecca the main objective of Islamic Law in prohibiting
did not result in the welfare of its society as certain monopoly is for the prosperity of mankind.
clans had hoarded foodstuff resulting in the high However, since the advent of Islam up until the
price of goods. This action is known as ihtikar (or present day, business strategy in profit finding
monopoly).1 has continuously developed, in forms such as
If traced further back, the issue of monopoly price fixing agreements, binding products, market
has been an issue in different civilizations whose division, loss selling, vertical integration, mergers,
economy is supported by trade. The Zeno Roman etc. Such development warrants further justification
Empire, for example, had prohibited the stock piling for Islamic law’s prohibition towards monopoly as
of foodstuff and textiles, where such rule would issues has become more and more complex.
even apply to businesses who stock piles in order to In relation to the above, this writing will
accommodate purchases from other regions.2 Even analyze the scope of the Islamic law prohibition
in Ancient Greece, Aristotle had already illustrated towards monopoly through a law and economics
that monopoly happens when there is the stock approach. Law and economics is a school of law
piling of goods in order to raise prices.3 which uses economic theories to examine the
Back to 500 C.E. Mecca. It is clear, that even economic formation, composition, process and
before arrival of Islam, Mecca was an area whose influence in the applicability of a certain law or
economy was supported largely by the trade sector. legal institution.8 Law and economics pushes law
With the arrival of Islam around 700 C.E., the act of to achieve efficiency,9 until it is fitting with the
monopoly was specifically prohibited, as shown in objectives of Islamic Law in prohibiting monopoly.
the following Hadith: Based the above description, the research
1. Only the errant monopolize (H.R.
question will focus on the following: (1) how
Muslim, Abu Dawud, dan at-
Tirmidzi);4 does Islamic law prohibit monopoly; (2) what
2. A person that monopolized foodstuff is the economic rationale towards the existence
for forty days has disowned Allah The of monopoly; and (3) what matters need to be
Almighty, and Allah The Almighty has given attention to in carrying out the Islamic Law
Disowned him. (H.R. Ahmad);5
prohibition towards monopoly.
3. Whoever withholds food (in order
to raise its price), has certainly erred
(HR. Ibnu Majah dan Abu Hurairah);6 B. Discussion
4. 4. Whoever strives to increase the 1. Islamic Law Prohibits Monopoly
cost (of products for Muslims, Allah, a. Source of Islamic Law
the Exalted, will seat him in the center
Islamic law or sharia law refers to
1
Mahmood Ibrahim, “Social Economic Conditions in Pre-Islamic Mecca”, International Journal of Middle East Studies, Vol. 14, No. 3, August
1982, p. 347.
2
Adam D. Moore, 2009, Intellectual Property and Information Control: Philosophic Foundations and Contemporary Issues, Transaction
Publisher, New Jersey, pp. 10-11.
3
Henry William Spiegel, 1991, The Growth of the Economic Thought (Third Edition), Duke University Press, North Carolina, pp. 33-34.
4
Sri Nurhayati, 2013, Akuntansi Syariah di Indonesia (Third Edition), Penerbit Salemba, Jakarta, p. 81.
5
Muhammad Saifullah, “Etika Bisnis Islami dalam Praktik Bisnis Rasulullah”, Walisongo, Vol. 19, No. 1, May 2011, p. 154.
6
Sri Nurhayati, Loc.cit.
7
Ibid.
8
Nicholas Mercuro and Steven G. Medena, 1999, Economics and the Law from Posner to Post Modernism, Princeton University Press, New
Jersey, p. 3.
9
Richard A. Posner, 1992, Economic Analysis of Law (Fourth Edition), Little Brown & Company, Nevada, pp. 3-4.
168 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

