Some thoughts on natural monopolies
I read the other post the other day by @vieira with the claim that monopolies are only allowed to exist due to governments. I've heard that before as well. Of course, it may be a question of definitions - some may define the word "monopoly" as a government-sanctioned regime, others may say that the word "monopoly" is inappropriate if there actually exists another provider - even if said provider has less than 1% market share. I think it's fair to disregard that - natural de-facto monopolies do exist due to the barriers to enter a market - and no matter the definitions, it is a bad thing when one provider dominates a market - and even if there are some few providers, it's bad if it for all practical purposes is impossible to establish yet another competing company.
I would argue that the examples of companies gaining de-facto monopoly, duopoly or ogligopoly are ripe, that it's a natural phenomena not caused by governments. Governments ought to do what they can to break up such monopolies - and actually, sometimes they do.
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The telephone network example
The classic example is telephony service; here the network effect and the high investment costs are the main barriers to entry.
Consider that there is The Telecom Company (TTC) has invested lots into connecting every home and business in a bigger area towards some telephone central, and TTC is owning both the telephone central, the actual telephone lines and the telephony service. It's pretty much impossible for any Challenging Competing Company (CCC) to establish itself; it's not in TTCs interest to allow customers from CCC to communicate with customers from TTC, it's in nobodys interest to sign up with CCC since they can reach approxomately 0 peers through CCC. Even if massive investments are done into CCC to make it able to compete with TTC, it won't work - most people would consider that it's not in their interest to allow CCC to dig in their gardens. Long before CCC gains any real foothold, TTC may respond by lower their prices or even offer their services for free for a period, such a move will likely cause CCC to go bankrupt as they cannot compete. TTC can charge excessively for their services; the price charged does not reflect the cost of operating the telephony network and central, but how much they are able to charge without a sufficient number of customers becoming enough grumpled to sign up with CCC or foregoing telephony completely. TTC also doesn't need to be much innovative - there is no need to spend lots of money on R&D, customers won't pay more for "better phones" as long as there are no competitors out there. TTC doesn't need to be much customer-friendly - a bare minimum of customer service is required, otherwise the customers may revolt.
Moscow central telephony hub, 1890
As long as the TTC customers don't really have anything to compare with, and as long as the bills from TTC is not really painful, they may be happy with the service. The customers may be blissfully unaware that they are being overcharged. For the society as such, the TTC monopoly can still be very bad, not only that large amounts of money are siphoned from regular people and into the pockets of the TTC owners, but also that it cripples innovation.
Other examples
There are many examples of such natural de-facto monopolies, as well as duopolies and ogligopolies. I came across an article the other day arguing that it's inevitable that Bitcoin mining (or mining of almost any crypto currency) will become centralized and that it's pretty much impossible to compete against Bitmain nowadays: https://blog.sia.tech/the-state-of-cryptocurrency-mining-538004a37f9b
Another example that I have a personal relationship to is Microsoft - it was my "favorite enemy" for many years, perhaps I'll write up a separate post on that. I was happily using MS-Dos for many years, didn't quite see it as problematic that Microsoft pretty much could define their own de-facto-standards. I tested Windows 2.0 for a day or two ... it was sort of cool, but no much useful. I tried out MS Windows 3.0 for two weeks before realizing ... "Windows wasn't made for me ... and actually, it sucks". After that I stopped using Microsoft products, and I've never looked back - but boy, it has been a difficult time! Luckily they aren't as dominant as they used to be ... and I attribute it more to luck than anything else. The Internet could have been as irrelevant today as FidoNet, Usenet and others - they did have a vision was that everyone would connect to the Microsoft Network. I'm not much happy about Android, but at least I'm very happy that it got more popular than Windows for Mobile.
Breaking up the monopoly
Such a monopoly sometimes gets broken due to technical innovation. Cellphone replaces the landphones, internet services supercedes the old voice connections, the old telephony cables becomes obsolete as people want increased bandwidth, i.e. through optical cables. CCC may break through by being innovative. We've seen Microsoft losing dominance due to Internet and Cellphones becoming popular.
