Monopolies are bad and deserve their reputation when things are static and the monopolies function as toll collectors … But I think they’re quite positive when they’re dynamic and do something new.

History tells us that monopolies that are truly benevolent and effective are rare.

I talked about the barriers created by monopolies. I said that it was the role of government to break up these monopolies and that we couldn’t do it alone.

It is often remarked that we are living through a new Gilded Age. Indeed, it is not just spiralling inequality that gives us this sense of historical Deja Vu. It is also the return of big monopolies that abuse their market position to excessively enrich their managers and owners, while making life a little bit worse for everyone else by charging higher prices for inferior service. Back in the day, it was railroad and oil trusts, and, later on, the telephone monopoly.

Now, increasing industrial consolidation is an issue across many sectors of the economy, but it is especially alarming when it comes to the new tech monopolies. They continue to grow voraciously while regulators look the other way or take half-measures. Consumers end up paying more and innovation is stifled, while these new 21st century trusts are snooping around in the most intimate details of their customers’ lives.


One of the key roles of the state as a regulator is to oversee the proper functioning of markets. That entails preventing market abuses, chief among them the formation of cartels and monopolies. In both cases, a company, or a limited number of companies acting in concert, are able to extract from consumers a “rent”, that is charge more money than a competitive market would allow. In doing so, it provides superior profit to a limited number of employees and shareholders. It harms many for the benefit of a few, which is why the state is charged with stepping in for the public good.

It is natural for a company to strive to achieve a monopoly, for its goal is to maximize profit, and monopoly rents generate extraordinary profits. Further, monopoly rent is not necessarily bad. Schumpeter, for instance, insisted that these rents are actually beneficial because they incentivize new entrants to challenge the prevailing monopoly in order to capture that extra rent, i.e., profit. In other words, the rent earned by a monopoly is like a prize, waiting to reward innovation by new entrants who dare to try and snatch it away. In the meantime, the monopolist uses its rent to perpetuate the status quo, and to overpay its managers and investors at the expense of consumers43.

This is indeed a market behavior that regularly occurs. Investors finance many start-ups in an effort to challenge Facebook’s or Google’s monopolies and capture their profits. In fact, Google itself was initially a start-up designed as an alternative search engine to Yahoo, the prevailing search monopoly at the time. Yahoo failed to acquire Google on its way up because the newer firm’s approach did not fit Yahoo’s search paradigm. Google went on to supplant Yahoo as the search monopoly on the strength of sheer technical superiority. In this case, consumers benefited from Google’s faster, more helpful search technology.


The search engine case vindicates Schumpeter’s view, but the economist failed to anticipate the way that monopolies can respond in practice. In many cases, monopoly rent indeed attracts lots of innovation from entrepreneurs attempting to claim the extravagant profit captured by the incumbent monopolist, but the monopolist acquires the potentially successful start-up before the younger firm can displace it. In this case, the incumbent consolidates its monopolistic position to the detriment of customers by preempting the growth of competitors. We end up with an unchallenged, static monopoly rather than a dynamic, changing one.

Today’s monopolists have learned from Yahoo’s mistake, and anti-competitive acquisition has become ever more common. Facebook, for instance, bought Instagram, and sought to acquire Snapchat. Indeed, many startups base their entire “business model” on creating a sufficient threat or useful technology that will force monopolists to acquire them. For their part, the monopolists have developed a “hug to kill” approach44 to avoid having to acquire them all.

In fact, it is well established that if a monopolist, by the overwhelming advantages conferred by a natural monopoly, or by a policy of acquiring or suppressing all emerging threats, can maintain the status-quo, competition and innovation will be ill-served. The break-up of the telephone monopoly AT&T led, for instance, to a dramatic drop in call costs as well as the provision of multiple services that had not been available before.

