Monopolies thrive thanks to technological advantages, network effects, economies of scale and great branding.
So what exactly makes monopolies so successful? Typically, monopolies share some combination of four beneficial characteristics:
First, they have a technological advantage: their proprietary technology works much better than anyone else’s – usually, at least ten times better. Google’s search algorithms, for example, are much faster and have better predictive power than anyone else’s, which makes it very difficult for a competitor to supplant them.
Second, monopolies enjoy network effects, meaning the more people are using their product, the more useful it is. As an example, consider Facebook: it wouldn’t be very useful if none of your friends were signed up. What makes it valuable to you is the fact that many of the people in your network can be found there. This means that newcomers face an uphill battle when trying to lure customers away from monopolies with broad existing customer-bases.
Third, monopolies benefit from economies of scale: cost savings gained by producing something on a large scale instead of a small one. Say you own a bakery, and have fixed costs like rent, heating and electricity, totalling $1,000. In this bakery, you can produce between 1 and 10,000 buns a month, while the fixed costs remain the same. The more buns you sell, the more you can spread out those fixed costs, meaning that the effective cost incurred per bun is less. Since monopolies are the largest producers in their industry, economies of scale allow them to offer customers more attractive prices than newcomers, further strengthening their position.
Finally, monopolies often have strong brands that can’t be replicated. Apple, for example, is the strongest tech brand in existence today. While many other companies have tried to emulate its sleekly designed products and stores, they just haven’t seen the same level of success because they lack Apple’s powerful brand.
When analyzing a business, look at these four characteristics to understand if they have or are close to having a monopoly.
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