What is the definition of a monopoly?
A monopoly exists when a single seller can sell more than a market can produce. As such, monopolies are typically in the public eye and are considered to be bad for society. Historically, this has been seen as an issue because if a monopoly is broken so that more than one seller could sell the product at the same time, each individual consumer would get less of what they want. But this is not true today — in fact, many products now come with features that make competition unnecessary, and thus, monopolies are becoming increasingly rare.
In fact, why do we think it’s important to define what a monopoly is? Because as much as we all like to believe in the “free market”, all markets are ultimately defined by their participants: if there are no consumers to buy from then the market will fail; without buyers, there is no market for sellers; without buyers, there is no price for sellers.
The problem with defining a monopoly as being bad is that it doesn’t explain why it happens – what gives rise to it. We have all heard of a certain ship being locked up by pirates but we don’t know what causes it; there maybe something about the ship that allows for piracy (perhaps an anchor was used) or perhaps something about how piracy works itself out (people might kidnap people off their ships).
What we do know though is that if you do damage to someone enough times they will eventually turn around and become your enemy and lock you up too. The same goes for monopolies: not only do they tend towards crime but they also tend towards non-sticky prices – as long as there are enough buyers then prices will stay low so long as there aren’t enough sellers willing to undercut them on price (and prices need not be sticky since people can easily switch producers or even move away from them altogether).
We need to understand these phenomena better and work harder at understanding them (this post by Paul Buchheit attempts some good breakdowns of our understanding), but we also need to treat them with appropriate seriousness when thinking about our customers and competitors – treating them like real things should help us avoid some of our worst mistakes.
Example of Monopoly
The key problem with the internet is that it’s an unregulated monopoly.
It’s also a very dangerous monopoly because it has been built on the foundation of a lack of competition.
In the early days of the internet, there were no competitors. The market was so small and there was so much growth potential that nobody could have known what it would be like to be in a market with no competitors.
The companies which became the pioneers of this new technology we’re able to take advantage of this situation. They had lots and lots and lots of money to invest in more research and development and they started to build larger networks (often by acquiring smaller ones), so they could use the network effect to their advantage.
As time went on and as more people got access to the internet, those networks grew bigger, bigger, and bigger – sometimes literally overnight. One big network grew so big that its name became synonymous with “the whole internet” – even though all those people using that network never used any other one (like Facebook).
Types of monopolies
The term “monopoly” has been bandied about by some in recent years. There are a number of definitions, but they all end up having the same result: the state can restrict competition in that market.
In this post, I’d like to briefly go through each definition and offer some insight into what it means for a company to be in a monopoly or not.
The first definition of monopoly is simple: when there is only one supplier of a good or service in a given market (which for bicycles would be all manufacturers). The second one is more complicated: when there are several suppliers (although it IS possible to have only one) but at least some or most of them are not allowed to sell the product themselves but rather must license it from another supplier.
These two types of monopolies exist for different reasons and should be approached differently. A bicycle manufacturer will want to keep prices low and so will worry about cutting costs if they can get away with it; however, as they increase their sales volume, they will probably want to raise prices higher than they would otherwise with customers paying more per bike than they would without the exclusive franchise model. The same thing goes for an app developer who wants to bolster their confidence in the rest of their competitors while increasing customer acquisition costs; however, if they do this without causing harm to the other competitors then it might be considered extortion and their monopoly might be challenged. In both cases, we need to make sure that our actions do not reduce competition.
These two types of monopolies are pretty complicated: bicycle manufacturers vs app developers vs bicycle manufacturers vs bicycle manufacturers vs app developers each have different reasons for wanting to maintain control over their own supply chain and why that makes sense from a business perspective (for example, price cuts could lead consumers away from them); however, there are also several general rules which all tend towards the same end:
• The cost of getting products into the hands of customers should always exceed the cost of producing them (If you make things cheaply you sell less, if you make things expensive you sell more)
• The cost of licensing products should always exceed the cost of making them (If you make things cheaply then users will continue buying them even if others provide free products because free stuff doesn’t count as revenue)
• The cost advantage gained from being an ‘exclusive’ seller should always outweigh any disadvantage gained from being an ‘open shop’ seller.