The case of the natural monopoly is the hardest to deal with, for there are situations where a common system has so many advantages, from economies of scale to uniformity of use, that a breakup is difficult to justify. For instance, it has been argued that the operating system of computers is a natural monopoly, as is say Word, for its universal use creates dramatic savings in programming, maintenance, and use of word processors across multiple platforms.

Beyond the longstanding “traditional monopolies” – think of the Boeing and Airbus duopoly – a number of new technological monopolies have been forming in recent decades. Microsoft has become a monopoly for its OS and Microsoft Office, Google for search, Facebook for social media. Tomorrow, Amazon could conceivably achieve local monopolies on the distribution of goods. All these companies exhibit a propensity to preserve their monopoly status through acquisitions. Some also exhibit conglomerate-like expansion in attempting to extend their monopolies to closely related (or not) activity. The typical monopolist behavior is in its own sector – think Boeing’s acquisition of MacDonnell Douglas and Airbus’s acquisition of Bombardier. But there are also the expanding monopolies. For instance, Google attempted to build a monopoly in map access through the systematic mapping and photographing of the world.

Once a monopoly is built, it has special characteristics that make it difficult to challenge. It has achieved economies of scale, unique control of a resource, or a specific “universal” standard or brand recognition. In other words, it has raised barriers to entry in a specific business segment so high that a new comer cannot enter economically. It can then overcharge as no credible competitive threats exist. Why re-enter your private data and relink with people if you already have done it with Facebook? Why reprogram your application for a new OS? How can you create a plane manufacturer from scratch at a reasonable unit cost compared to Boeing or Airbus?

It is doubtful that these monopolies are very good at expanding technologies beyond their original scope. But because of their staying power, aggressive acquisition strategies, and access to resources, they have over time been able to slowly expand their monopolies. Again, this is not a favorable outcome. Under these conditions, the monopoly rent, rather than acting as a prize to entice potential challengers, is used to finance the preservation and expansion of a market abuse and maximize profit.

Increased Concentration, U.S. (Competition Policy)

Top Firms Increased Profits, U.S. (Competition Policy)


This has led to higher industrial concentration in recent decades, and a profound shift in profit distribution. In 1975, 109 companies collected half of the profit captured by all publicly traded firms. In 2017, a group of only 30 companies collected half of that pie. As profit gets concentrated, so does the ability to gather resources for research. With the concentration of research in a few hands, innovation suffers, and revolutionary thinking gets ignored. The competitive push for true technological change is reduced. One can wonder if Apple, the world’s first trillion-dollar company, has really improved on its revolutionary iPhone since its introduction over ten years ago. What is certain is that the process of creative destruction has been reduced. In the U.S., in the late ’70s, 14% of firms were less than one year old, compared to 8% today. Quartz.

Yet this has a direct impact on the well-being of the vast majority, as concentrated industries charge higher prices while investing less. The U.S. Federal Reserve documented that mergers lead to systematic price increases but minimal efficiency gains. In fact, there is considerable evidence that whenever there are fewer than six competitors in an industry, prices rise.45 Less competition leads to higher prices that maximize the oligopolies profits. But they compromise today’s consumers’ well-being, exacerbating inequalities, as well as tomorrow’s economic competitiveness and innovation. Financial Times.

Employment Share By Firm Age (Competition Policy)

Firm Dynamism, U.S. (Competition Policy)

Increased Concentration And Profit, U.S. (Competition Policy)

Largest Firm Return On Capital, U.S. (Competition Policy)


While government break-up of monopolies was never exactly a common occurrence, it did happen regularly throughout much of the 20th century. After the passage of the Sherman Act in 1891, the U.S. broke up International Harvester, then Standard Oil, then U.S. Steel, then AT&T. But the U.S. government has not taken any such measure since the break-up of the phone monopoly nearly 40 years ago. Since then, no major break-up of new monopolies has been ordered. There have been fines, particularly from the European Commission,46 and divestment requirements for certain acquisitions in traditional sectors. But, by and large, no structural government action has taken place, allowing monopolies to flourish.

