Overview

The board game is fun; the economic reality is not. A Monopoly is when one company owns the entire market. They have no competition, so they can charge whatever they want and treat customers poorly. It is the opposite of Capitalism (which relies on competition).

Core Idea

The core idea is Market Power. The ability to set the price.

  • Perfect Competition: Farmers selling wheat. If one farmer raises his price by 1 cent, everyone buys from his neighbor. He has zero market power.
  • Monopoly: The electric company. If they double the price, you still have to pay. They have absolute market power.

Formal Definition

A market structure characterized by a single seller, selling a unique product in the market. Barriers to Entry: The walls that keep competitors out (Patents, High Startup Costs).

Intuition

  • The Castle: The Monopolist sits in a castle with high walls. No one else can get in to sell goods to the villagers. The Monopolist can charge a toll for everything.

Examples

  • Standard Oil (Rockefeller): Controlled 90% of oil in the US. He lowered prices to bankrupt competitors, then bought them out, then raised prices. The government broke it up in 1911.
  • De Beers: Controlled the global diamond supply for decades. They convinced the world that “A Diamond is Forever” to keep demand high.
  • Utilities: Your water and power company. These are “Natural Monopolies.” It doesn’t make sense to run 5 sets of water pipes to your house. So the government allows the monopoly but regulates the price.

Common Misconceptions

  • Being big is illegal: It’s not illegal to be a monopoly if you got there by being better (Google). It is illegal to abuse your monopoly power to crush competitors (Antitrust Laws).
  • Oligopoly: A few companies rule (Coke vs. Pepsi, Boeing vs. Airbus).
  • Monopsony: A market with only one buyer. (e.g., The Military is the only buyer of fighter jets).

Applications

  • Patents: A government-granted temporary monopoly (20 years) to reward inventors. “If you invent a new drug, you are the only one who can sell it for 20 years.”

Criticism / Limitations

  • Innovation: Monopolies often stop innovating because they don’t have to. (Why improve the service if the customer can’t leave?)

Further Reading

  • Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr..
  • Wu, Tim. The Curse of Bigness.