What is Monopoly?

What is Monopoly?

Monopoly refers to a company that holds a dominant position in an industry or sector and excludes all viable competitors.

Monopolies in free-market countries are often discouraged.

It is often seen as leading to price gouging and quality deterioration due to a lack of alternatives for consumers.

They can also concentrate wealth, influence, and power in the hands of a few people.

However, governments may encourage and even force monopolies on essential services like utilities.

Key Takeaways

• Monopoly refers to a single dominant company in an industry.
• A monopoly can be government-sanctioned or improve naturally for particular reasons.
• A company can still gain or keep a monopoly position by using unfair practices that suppress competition and deny the consumers choice.

The 3 Steps to Building a Monopoly

Start Small and Monopolize

Each startup is small in its initial stages and each monopoly controls a significant share of its market.

Every startup should begin with a small market because It is never too late to start big.

It’s much easier to dominate small markets than large ones and It’s almost certain that your initial market is too large if you think it might be.

Small doesn’t mean nonexistent.

This was a mistake we made at PayPal.

Our first product allowed people to send money via PalmPilots and it was a unique technology that no one was using.

The millions of PalmPilot owners around the globe weren’t all in one place.

They had very little in common, and they used their devices only occasionally.

We didn’t have any customers because no one needed our product.

So, we learned from this lesson and decided to focus our efforts on eBay auctions.

This is where we had our first success.

We were serving 25% of the PowerSellers that eBay had in late 1999. It was a small group of high-volume PowerSellers.

It was easier to reach just a few thousand people who needed our product than trying to attract millions of people.

With few or no competitors, a small number of people is the ideal target market for startups.

But

A large market is bad, and even worse for the market that competitors already dominate.

Entrepreneurs who want to get 1% of a $100-billion market are always warned because It is not easy to reach 1% in a large market.

A lack of a starting point or open competition will make it difficult.

Even if you do manage to gain a foothold in the market, it will be challenging to make a profit.

Scaling Up

After you have established and dominated a niche market then you can expand your reach into other markets.

Amazon

Amazon is an exceptional example of how it can be done.

Jeff Bezos had the vision to be the leader in online retail but However, he started Amazon with books.

Although there were many books to catalogue, they all had the same basic shape and were easy to ship.

The books that were most frequently sold were the least profitable to stock in a retail store, but they also attracted the most customers.

Amazon was the most popular solution for those who couldn’t find a bookstore or wanted something unique.

Amazon had two choices:

• Increase the number of book readers, or
• Expand into new markets.

They decided to go with the latter and started with the most similar markets, including CDs, videos, and software.

Amazon slowly added categories until it became the largest general store worldwide.

Amazon’s scaling strategy was beautifully reflected in the name.

Amazon’s original goal to catalogue every book in the globe was reflected in the biodiversity of the Amazon rainforest.

It now stands for everything in the world.

eBay

eBay also started out by dominating small niche markets.

It didn’t need to adapt to the whole world when it launched its auction marketplace in 1995.

The product was well-received by intense interest groups like Beanie Baby obsessives.

After monopolizing the Beanie Baby market, eBay didn’t immediately move to list industrial surplus or sports cars.

It continued to serve small-time hobbyists and became the most reliable online marketplace for anyone trading any item.

In scaling, there can be hidden barriers and it is something eBay has learned over the years.

The auction marketplace is like all marketplaces where Buyers go to the sellers and vice versa.

eBay discovered that the auction model is most effective for unique products such as stamps and coins.

It doesn’t work well for commodities products.

People don’t want the hassle of bidding on Kleenex or pencils, so it’s easier just to buy them from Amazon.

While eBay remains a valuable monopoly, it is now smaller than most people thought.

It is important to know how to sequence markets correctly and have the discipline to grow slowly.

Those companies are the most successful that first dominate a small niche market and then expand to other markets.

Don’t Disrupt

Silicon Valley is obsessed with “disruption.”

“Disruption” is a term that initially meant how a company could use new technology to create a low-end product, increase its quality over time, and ultimately overtake the premium products of established companies that used older technology.

For example,

This is exactly what happened with the entrance of PCs to the mainframe computer market.

At first, they were irrelevant, but then they took over as Mobile devices could be doing the exact same thing as PCs today.

Disruption has become a self-congratulatory buzzword that refers to anything trendy or new.

This seemingly insignificant trend is important because it can distort an entrepreneur’s self-understanding in an intrinsic competitive way.

This concept was created to describe threats to incumbent businesses.

Startups’ obsession with disruption causes them to see themselves through the eyes of older companies.

It’s easy for you to get too focused on the obstacles that are in your way if you see yourself as an insurgent fighting dark forces.

If you really want to create something new, it is more important than the existing industries that may not like your creations.

If your company’s opposition to existing companies can sum it up, it won’t be entirely new, and it probably won’t become a monopoly.

Disruption is attractive, and people who search for trouble and find it are disruptors as Disruptive children are sent to the principal’s desk.

Disruptive companies are often in fights that they cannot win.

Take a look at Napster,

The name that means trouble.

What types of things can one “nap?” Music, Children, or maybe not much else.

