Natural Monopoly

(These are just my half-baked thoughts. I am happy to adjust them in part or in whole, and to annotate them with links to relevant research etc.)

In Economics (and econ. of capitalism) it is generally understood that Monopolies are Bad.

Monopolies mean that a single player gets to control any one or more of the following: prices, supply, features. These cause what is called "Market Inefficiency" which, in economics, is the big bad, the worst thing, a terrible no good problem to have.

However, there is also this thing that happens where people say:

Some monopolies are inevitable.

For example, in a city, it is very hard to have two different, competing, "street networks" -- the main network of streets and a lesser known alternative network of streets.

Generally there will be only one network of streets. If a given entity owned the street network, they would inevitably have a monopoly. Inevitable monopolies are also often referred to as "natural monopolies."

"Networks" are a common scenario where monopolies are considered inevitable; the 'network effect' is a mathematical force that applies to networks and shows why one has more power than two; in the case of city streets you also see the geographic impossibility of having two competing networks due to the cost of building "crossings" (such as overpasses, underpasses or other intersections).

One thing I want to specifically state, however, is that just because a monopoly power claims that the thing they own is a "natural monopoly" does not mean it is a "natural monopoly".

For example, Facebook can claim that it is a "natural monopoly", and a lot of people would believe this is true. It certainly benefits from "network effects" -- if more of your friends are "on" facebook, then the network has more value to you, hence the bigger it gets, the more likely you are to join, and the more people join, the more value it gets.

But benefiting from "network effects" alone does not prove you are a "natural" monopoly. A tell-tale absolute dead giveaway about fake "natural monopolies" is that the monopolist will need to spend energy to stop competitors from getting a foothold.

Two examples of anti-competitive monopolistic behaviour by Facebook that readily spring to mind:

  1. Purchasing companies that are potential competitors. e.g. Instagram and Whatsapp, and multiple attempts to acquire Snapchat.
  2. Resistance to interoperability outside their network.

It used to be that companies with significant market power were prevented from the wildly anti-competitive activity of purchasing their competitors.

But the second point about interoperability is particularly relevant here when considering a "natural monopoly".

Unlike the example with a street network, every social network could freely "interoperate" with other social networks, and still benefit from network effects, probably more than they do currently. Such efforts are discouraged by big players, simply to control their monopolistic rents.

Generally in economics of capitalism there's this interplay between "free" markets and "regulation". Too much "regulation" means the market is constrained and "inefficient". But a complete absence of regulation means that (as in this case) monopolists arise and put up barriers that also create massive inefficiencies. Luckily for the monopolists, they are rich enough (due to the aforementioned monopoly) that they can lobby governments, influence mass media, and generally control the narrative around much of how they are perceived. (And if they can't do that -- they will soon be replaced by monopolists who can.) On that topic of media influence -- it's no coincidence that very powerful monopolies (and oligopolies etc.) quickly arose in the Newspaper industry, as newspapers grew in popularity.



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