the set of rules applicable to an individual needs of the society in each region has
(regulating his/her behavior, worship, an influence on the development of each
and morals) and varies from rules that are school of thought adding to the dominancy
obligatory until rules that are haram or of each legal school –this explains the non-
forbidden in character. These set of rules can fundamental differences between them–
be divided into two categories, regulations the most important thing is that this factor
on ibadah (or ‘worship’, an individual’s enables Islamic law to work in the societies’
relationship with Allah) and muamalah lives.15
(individual’s relationship with other Besides the four large legal schools,
individuals in the society).10 there is also talfiq, which attempts to collect
There are two primary sources in the opinions of two or more legal schools
sharia law, namely the Quran and the Hadith. in parts that are interrelated for a particular
Other than the primary sources of law, the action. It systematically compares two or
sharia law system is build through ijtihad, more legal schools and integrates them
which interprets the two primary sources of into a single line of thought for a particular
law with instruments and methodologies such problem.16 Although not all Islamic law
as ijma (consensus) and qiyas (analogy) to experts agree on the existence of talfiq,17 talfiq
solve concrete legal problems of the society. has the potential to complement Islamic law
This becomes the secondary source of law in in solving concrete legal problems. This also
Islamic Law (ushul fiqih).11 proves the Islamic law system is pragmatic,
The development of Islamic law from and therefore it is flexible in adjusting the
its secondary source of law had started since need of the society throughout time..
the death of the last prophet, Muhammad.12 b. The Prohibition on Monopoly
Because of this event, non-fundamental Muhammad Baqer as-Sadr states that
differences between Islamic law experts there are three basic principles in economic
(faqih) became unavoidable. Presently, there activity in Islamic law, namely:18
are four legal schools in Islamic law, namely 1) Multifold property. Islamic law divides
Maliki, Hanafi, Syafi’i and Hambali.13 property ownership into three forms:
private, public, and state.
The four schools are concentrated in
2) Limited economic freedom. Two limits
different geographical locations. The legal hamper the absoluteness of private
school of Maliki is dominant in the northern property, subjectively and objectively.
and western parts of the African continent, Subjective limits derives from an
Hanafi is dominant from western Asia up individual’s internal orientation, thus
there is no need for state coercion
unto northern Egypt, Syafi’i is dominant in towards the individual. This first
southern Asia, and lastly Hambali is dominant limit is in the form of the individual’s
in the Arabian Peninsula.14 Although the generosity towards their community.
The second limit, which is muamalah
10
Ahmed Akgunduz, 2010, Islamic Law in Theory and Practice: Introduction to Islamic Law, IUR Press, Rotterdam, p. 19.
11
Ibid., p. 22
12
Ibid., p. 25.
13
Knut S. Vikør, 2005, Between God and the Sultan: A History of Islamic Law, Oxford University Press, New York, p. 10.
14
Ibid., p. 11.
15
John. R. Bowen, 2003, Islam, Law, and Equality in Indonesia: An Antropology of Public Reasoning, Cambridge University Press, Cambridge,
pp. 14-15.
16
Fauzi Saleh, “Problematika Talfiq Mahzab dalam Penemuan Hukum Islam”, Islamica, Vol. 6, No. 1, September 2011, pp. 66-67.
17
Ibid., pp. 68-69.
18
Chibli Mallat, 2003, The Renewal of Islamic Law: Muhammad Baqer as-Sadr, Najaf and the Shi’i International, Cambridge University Press,
Cambridge, pp. 114-115.
 Johan, Monopoly Prohibition According to Islamic Law: A Law and Economics Approach 169