However, TTC still has a pretty good edge if they stay innovative, gradually exchanging their old copper cables for fibre cables, building out wireless access points for the mobile telephones, gradually rolling out Internet to customers ... though, try for as long as possible to keep the internet connectivity sufficiently crippled that customers will still rely on the TTC network for voice communication with the neighbours. We've also seen Microsoft trying to gain dominance on networking and mobile OS, luckily without success.
@vieira mentions specialization as the solution. If we have three companies instead of one - The CablingCompany (TCC) dealing with the physical cabling, The Phone eXchange Company (PXC) company owning the telephone central and the Phone Service Company (PSC) operating the telephony service, then theoretically, CCC can now enter the market in any business area, i.e. negotiating with the PXC and the end customer on equal footing as the TCC and compete directly with TCC on cabling.
Governance
It has happened several times that governments have forcefully split up businesses to break up monopolies - like in the example above, breaking TTC into CC, PXC and PSC. I don't think such a split can be possible to achieve without government intervention. Governments can also put other kinds of regulations in place to encourage competition.
Goverments can also grow monopolies, both de-jure and de-facto monopolies, plus other kinds of regulation causing barriers to entry. Monopolies may even in some cases be a good idea - but that's a discussion outside the scope of this article. Crony Capitalism is indeed a real problem, and many telecom companies grew up as regulated monopolies - but to me, it still seems like wishful thinking that we would organically get three entities instead of one in the first place in a world without governments and regulations.
As for Microsoft - admittedly they are spending significant resources on lobbyism, we even saw national standard bodies being outright bought up when they wanted ISO to approve their OOXML format. Government organizations are maybe the largest customers for their Office suite. They also get significant subsidies from governments all over the world as pupils and students are efficiently getting education in "the Microsoft way" of doing things - but would it be different without governments? I doubt so. The foundation of the Microsoft dominance was laid in November 1980 as they signed a contract with IBM - and private companies and private schools are just as eager on using Microsoft products as governmental organization.
What can be done without governments? Well, customers can organize themselves, the CCC can be established as a non-profit organization, with people signing up because they know that in the long term they will profit if the CCC can break the monopoly. How often does that happen? Extremely rarely ... people are usually only concerned with their own short-term interests, the pragmatic thing to do is to just keep paying to the TTC and ignore the alternatives. Microsoft is a good example, most people are happy Microsoft customers - by now we even have free alternatives, and quite some organizations have tried pushing the Linux Desktop for end consumers ... without success. For most people it's easier swallowing the blue pill rather than the red pill.
In a democratic society, the existence of large centres of private power is dangerous to the continuing vitality of a free people.
Google has an 88% market share in search advertising, Facebook (and its subsidiaries Instagram, WhatsApp and Messenger) owns 77% of mobile social traffic and Amazon has a 74% share in the e-book market. In classic economic terms, all three are monopolies.
We need look no further than the conduct of the largest banks in the 2008 financial crisis or the role that Facebook and Google play in the ‘fake news’ business
Interesting article @tobixen on monopolies. It is fact that some of the most powerful monopolies are running the economy of any country.
Eh, you're oversimplifying to abstraction.
How did TTC get a monopoly in the first place? All of that capital raising and infrastructure building would have been noticed by other people in the economy and attracted competition well before there was 100% market penetration.
Like you say, it depends on how you define your terms. Peter Lynch, a famous fund manager, was famous for buying companies that had a natural competitive advantage. I remember one was a gravel quarry in the NYC area somewhere. It just wasn't cost-effective for a new company to come in and create a gravel quarry because of the cost of real estate, permits, etc. So if we grant that those costs were not heavily influenced by various other legislation (they were), then you have something near a monopoly for a small geographic region.