Shawn Fanning (then-teenager founder of Napster) and Sean Parker allegedly threatened to endanger the music industry’s powerful recording industry in 1999.

They were featured on Time magazine’s cover the following year and were eventually declared bankrupt a year and a quarter later.

Although PayPal might be considered disruptive, we didn’t attempt to compete directly with any major competitor.

While it is true that PayPal took some business from Visa, you can still use your Visa card to purchase something in stores by using PayPal instead.

We gave Visa more business than we received because we expanded the payment market overall.

The overall dynamic was net-positive, contrary to Napster’s negative struggle with the U.S. record industry.

When you plan to expand into adjacent markets, avoid disruption.

Monopoly Capitalism

A monopoly is good for all those who are inside it, but what about the rest outside?

Are outsized profits come at the expense or the benefit of the rest of the society?

Profits come from consumers’ pockets, and therefore monopolies have a bad reputation.

A monopolist in a static system is nothing more than a rent collector.

If you have a monopoly on a product or service, others will be forced to buy it from you.

You can imagine the classic board game.

The deeds are passed from one player to the other, but the board remains the same.

Inventing better real estate development is not a way to win.

You will only be able trying to purchase them because their relative values are set for life.

The world that we live in can be dynamic and It is possible to create new and more immeasurable things.

By creating new types of abundance, creative monopolists offer customers more options.

Creative monopolies can be beneficial for society as a whole because they are powerful engines of improvement.

The government well knows this fact, and one of its departments operates carefully for monopolies through granting of patents for new inventions.

At the same time, another part pursues them (by prosecuting antitrust lawsuits).

You can question whether someone should be granted a legally binding monopoly just for being the first to create a mobile software design?

It’s obvious that Apple’s monopoly profits in producing, marketing, and designing the iPhone were the award for creating more affluence, not artificial insufficiency.

Customers were delighted to have the option of paying high prices to purchase a phone that actually works.

Old monopolies can’t choke innovation because of the dynamism of new monopolies.

The rise of mobile computing with Apple’s iOS operating system at the lead has drastically decreased Microsoft’s long-standing dominance in the operating system market.

The software monopoly that Microsoft has overtaken IBM’s hardware monopoly in the ’60s & ’70s had existed before this.

AT&T held a monopoly over telephone service for the majority of the 20th Century, but anyone can now get a cheap plan with any of many providers.

Monopoly businesses would be dangerous if they tended to hold back and should be opposed.

However, the history of progress shows that there have been better monopoly companies replacing incumbents.

Monopolies are a strong incentive to innovate because they promise monopoly profits for years or even decades.

Monopolies can continue innovating, as profits allow them to plan long-term and finance ambitious research projects that competitors can’t.

Why is competition so important to economists?

It is a remnant of the past, and economists drew their mathematics from 19th-century physicists.

They see businesses and individuals not only as creators but as an interchangeable atoms.

In their theories, they describe equilibrium states of perfect competition because it’s easy to model and not because it’s the best for business.

It’s important to remember that 19th-century physics predicted that equilibrium would be long-term.

This state is also known as heat death in the universe.

It is where all energy is equally distributed, and everything goes to rest.

It doesn’t really matter what your views on thermodynamics are But, it is a powerful metaphor.

Equilibrium means stability, and stasis can be defined as death in business.

The death of your business in an industry that is competitively equilibrium won’t impact the world because there will always be an undifferentiated competitor ready to replace you.

The universe may be described as perfect equilibrium.

It may be a characteristic of many businesses.

Every new creation is far from equilibrium, and every business succeeds in the real world, outside of economic theory.

Monopoly is not a disease or exception, but Monopoly is a condition for every successful business.

Tolstoy opened Anna Karenina with the observation:

“All happy families have similar characteristics; every unhappy family is different.”

The opposite is dependable for business because happy companies are all different.

Each one is able to claim a monopoly by solving a unique query, but every failed company is the same because they couldn’t escape competition.

Characteristics of Monopoly

A monopoly is defined by:

• Brand,
• Scale,
• Network effects, and
• Technology.

However, to make them work, you must choose the right market and expand carefully.

How does a company that has large cash flow far into the future look?

Each Monopoly is unique but shares some common characteristics:

• Network effects,
• Proprietary technology,
• Economies of scale, and
• Branding.

These are not a set of rules to follow when building your business because Monopoly is hard to achieve.

These characteristics will help you to think about how to make your business last.

Proprietary Technology

Because it makes it impossible to replicate your product, proprietary technology can be a massive advantage for a company.

For example,

Google’s search algorithms are superior to all others, returning better results than any other.

Core search products are robust and easily defendable by proprietary technologies, allowing extremely fast page load times and accurate query autocompletion.

It would be very difficult for anyone else to do the exact same thing as Google did to search engine firms in the early 2000s.

To be considered a monopolistic technology, proprietary technology must be at least ten times more efficient than any substitute in an important dimension.

Any improvement of less than one order of magnitude will likely be seen as marginal and difficult to sell in a highly competitive market.

Inventing something entirely new is the best way to achieve a 10x improvement.