in character, prohibits economic price; and

activities such as riba (usury) and 3) The goal of the monopolising person is
ihtikar (monopoly). The second limit
to buy the goods from the market and
requires state coercion; and
3) Social justice. Solidarity is emphasized withhold them to create scarcity.
in Islamic law, and such is done through There are several concepts in Islamic law to
instruments such as zakat, infaq, and explain why Islam prohibits monopoly, this
shadaqoh. Acts towards social justice include maslahah, saddu zara’i, ta’assuf
is similar to that of subjective limits,
namely that it does not need state fi al-Isti’mal al-haq, maqasid al-syariah,
coercion qawa’id fiqhiyyah, and tauhid.21 The first
In relation to the definition of monopoly, there concept is maslahah, where in essence it
are differing views on the four legal schools uses the profit and loss approach.22 The three
in Islamic law. The legal school of Maliki requirements for maslahah for it to be used
defines monopoly as an act of hoarding goods as legal basis are the following:23
to gain profits when prices increase, however 1) Prosperity is in line with the will of
hoarding foodstuff is not included within this Islamic law and is supported by nash/
definition. According to the legal of school general clarity;
of Hanafi, monopoly is the act of buying 2) Prosperity that is both rational and
foodstuff from the market or neighbours and certain in character resulting in
holds on to it for forty days to wait until the prospersty and avoidance of misery;
prices increase. The legal school of Syafi’I and
opines that monopoly is the act of buying 3) Prosperity involving the interests of
food when the society needs it and resells people, and not just certain groups or
them with a higher price. Lastly, the legal individuals.
school of Hambali states that monopoly is an Through this approach, Islam prohibits
act of buying goods needed by society, which individuals from taking profits which results
results in the society’s detriment.19 in the detriment of the public economic
From the four legal schools above, Al- interests.
Robi directs attention to the three primary The second concept is saddu zara’i,
elements: 20 is the prohibition of evasive legal devices.24
1) The basic notion of monopoly There are three classifications in this
indicates both the goal and the result concept:25
of monopoly; 1) An act where in the normal circumstance
2) The goods which caused harm to it is undertaken, prohibited actions will
the consumers are necessary and the also be carried out;
consumers do not have any other 2) An act if not conducted will end in
alternative in terms of the quality or carrying out prohibited actions and

19
Musaed N. Alotaibi, 2010, Does the Saudi Competition Law Guarantee Protection to Fair Competition? A Critical Assessment, Thesis, Doctor
of Philosophy Degree University of Central Lancashire, pp. 37-38.
20
Ibid., p. 38.
21
Zulkifli Hasan, “Islamic Perspective on Competition Law and Policy”, International Conference on Law and Commerce, International Islamic
University Malaysia and Victoria University, Australia, 29 September 2005, pp. 4-13.
22
H. Said Agil Husin Al-Munawar, “Konsep al-Maslahah sebagai Salah Satu Sumber Perundangan Islam”, Islamiyyat, Vol. 18 & 19, 1998, pp.
60-61.
23
Abu Ishak Al Syathibi, 1973, al-Muwafaqat fi Ushul al-Syari’ah, Dar al-Ma’rifah, Beirut, pp. 8-12.
24
M. Hasbi Ash-Shiddieqy, 1990, Falsafah Hukum Islam, Bulan Bintang, Jakarta, p. 320.
25
A. Basiq Djalil, 2010, Ilmu Ushul Fiqih 1 dan 2, Kencana, Jakarta, p. 166.
170 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

3) An act if conducted after considerations The fifth concept is qawa’id

has the same possibility to end in fiqhiyyah, which represents the union of laws
carrying out prohibited actions. which are closely related.29 Qawaid fiqhiyyah
The concept of saddu zara’i is taught in Islam to solves practical legal problems that arise
avoid monopoly, because monopoly harms the with the implementation of istimbath from
public economic interest. the Quran. For example, the rule where all
The third concept is ta’assuf fi al-Isti’mal persons must be kept out of hardship (ad-
al-haq, the misuse of rights. There are two reasons Dhararu yuzalu)30, such is applied through
why an individual is prohibited from misusing their the prohibition in conducting monopoly.31
rights: 26 The last concept, tauhid, is to
1) Each person cannot exercise their right devote themselves only to Allah purely and
arbitrarily to the detriment of others, consequently complies with the obligations
both individuals and society; and and avoid the restrictions imposed by Him.32
2) The use of personal rights is not just The concept of tauhid provides spiritual
for personal use but can also be used to encouragement to Muslims to achieve the
support the rights of the society. prosperity of mankind and in accordance
Through the concept of ta’assuf fi al- to Islam’s objective, which among others
Isti’mal al-haq, Islam prohibits individuals include not to monopolize.
from misusing their rights to monopolize, 2. The Economic Rationale for Monopoly
as this would result in the economic loss of a. Price as Indicator of Efficiency
individuals and other members of society. The subject of monopoly is a seller
The fourth concept is maqasid al- (or groups who act as if they are individual
syariah, conceptualizes that the end goal of sellers) who can manipulate the price of
Islamic law is to achieve the prosperity of products by changing the quantity of the
mankind.27 K. Prosperity, which is Islamic product being sold.33 The subject of monopoly
law’s objective, is limited to five separate has been studied intensively over the years by
matters: religion, soul, jiwa/nafs, intellect, economists using their economic knowledge,
lineage and property. All matters related to independent from the involvement of
the protection of the aforementioned five legal studies. Economic study shows that
subject matters are called maslahah and the competition process in the market can
matters which endangers the five elements are allocate scarce limited resources optimally in
called mafsadah (pain).28 Within this context, order to meet the unlimited human needs.34 It
Islamic teaching prohibits monopoly because is the key to explain existence of monopoly
its consequences harms other individuals (loss and becomes an integral part in justifying the
of property due to involuntary exchange). prohibition to monopolize.35

