Thread by @PerBylund

People have an emotional dislike for monopolies that is rather uncalled for. It is not the fact that there is one seller, the definition of #monopoly, that is problematic, but the reason there is only one--which affects the behavior of that one. There are, generally speaking, two

types of monopoly: one that is created by or arises out of limitations imposed on the economy, and one that is due to superior value creation. The former is the kind that we should be repulsed by, because such monopolists can indeed take advantage of the consumer. The latter is

very different. We tend to think of monopolies only in the former sense because those were common historically: the king granted some feudal lord or firm the sole right to a market, because of guilds controlling an industry in a town. This is also how monopoly theory in economics

is formulated, indicating the problem. Whoever in a market is protected from competition can raise prices above the "natural" market price. There is also a somewhat reversed dependence relationship between the firm and consumers: whoever wants the good or service must buy it from

the monopoly. Not only is there no option, but there cannot be an alternative because it is directly or indirectly prohibited. In other words, the monopoly producer can raise the selling price to such a level that there is almost no consumer surplus. The price gets close to the

consumers' valuation of the good--the producer captures almost all the value of it. Single-seller markets (monopolies) that are protected do not have to position their offering with respect to potential new entrants, because any such are not allowed to enter the market. This is

because the incumbent (the already existing producer) has been granted a legal privilege (utilities, infrastructure, licensing) and is thus protected by government from competition. It does not have to be an outright monopoly privilege, but can arise out of cost barriers to entry

such as legally required licenses, certifications, documentation, bureaucracies, etc. Because of this artificial cost primarily to competitors, the monopolist can raise prices and offer a suboptimal product. But the second type of monopoly is very different. It is still only one

seller, but there is only one seller because it creates value beyond what other firms can. This monopoly is due to innovation: one firm innovates a successful product that other producers have not yet produced, making the firm the only seller. Most people recognize that this is

temporary and not a problem. They tend to not see this as a monopoly (which is wrong: there is only one seller, at least for now). Probably because it is not problematic, but to consumers' benefit: they get a better product. But such non-protected market monopolies can extend

through time if the one firm (the monopolist) continues to innovate and keeps prices low and increases the quality (really, the value to consumers) high. As long as this firm stays ahead of any (potential or real) competitors, it is a de facto monopolist. But it is a monopolist

because there are no better--and even no equally good--firms at producing this value for consumers! This is not a problem. In fact, this monopoly is a competitive situation because there are plenty of potential competitors who would enter to compete for profits if they had been

able to produce as much value at as low cost. Whether or not they are able to do so, they are still potential competitors that the one firm must stay ahead of. Only by keeping costs low enough, and thus prices low enough, can this monopolist keep the market share. In other words,

the firm is acting as a competitive business in order to not get actual competitors. There is thus no reverse dependence--consumers get as much value as they probably would get in a multi-firm market--and there's at least as much innovative value creation as there would otherwise

would be. The one firm can only stay a monopolist for as long as nobody else is able to provide at least as much value. This argument holds also for capital-intensive or "natural monopoly" businesses as long as they are not also protected by artificial barriers to entry. It is so

because profit potential drives investment. And investment capital is available for those projects promising high return. Whether a business requires a large up-front investment is therefore rather irrelevant. Such 'cost' can be easily covered if the return is higher. Also, if

this is 'necessary' then this cost must also have been borne by the incumbent, meaning it affected the monopolist's entry as much as any follower's/competitor's. If the cost itself is too high, it is better for consumers that producers seek projects elsewhere--where they can

create more value. This means the proper monopoly analysis does not actually hinge on whether there is one seller, which is quite irrelevant, but *why* there is one seller: either it is because this one seller is privileged by exogenous, non-economic protection (almost always

government regulation), which means the monopolist can take advantage of the position relative consumers, or it is because this one seller is better at creating value for consumers than any other would-be producer expects they are able, which means consumers truly gain. It is a

major error to conclude, as most people unfortunately do, that monopoly itself is problematic. It need not be. What makes a market with only one seller problematic is *why* there is only one, i.e. if other competitors are legally prohibited from competing (which hurts consumers).