The potential for infinite value increases is possible if you create something new and valuable from the ground up.

For example,

Monopoly businesses would be supported by a drug that can safely eliminate sleeplessness or cure baldness.

It is also possible to radically improve an already existing solution.

Once you are 10x better than the competition, you can escape from the competition.

PayPal made eBay selling and buying easy by making it at least 10x more efficient.

PayPal allows buyers to pay immediately after an auction ends instead of waiting for a check to arrive.

Sellers got their funds immediately, unlike with a cheque, and they also knew that the funds were safe.

Amazon’s first 10x improvement was visible in a very obvious way.

They offered ten times more books than any other bookstore.

Amazon was the “Earth’s Largest Bookstore” when it opened in 1995.

Unlike a bookstore that may stock 100,000 books, Amazon did not need to store any inventory.

When a customer orders, Amazon simply requests the title from its supplier.

This quantum growth was so successful that a lawsuit was filed by Barnes and Noble just three days before Amazon IPO.

It claimed that Amazon was misleadingly calling itself a bookstore when it was actually a book broker.

A superior integrated design can help you achieve a 10x performance improvement.

The market for tablet computing didn’t exist before 2010 when Microsoft Windows XP Tablet PC Edition was first released in 2002.

Nokia also launched its “Internet Tablet” in 2005 But they were also discomforted to use it while Apple launched the iPad.

Although design improvements were challenging to measure, it is clear that Apple made significant improvements to the iPad’s functionality that the tablet went from being inaccessible to accessible.

Network Effects

A product grows more helpful if more people use it.

For example,

If all of your colleagues are on Facebook, then it makes sense to join Facebook.

Unilaterally choosing another social network would make you eccentric.

Although network effects are powerful, they can only be realized if your product is of value to the first users.

In 1960, a shady company called Xanadu attempted to create a two-way communication system between all computers.

This was a kind of early, synchronous version of the World Wide Web but after three decades of futile efforts, Xanadu was finally shut down just as the internet became commonplace.

Although their technology would have been able to scale up, in another way, it was not able to scale up because it required all computers to be connected to the network simultaneously, which was impossible.

Network affects businesses and should start with small markets, paradoxically.

As an example,

When Harvard students founded Facebook.

Mark Zuckerberg’s initial product was created to get his Harvard classmates to sign up and not to attract everyone.

MBAs are rarely successful in starting network businesses.

The initial markets for these companies are often so small that it is difficult to see them as business opportunities.

Economies of Scale

Monopoly businesses become more robust as they grow in size: fixed costs (engineering and management) for creating a product can be spread over more significant sales volumes.

Software startups have the potential to enjoy dramatic economies of scale due to the low marginal cost of making another product copy.

As businesses grow, many gains limited advantages.

It is challenging to monopolize service businesses.

For example,

A yoga studio will only serve a limited number of customers but you can hire more teachers and expand your business to other locations.

Your margins will be still low, and you won’t reach the point where a core team of talented people can offer something of value for millions of clients as Software engineers can do that.

Good startups should be able to scale quickly from their initial design.

Twitter has over 250 million users. Twitter doesn’t have to offer too many features to attract more users, and there is no reason to stop growing.

Branding

By definition, a company holds a monopoly over its brand.

Therefore, it’s essential to build a strong brand like, Apple which is today’s most powerful tech brand.

The attractive design of Apple’s products, including the MacBook and iPhone.

The Apple Stores’ minimalist design and tight control over the customer experience, as well as the price positioning of Apple as a premium goods manufacturer.

The persistent nimbus of Steve Jobs’s charisma, all contribute to the perception that Apple products are so great, they can be considered a category.

Many people have attempted to copy Apple’s success including,

• Paid advertising,
• Branded stores,
• Luxurious materials,
• High prices, and
• minimalist designs.

They were all possible to imitate but these techniques don’t work without a potent base substance.

Apple offers a variety of proprietary technologies, including superior touchscreen materials and software that are specifically designed for certain materials.

It produces products on a large scale that allows it to control the pricing of the materials it purchases.

It also enjoys strong network effects through its content ecosystem.

Thousands of developers create software for Apple devices, that is why hundreds of millions of people use it.

Those users then stay on the platform to access the apps.

Although these monopolistic benefits are not as obvious as Apple’s brand, they are fundamentals that allow the branding to reinforce Apple’s Monopoly effectively.

It is risky to start with a brand and not with substance.

Yahoo! has been led by Marissa Mayer since she became its CEO.

She has been working to make Yahoo! a fabulous internet company since she became CEO in 2012.

Yahoo! summarized Mayer’s plan in a single tweet: “A chain reaction of people, products, traffic, and revenue.”

Yahoo! was the place where people would come to find coolness.

It demonstrated design awareness by redesigning its logo and acquired hot startups such as Tumblr to show youth relevance.

Mayer’s star power has also attracted media attention.

The big question was: What products Yahoo! will actually create?

Steve Jobs didn’t just make Apple a great place to work; he also slashed product lines to concentrate on the few opportunities for 10x improvement.

Branding alone is not enough to build a technology company.