26
Nasroen Haroen, 1996, Ushul Fiqh, Logos Publishing House, Jakarta, pp. 10-11.
27
Muhammad Khalid Mas’ud, 1995, Filsafat Hukum Islam dan Perubahan Sosial (Islamic Legal Philosopy, trans: Yudian W. Asmin), Al Ikhlas,
Surabaya, p. 225.
28
Zaenudin, “Hukum Islam dan Perubahan Sosial (Menyelaraskan Realitas dengan Maqashid Al-Syariah)”, Media Bina Ilmiah, Vol. 6, No. 6,
December 2012, p. 20.
29
Ahmad Sudirman Abbas, 2004, Sejarah Qawa’id Fiqhiyyah, Pedoman Ilmu Jaya, Jakarta, p. 61.
30
Abdul Haq, et al., 2006, Formulasi Nalar Fiqh, Telaah Kaidah Fiqh Konseptual, Khalista, Surabaya, p. 177.
31
Djazuli, 2007, Kaidah-Kaidah Fiqh, Kencana, Jakarta, p. 68.
32
Syekh Muhammad bin Abdul Wahab, Kitab Tauhid (trans: Yusuf Harun, Islamic Propagation Office in Rabwah), Riyyadh, pp. 4-5.
33
Richard A. Posner, 1976, Antitrust Law: An Economic Perspective, The University of Chicago Press, Chicago, p. 8.
34
Thomas J. Miceli, 2004, The Economic Approach to Law, Standford University Press, California, p. 6.
35
Louis Kaplow and Carl Shapiro, “Antitrust”, in A. Mitchell Polinsky and Steven Shavell, 2007, Handbooks in Economics 27: Handbooks of
Law and Economics, Horth Holland Elseiver, Amsterdam, p. 1213.
 Johan, Monopoly Prohibition According to Islamic Law: A Law and Economics Approach 171