But then what? If the quarry used their monopoly power to the point where it made sense for a consumer to ship in gravel from farther away then the quarry would be losing business. So even in that case there was some competitive pressure to keep prices lower than monopoly theory would suggest.
Even in cases where industries formed an outright cartel like the famous trusts of the late 19th century there were always defectors trying to steal market share by undercutting the established cartel price. Look at the basket case that is OPEC today to see the same effect. "Smaller country, cut production by 80k barrels per day." "Hmm... no."
In the tech space the landscape is littered with IP laws and lawsuits. It's a freer market than most simply because of the pace of innovation, but we can see in the crypto space with its generally open source software that we get a lot more variety a lot faster without artificial barriers to entry.
In reality when it comes to telecom markets, many of the big ones were granted monopoly rights. I still believe it could have worked out without government intervention - maybe not at the biggest scales, but still ... if one company would start with telephone lines while everyone else are using horses for message delivery, one can get quite a competitive edge. It's of course risk taking at its fines level ... one can say that people should be rewarded for taking risks, but it is harmful for the society that one company has such a big grip on the market decades later.
If TCC would be starting i.e. in City of London, expanding to Westminster and so forth ... even if another company starts in another borough of London, the TCC could gain such an upper hand that they could gradually overtake customers from the competitors or buy up the competitors, becoming the de-facto monopolist in all UK. Fully possible I think ... but it's quite hypothetical.
Microsoft, Facebook and Google are the bigger elephants in the room, internationally.
The only one of those that could be considered to be approaching a natural monopoly is Google, and we are seeing their market share shrink (although still very high).
Market domination is just a temporary phenomenon when there aren't laws and guns supporting a firm.
Facebook probably doesn't deserve the label "monopoly" - but still I think it's a major problem that "everyone" expects "everyone else" to have a Facebook account. I still haven't joined Facebook, but it's sometimes making things difficult for me, and I know people that have missed invitations to weddings and similar due to not being at Facebook.
As I've written in my post, Microsoft is losing some of the grip on the markets, but it's still pretty hard i.e. to buy a regular laptop without paying a "Microsoft tax" - and I'm regularly getting into problems both from my children, my wife, the childrens school and other instances for not providing Microsoft Windows and Microsoft Office at home. Microsoft still has a pretty good grip on those things - you may argue that they don't qualify as a "monopolist company" due to the mere fact that alternatives indeed does exist, but the problem doesn't go away by arguing over definitions.
That's pretty much what I said - the price limit for what the "monopolist" can charge is limited by the alternatives, in this case the price for shipping in gravel from quarrels further away, not by the actual cost of production. Now if it doesn't cost too much shipping in gravel from quarrels further away, it doesn't matter that much for the end consumer anyway.
On a related note, I've heard quite some Russian fishing boats unload their cargo in Tromsø, Norway and ships the load by trucks through Finland to Moscow rather than by rails from Murmansk because the harbour fees in Murmansk are too high.
The network effect is still very strong. Consider Bitcoin, it historically had some 80-95% market share of all cryptos according to coinmarketcap, all until they got into capacity problems. Even though it's open source, it's heavily centralized both at the mining side and the development side.
That TTC example made me think about the heavy debate about net neutrality a while back, but I don't want to go off-topic here.
At the end of the day, people will always prefer going the comfortable way, swallowing the blue pill instead of the red one.
We see it everytime facebook pushes something that doesn't please the masses. They will complain, but in the end, they will comply.
An interesting read.
The telephone network example interested me. In the UK, BT was the monopoly until around the late 90s, but they were slow on the uptake with regards to broadband. NTL, now Virgin Media, dug the country up to fit cable, and without knowing the stats, that was very shrewd.
Some monopolies that appear out of natural progression of events are potentially more insidious. Their growth goes unnoticed and their roots go even deeper.