Yet, as monopolies have formed and expanded, deterring innovation and stifling competition, strong government action has become warranted. It is not that Schumpeter ultimately is not right. There always comes a point where the monopoly gets chipped away. Microsoft, which had lost its monopoly case with the Department of Justice was not broken up. While value of its monopoly has been limited through the emergence of search engines and open source operating systems, it remains by and large a predominant monopoly, and it is charging customers heavily for it. A state intervention in due time would have accelerated innovation and saved customers money.

At a minimum, acquisition of start-ups by monopolies should be made difficult or even forbidden.

When I joined a U.S. insurance tech startup as a co-founder during the first dotcom boom, it was explained to me that that the objective was to get bought. It did not make sense to aim to “make it big” and IPO, because selling the company to an existing industry giant was a far surer route to riches. This may well be realistic management, but it prevents the emergence of new challengers to monopolies, or in some industries, to oligopolies. When creating new companies today, or investing, the dynamic I encountered two decades ago is even more prevalent. We are facing an ecosystem where start-up founders no longer aim to grow their firms into the next wave of dominating companies because they have been conditioned to sell out first. This is not necessarily bad for investors. Facebook bought WhatsApp and Instagram for billions. But it is bad for competition and, ultimately, for society.

Similarly, investment by monopolies in non-core activity should be strongly discouraged or forbidden. The shareholders of monopolies can – and should if they believe it worthwhile – invest in new companies in new industries that tackle new problems, but monopolies should not be allowed or encouraged to expand, for it is long-term detrimental to innovation and competition, ending up profiting a few to the detriment of the many. Look at Google, which went from search to maps, to email and now, through its parent company Alphabet, wants to cure cancer and do just about everything else. Amazon, after upending the book industry, has expanded to all of consumer goods: Should it use its rents to seek to expand its dominion to movie production and cloud computing as well? Finally, special taxes should be levied on monopolies, so that their rents can be used to subsidize research and innovation. At the extreme, break-up of companies like Microsoft or Google should be actively considered.

The lack of intervention by the state to prevent monopoly expansion is particularly worrying. It is also a deliberate policy. In the U.S., while mergers have expanded by over 80% since 2010, the Department of Justice’s antitrust operations have had essentially the same budget. In these conditions, it is hard to see how a proper anti-monopoly policy can be enforced. The Antitrust Institute reported that “merger control in moderately concentrated sectors appears to have virtually ceased.” Axios

In that regard, the E.U. is fortunately more active, and has been collecting more fines from traditional anti-trust enforcement than the U.S. has. It has also been more assertive against the U.S. tech monopolies, although some argue that there is an element of trying to “recapture” the monopoly rent taken from E.U. consumers. However, none of these approaches provide a long-term solution. The only real way to prevent industrial consolidation is good old-fashioned trust-busting.

Monopolies and cartels represent one area of microeconomics that is reasonably well understood. What is less understood is the use – or abuse – of products by new technology companies navigating the uncharted waters of cyberspace. In the past, it would have been unheard of to have AT&T make money out of recording your telephone conversations, keeping them, and selling your information or advertising to you based on them. It would have been unheard of to have car companies force you to refuel at their gas stations alone. Similarly, the control by new monopolies of news feeds has gone largely unchecked and only started becoming an issue after the inquiries into Facebook’s role in the 2016 U.S. presidential election. Yet this is exactly the kind of business model that has gone unchallenged by regulators. There has been very little debate about these practices, let alone action to check them.

Government inaction on all these issues, old and new, results not from a misunderstanding of what can or should be done, but from a lack of will to do it. It is a dramatic abdication of the role of the state. In the meantime, a few capture monopoly rents to the detriment of the many, wages stagnate, and discontent grows.

Antitrust Investigations, U.S. (Competition Policy)

Doj Antitrust Budget (Competition Policy)