Economics explains that human in the market,38 this is because price levels
beings as economic beings will always act correlate with the supply-demand position,
based on self-interest in order to maximize and such is a natural characteristic of products
profits and benefits; this is often referred within a market.39 Price serves as guidelines to
to as methodological individualism and determine where resources are most needed,
rational action (MIRA).36 MIRA is used as a and also presents an incentive for people to
framework to optimize social welfare within follow these guidelines. In addition, price
the competitive market under the following works on the product distribution function
premises: (1) the individual’s welfare can whereby other costs, namely production
only be measured personally through the costs, can work on its standard-setting and
said individual, whereby cross comparison production organization function.40
does not apply; (2) optimal benefit is defined b. Formal Analysis of Monopoly
as Pareto-efficiency, where an individual’s From the elaboration of previous
maximum profit exist without putting other sections, an initial question that needs to be
individual to suffering, in which in the answered is that if prices provide information
circumstance this is cannot be achieved, on the efficiency of a market, how would such
the Kaldor-Hicks efficiency is used; the apply to prices set by actors who monopolize.
economic efficiency stresses that an outcome Would consumer suffer from this?
is more efficient if those that are made better Monopolists are assumed to sell their
off could in theory compensate those that products at a price. However, to maintain their
are made worse off; and (3) that there are position, monopolists can make variations so
no externalities in economic competition, that consumers will still want their products.
and when businesses compete to maximize Monopolists attempts to use the difference in
profit, all exchanges on the product market high priced items for low quality substitute
and production factors will bring the price products, and use the difference of low
proportional to the marginal costs, which priced items for high priced replacement
means that the exchange ratios will optimize goods. For example, suppose the monopolist
social welfare.37 can undertake price discrimination perfectly
The results of economic study has and holistically: all sales will be made at a
shown that prices can be a valid starting point price equal to the value consumers want.
to explain the absence of an efficient market The result is the comparison between price
mechanism in allocating limited resources. discrimination (a) and price monopoly (b) as
Prices are formed from the competition illustrated in the following:41
process and not from the number of actors

36
Lance Taylor, 2004, Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the Mainstream, Harvard University Press,
Cambridge, p. 44.
37
Jeffrey M. Perloff, 2012, Microeconomics (Sixth Edition), Addison-Wesley¸ Boston, pp. 316 – 317.
38
Robert H. Bork, “The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, Part II”, The Yale Law Journal, Vol. 75, No.
3, 1965, p. 377.
39
George J. Strigler, “The Kinky Oligopoly Demand Curve and Rigid Price”, in J. Strigler dan Kenneth E. Boulding, 1952, The Series of
Republished Articles on Econom: Vol. IV, George, Richard D. Irwing Inc., Chicago, p. 419.
40
Milton Friedman, 2008, Price Theory, Transaction Publisher New Brunswick, New Jersey, p. 9.
41
Richard A. Posner, 1976, Op.cit., p. 242.
172 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

Comparison of Price Discrimination and Monopolized Price

The demand curve (dd) are each From the above formula, it is known
coupled to become a – bQ, where a is the that monopolists cannot stand on their own,
vertical axis and it is reduced by b, because monopolists rely on the demand elasticity
it is assumed that the demand for output, Q, of the products they offer. In addition, if
always declines. The demand curve creates marginal costs are low, then maximum profit
a price, thus P = a – bQ. Marginal costs, C, for a monopolist can be achieved by making
is assumed constant. Since the total revenue marginal costs proportional to total revenue,
is proportional with price, and since the total this will result in the large quantity of
costs is proportional to the marginal costs, products bearing low prices. This means that
and since profit is the difference between consumers prosper as much as monopolists
total revenue with total costs, it can then be do.44 Which means that allocative efficiency
written π as the profit of a monopolist and € is achieved.
as the demand elasticity of the monopolist.42 The above elaboration shows that
Thus, it can be formulated as follows:43 monopolists does not need to worry about
π = (a – bQ)Q – CQ, because C = (a raising prices by reducing the quantity of
– bQ) – (a – bQ)/ €, thus π = (a – bQ) production, as this will give incentives to other
Q – ((a – bQ) – (a – bQ)/ €) businesses to enter the market. Even though
π = profit other businesses may not have anticipate
Q = product quantity where a move such as this (i.e. not entering the
the monopolists sells to gain market), monopolists will only have enjoyed
maximum profit (π) the increase in prices temporarily. Consumers
C = marginal cost are rational creatures, which means that when
a = price discrimination the current price level is not in accordance
b = monopoly price to their preferences,45 consumers will steer
€ = demand elasticity towards the away from the product.
monopolist’s products. For example as a simple way to
illustrate this: a monopolist receives a profit