Of course 'natural progression' also contains the human element within it. Meaning that an opportunity wouldn't always be available and empty slots will eventually be filled by people. If the occurrence of these events is such that players are organically coming from the same source then perhaps it might be called a natural monopoly. (This definition sounded a lot better in my head)
I have always believed that if something becomes to popular then it is usually time to move on. This thinking in me comes from an innovators perspective where an idea that was new at night would be old by morning - get it patented now or go home. But I found that this mindset helped me beat the bigger players on my own little chessboard.
sdge - Sempra energy- is a monopoly in my locale - there are no viable competitors - it used to be regulated by #government but then got 'deregulated' in the 1990s - saying that deregulation was great because now #consumers had the option to buy energy on the open marketplace and competition would keep that cost down. They sent us magnets to put on our fridges. I knew that it was total BS--- @angrytwin
In a perfectly competitive market, decisions about the number of output firms individually can not affect the price level, and for decisions on pricing, the demand curve is horizontal, therefore price is considered constant, regardless of output. Thus the total profits will be obtained.
The monopoly market is a form of interaction between demand and supply where there is only one seller/producer dealing with many buyers or consumers. Pure monopoly is a market where there is only one seller. There is no substitution for the goods or services offered by the monopolist. Thus, the monopoly market has absolutely no competition, real or potential. Thus the actions of a monopolist do not affect other companies, such as price changes or the conduct of advertisements, and the actions of other companies also do not affect the monopolist. Pure monopoly, like pure competition, is an extreme market form and does not exist in reality.
Existing industries are near monopolies markets that are mostly served by one company or a seller in a particular location. For example, a doctor who opens a practice in a small town where he is the only doctor in town. Called approaching monopoly because the doctor is not really the only seller (service) and instead of having no rivals at all. In other nearby cities doctors are also available. The only meatball seller in our village, may be categorized as "near-monopoly". Markets approaching monopoly are usually local, but some industries are nationwide. For example, Pepsodent toothpaste is available in a store without any significant rivals and controls a large part of the store's market.
When it comes to toothpaste and other household items, there can be some dirty play, particularly if the distributor has strong hands and the shop has weak hands. If a significant amount of customers will use Pepsodent and only Pepsodent, because they think it's simply the best toothpaste, and if no other competitor is nearly as popular as Pepsodent, then it's easy for Pepsodent to give the shop a deal like ... "we'll allow you to sell pepsodent and give you a good discount if you sell our toothpaste and no other toothpaste". If the shop will reject the first offer, the second offer may be ... "we'll allow you to sell pepsodent but without any discount if you arrange the shelves so Pepsodent will be the dominating toothpaste".
Toothpaste is typically a quite insignificant cost in a family budget, hence there is no strong price pressure on it. If the customer believes Pepsodent is better than some other brand, he would typically choose Pepsodent even if the other brand was for free. Anyway, there exists plenty of competition, there are other international brands like Colgate and Aquafresh ... and even more - most markets also have domestic brands (in Norway we have Solidox, in Russia they have quite many domestic brands, etc.
Power & Money. wins everytime.
Monopolies are an interesting thing.
Ruthless competition can make a monopoly, but usually it is short lived.
To really have a monopoly, you really need a govern-cement to implement barriers to entry. Such as, right now it is almost impossible to start a new car company. Which proves that Tesla was in bed with those who control the govern-cement. How Musk cut through so much red tape, so quickly is amazing.
But, what always destroys monopolies is innovation.
A monopoly gets big and slow, and thus easy to outmaneuvre.
It many developing countries, hard phone lines are not even being installed. It is far cheaper to just put in cell towers.
AT&Ts days are numbered. They have fallen short on their promises too often, and their business will soon be gone. And it will be an innovation that just makes all of their services obsolete.
Same with Microsloth. They got so big because they had access to money that the competition did not. Whether it was started that way, or the spy agencies co-opted them is hard to tell. But, Microsloth should really come with a sticker (Virus Inside).
Now, if Microsloth makes any big errors, people will start fleeing in droves to linux. In 10 years, i doubt Microsloth will exist.