How a monopolist makes a profit
A monopoly is a market situation in which one seller provides a unique product or service to all buyers. Monopolies are often the result of government regulation and prevent competition. In the United States, monopoly power can be enforced through legislation, such as price and entry controls, minimum unit standards (such as width, height, or volume), requirements for disclosure of the identity or sources of supply, and anti-trust laws.
A monopolist is a seller who gives consumers an exclusive right to purchase its products. A monopoly can be established by government regulation. A few examples of monopolies: Apple Computer Inc., Microsoft Corporation, and AT&T Communications were once considered monopolies; but today their products are available to millions of people worldwide through the Internet.
Why there are monopolies in some industries but not in others
In the context of monopolies, it is often useful to think of them as something like a state. Like all states, they have their own unique characteristics, but they also have some traits in common. In our case, we can think of monopolies as bureaucracies that operate with a strong central authority, usually derived from the government, and control the functions of the entire economy. They are not necessarily bad things in themselves; there are many instances where they can be highly beneficial. In fact, many industries could be considered monopolistic (the mobile phone industry is a great example).
However, there are some particular elements of a monopoly that make them particularly problematic and we should be aware of them when we’re considering what makes for good or bad monopolies:
• Monopolistic competition is one thing — and it’s important to focus on that. But now consider what happens when you only have one type of product or service available which competes directly with your monopoly. Those other products no longer exist because they can’t compete with your product — and this leads to a situation where customers won’t switch to those companies because their options are limited to using your product instead. This is called “negative freedom” — i.e., customers will use your monopoly product even if those other products exist (in theory) but in practice aren’t very successful.
• The negative freedom problem doesn’t happen all the time; sometimes it happens only in some situations, but it’s still something worth paying attention to if it does occur (for example Apple’s “iTunes” and Google’s Chrome).
• Sometimes there isn’t even negative freedom involved; e.g., Uber could have been UberX rather than UberPool and its drivers would still have no choice but to drive with UberPool (they simply wouldn’t have been able to switch brands)….but that would be an example of positive freedom: since UberPool is made up of drivers who already choose not to work for any other competitor then they would be free to switch between different competitors at will without worrying about losing their current incomes or jobs….
It’s easy for people who don’t know about these categories (like me)to assume that “monopoly” means an industry dominated by one company/business model/etc…but we needn’t assume this just because “monopoly” has “monopoly” written all over it: there might well
A monopoly is a situation where one entity has more power to do something than another entity. An example of this can be found in the business world, but it is also prevalent in the technology world. In the case of tech companies, an example would be Google (with its WordPress and YouTube services), Facebook (which has a vast array of social apps and messaging tools), or Apple (with its iPhone as a platform for iMessage, as well as its App Store).
Essentially there are three types of monopoly:
1. Monopolistic competition: This type is characterized by a highly competitive market with a wide variety of products being offered by multiple players. Each product provides a different level of value to its users – thus the competition between the players is not very intense. There are lots of potential customers looking for your product but only you have the right to offer it to them. It is hard to find your competitors’ products because they are not available in all locations and at different prices.
2. Monopolistic dominance: This type also includes situations where there are many players that dominate an industry for some period – but we aren’t talking about these scenarios here; rather, monopolistic dominance refers to situations where an industry is completely dominated by one player for over 10 years so that there doesn’t exist any other way for other players to enter.
3. Monopolistic stasis: This type refers to situations where one company dominates an industry so much that no other way exists for other competitors to enter (for instance, Microsoft’s dominance on the PC market).
The last 2 types could be called “non-monopolistic competition”; however, it is important not to confuse them with “competitive neutrality:” when terms like “competitive neutrality” or “competitively neutral” are used in discussions of market structure it usually refers only to monopolistic competition and monopolistic stasis, respectively – not non-monopolists such as Apple or Google which hold their total share by virtue of having been granted monopoly status (or monopoly status plus dominant position).
There is no neutrality when it comes down to which company gets access to which resources at any given time. Competition between different sources of power can occur within monopolies – just take Facebook vs Google vs Microsoft vs Yahoo… etc. However, if you want more detail on what I mean by monopolistic dominance or monopolistic stasis check out my post about