42
Ibid., p. 243.
43
Ibid., pp. 243, 244 and p. 246.
44
Robert H. Bork, 1978, The Antitrust Paradox: A Policy at War with Itself, Basic Books Inc. Publisher, New York, p. 101.
45
An economic approach towards a behaviour depicts that an individual’s motivation to act is always supported by a logical calculation of the
profit (incentive) and loss (disincentive) gained. This is what is referred to as preference, for further discussion on this matter see Uri Gneezy
and John A. List, 2013, TheWhy Axis: Hidden Motives and the Undiscovered Economics of Everyday Life, PublicAffairs, New York, p. 3.
 Johan, Monopoly Prohibition According to Islamic Law: A Law and Economics Approach 173

of 20 billion rupiahs for the sale of product X increased price of X will be considered not
in the amount of 20 million units. He expects proportional to the benefits received by the
an additional profit of 5 billion rupiahs, consumer. It is possible, the cause to the
whereas quantity of X only amounts to 15 consumer’s preference lead by the price
million units. of goods is simple, as long as the price
In the case where X has a substitute gives more benefit than losses, only then
product from other businesses, then the consumers will keep on consuming. Instead,
monopolists will try to win consumers: the consumers can easily leave the consumption
price of X is slightly cheaper than the high of a product, when the available price gives
quality substitute product, and that it is more losses than benefit.46
much cheaper than the low quality substitute 3. Matters that Need to be Paid Attention
products. If they reduce production by 5 to in Carrying Out the Islamic Law
million units in the market, then this will Prohibition on Monopoly
become an incentive for other businesses to Islamic teaching strictly prohibits monopoly.
increase productions, either for high or low Legal scholars of Islamic law from the four legal
quality. The purpose of other businesses is to schools (Maliki, Hanafi, Syafi’i and Hambali)
meet X shortages in the amount of 5 million has proven that the monopoly prohibition is
units in the market. The shift of consumers categorized under muamalah. The four openly
to substitute products restores balance to the mentions the prohibition on monopoly is based on
market. consequentialism, that is that the prohibition exist
If X does not have a substitute product, because of potential losses the society might bear.
this in effect there is no need for variation in Similar position is also shown in several concepts,
prices, or in other words monopolists sells which answers why Islam prohibits monopoly,
X at one set price. If they reduce production namely: maslahah, saddu zara’i, ta’assuf fi al-
by 5 million units in the market, then the Isti’mal al-haq, maqasid al-syariah, qawa’id
increased price of X will be considered not fiqhiyyah, and tauhid. Thus, it can be concluded
proportional to the benefits received by the that the prohibition on monopoly is an Islamic legal
consumer. It is possible, the cause to the instrument used for the welfare of mankind.
consumer’s preference lead by the price Parameters such as hoarding, price increase,
of goods is simple, as long as the price and scarcity directs to what is truly meant by the
gives more benefit than losses, only then welfare of mankind in this context is actually the
consumers will keep on consuming. Instead, welfare of consumers. Formal analysis of monopoly
consumers can easily leave the consumption clearly shows that price discrimination and
of a product, when the available price gives monopoly does not necessarily harm consumers.
more losses than benefit. This is where we need caution in carrying out the
If X does not have a substitute product, Islamic law prohibition toward monopoly.
this in effect there is no need for variation in Islamic law does not want businesses to
prices, or in other words monopolists sells take advantage of consumers without a reasonable
X at one set price. If they reduce production explanation to it, Islamic law definitely does not
by 5 million units in the market, then the want to have consumers blaming businesses over

46
Such concern is shown by Edward Chamberlin. See Don Bellante, “Edward Chamberlin: Monopolistic Competition and Pareto Optimality”,
Journal of Business & Economic Research, Vol. 2, No. 4, 2004. See also Alum Simbolon, “Kedudukan Hukum Komisi Pengawas Persaingan
Usaha Melaksanakan Wewenang Penegakan Hukum Persaingan Usaha”, Mimbar Hukum, Vol. 24, No. 3, October 2012, p. 530.
174 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

