No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eight: Market Structure: From competition to monopoly 180 INTRODUCTION Monopoly! This word can communicate several thoughts. For example, many of you have played the popular board game Monopoly , and have dreaded landing on Park Place if it was loaded with Hotels! You would be financially crushed if you landed on an opponents’ property. The idea is that if you have no other choice, you are subject to the rules of the monopolist (or the rules decided by the board game). A “ monopoly ” is almost universally thought of as a negative, and the idea of monopolies in markets suggests an exploitation of consumers where producers have an unfair advantage over consumers. Yet, pursuit of monopoly profit is the driving force behind most innovation and improvements in the products we purchase and consume. Without the lure of monopoly profits, we wouldn’t have the benefit of many of the products we enjoy today. In pursuit of ephemeral (short-lived) monopoly profits, entrepreneurs are driven to innovate and improve products. If they do not improve, another competitor may do so and win their consumers. COMPETITION EVERYWHERE! We’ve discussed iPhone production earlier in this book. While initially a monopoly product, its very success spawned many competitors to include Samsung’s Galaxy. The threat of competition to Apple’s monopoly profits spurs Apple to improve its iPhone, and over time we get to buy iPhones with larger memory, better visual displays, longer battery life, higher resolution cameras, etc. Likewise, to “steal” away Apple’s monopoly profits, Samsung introduces continual improvements to its smartphone. Even when they do not succeed ( Windows Phone R.I.P.! ), competitors keep trying, such as Microsoft’s post-Windows Phone concentration on building mobile apps for both Android and iOS. This is competition—which clearly benefits the consumer—yet it is competition for monopoly profits. While the two products mentioned are for the same function (smartphones), they are in no way exactly alike or perfect substitutes. Market competition is most often seen by entrepreneurs trying to distinguish their product from other potential competitors in order to gain a “monopoly” privilege due to the superior characteristics of their product or service. As we learned previously, there are substitutes almost everywhere such that most of the goods or services we buy could be replaced by something else. Can you think of additional substitutes to the iPhone? Obviously there are other mobile phones, but at some margin reading a book or watching television may be acceptable alternatives to listening to music streaming through your phone. If you think that there aren’t alternatives, just imagine if Apple raises the price of the iPhone to $15,000 each. Even those with the financial wherewithal to afford it will now assess the opportunity cost. Market competition is most often seen by entrepreneurs trying to distinguish their product from other potential competitors in order to gain a “monopoly” privilege due to the superior characteristics of their product or service. Monopoly: a market structure with only one substantial provider. The monopoly firm is therefore able to determine the price of the product, while consumers determine the quantity produced (according to their demand schedule).