price increase in products without reasonable accept prices based the availability of the product
explanation. they need. Such situation arises when there is no
Explicitly, Islam encourages fairness. This competition among businesses at the time leading
stated within the Quran Surah Al Maidah: 8: up to the exchange. Thus, the absence of competition
O you who believe! Stand our firmly for is not understood as a situation where there is only
Allah, as witnesses to fair dealing, and let not one business acting as the sole seller (or groups who
the hatred of others to you make you swerve act as though they are individual sellers) who goes
to wrong and depart from justice. Be just:
against the allocative efficiency.
that is next Piety, and fear Allah For Allah is
well-acquainted with all the you do. As described within the formal analysis of
monopoly, market balance will recover naturally
Reiterating the opinion of Muhammad Baqer as- if there is only one business (or groups who act
Sadr47 who states that Islamic law’s prohibition as though they are individual sellers) who goes
towards monopoly requires state intervention, then against allocative efficiency. The natural recovery
courts (as a form of state intervention) is obliged to of the market cannot occur if there is an agreement
uphold justice. The court’s obligation is elaborated amongst businesses to go against allocative
in the Quran Surah An-Nisaa’: 135 as follows: efficiency. This raises another question: why does
O you who believe! Stand out firmly for the focus of the prohibition to monopolize directed
justice, as witnesses to Allah, even though only to allocative efficiency? when in addition to
it be against yourselves, or your parents, or
your kind, be he rich or poor, Allah is a Better the allocative efficiency, there is also productive
Protector to both (than you). So follow not efficiency?
the lusts (of your hearts), lest you may avoid As previously elaborated, the price of
justice, and if you distort your witness or goods are indicators of allocative efficiency and
refuse to give it, verily, Allah is Ever Well-
productive efficiency. Allocative efficiency relates
Acquainted with what you do.
to the appropriate use of limited resources, whilst
It is clear, the primary source of law in Islam productive efficiency refers to the standard and
emphasizes on the obligation to be just. Therefore, organization of products. As explanation of why
the ‘exercise caution’ argument in carrying out the prohibition of monopoly is directed toward acts
the Islamic law prohibition in monopoly becomes against allocative efficiency, a simple illustration
relevant. This argument leaves out a question: will be provided.
if price discrimination and monopoly does not For example for businesses selling product X.
necessarily result in the detriment of consumers, Taking X from the distributor is done by businesses
thus in what situation is monopoly justified for by using a 25-year old land transport. Because
prohibition? the fleet of land transport is already quite old, it is
Monetary losses is a form of suffering due quite wasteful in terms of its fuel and its expensive
to the consequence of inefficiency in the process maintenance. This results in high production costs,
of exchange with other parties. Pareto-efficiency is thus the selling price of X also becomes high.
not achieved and neither is Kaldor-Hicks efficiency. Businesses who are not willing to replace its fleet,
Within this context, consumer’s monetary losses and due to the decrease in machine function with
happen when exchanges with businesses are not age, year by year the cost of production gets higher,
done voluntarily.48 Consumers do not want to and this will end up being directly proportional to

47
Chibli Mallat, Loc.cit.
48
Voluntary exchanges will certainly produce efficiency, independent from what the law thinks. Therefore, inefficiency exists in involuntary
exchanges, see Ronald H. Coase, “The Problem of Social Cost”, The Journal of Law and Economics, Vol. III, October 1960, p. 18.
 Johan, Monopoly Prohibition According to Islamic Law: A Law and Economics Approach 175

the selling price of X. competition and consumers, whilst the second form
From the illustration above, the high price of agreement still supports competition as well as
of X is not caused by the decrease in quantity, providing benefits for consumers.53
but is cause by the inefficiency of the business in The second form of behavior is in the act
organizing production. Therefore, the prohibition of between competitive businesses to merge in a large
monopoly need not apply to this business, even if percentages (very large horizontal merger). It is
they have agreement with fellow business owners to important to note that when a horizontal merger
keep on using the 25 year old fleet. It is unnecessary, becomes the cheapest way to achieve the amount
because the productive efficiency is not within the needed to achieve efficiency, and the cost of growth
same limits as consumer losses due to monopoly.49 falls on the consumer, then the cost of large size
As stated by Al-Robi, the four Islamic legal schools growth will prevent us in achieving efficiency. The
underlines that the element of manipulation in the measure of what constitutes as very large percentage
increase in demand is an absolute requirement on the is the control of 95% or more of market share.54
prohibition on monopoly.50 It can be concluded that Even though there is not much dispute
what is intended by the legal experts of Islamic law in businesses who conduct price discrimination
simply refers to acts which goes against allocative and price monopoly, the combining of two or
efficiency. more businesses into one business who retains a
Back to the subject of restoring market minimum of 95% market share control can draw
balance naturally, it may not work if there has been the prohibition on monopoly. The reason for this is
an agreement amongst businesses to go against that very large horizontal mergers undertake the act
allocative efficiency. The word “may” is used, which of eliminating competitors and price fixing (through
means that not all agreements between businesses the merger, price is fixed).55 Though this act can be
can go against allocative efficiency effectively. a form of derogation prohibition on monopoly, that
There are only two acts that can effectively go is not always necessarily the case.
against allocative efficiency. The before and after conditions of the merger
The first act is the act between businesses to need to be paid attention to as well. The condition
undertake an agreement on a set of price (horizontal before the merger takes out a lot time, whereby
price fixing). Judging from its goal, there are two costs covering this need for time is borne by the
types of agreements: (1) an explicit horizontal consumer. Whilst post-merger conditions, even if
agreement intended solely to reduce the quantity of the businesses conduct price discrimination and
products;51 and (2) ancillary horizontal agreement price monopoly, this does not matter much, because
not intended solely for the purpose of reducing the market balance will recover naturally.
quantity of products and pro-competitive reasons The focus of the prohibition on monopoly
still exists.52 towards very large horizontal mergers is directed to
The prohibition on monopoly is directed limit the time needed for the businesses to merger,
towards horizontal agreements which are explicit, thus the merger can be conducted quickly and
and not ancillary in character. The argument for consumers do not have to wait long for the natural
this is that the first form of agreement harms recovery of the market post merger.56

49
Robert H. Bork, 1978, Op.cit., p. 106.
50
Musaed N. Alotaibi, Loc.cit.
51
Robert H. Bork, 1978, Op.cit., p. 263.
52
Ernest Gellhorn and William E. Kovavic, 1994, Antitrust Law and Economics in a Nutshell, West Group, Minnessota, p. 172.
53
Ibid., p. 169.
54
Robert H. Bork, 1978, Op.cit., p. 222.
55
Ibid., p. 264.
56
Ibid., p. 222.
176 MIMBAR HUKUM Volume 27, Nomor 1, Februari 2015, Halaman 166-178

C. Conclusion on monopoly. Proportionality (justice) has been an

Based on the above discussion, it is known obligation emphasized in Islamic law.
that Islamic law prohibits monopoly. The flexibility Islamic law does not want businesses to take
of Islamic law gives rise to non-fundamental differ- advantage of consumers without a reasonable ex-
ing views between the four Islamic legal schools in planation for it, as Islamic law does not want con-
defining monopoly. However, the uncontested prin- sumers to blame businesses over increase in product
ciple within the Islamic prohibition on monopoly is prices without reasonable justification. Therefore,
that this prohibition is directed towards acts which exercising caution becomes important in carrying
goes against allocative efficiency. This principle is out the Islamic law prohibition on monopoly.
in line with the law and economic approach, which Caution is exercised through: (1) defining
brings back law to the principle of efficiency. monopoly as the absence of competition and lack of
The law and economics approach towards pricing options; (2) providing criteria of what causes
monopoly goes to show that price acts as a guide- monopoly in the form of agreements between busi-
line indicating the efficiency of the market at a giv- ness competitors who can go against allocative ef-
en time. It also shows price discrimination and price ficiency effectively; and (3) direct the prohibition
monopoly does not necessarily harm consumers. on monopoly towards two forms of behavior: agree-
These two explanations are worth considering, so ment on explicit horizontal mergers, and very large
that the standing of businesses and consumers are horizontal mergers which disregards quick mergers.
proportional in carrying out the Islamic prohibition

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