A good monopoly is a creative monopoly

Remember the orange bazaar in Sylhet where millions of identical oranges were selling? No seller or buyer was big enough to influence the market. Competition was cut-throat. Each seller's profit-margin was very thin. In course of time, some clever sellers saw a business opportunity and decided to pack oranges in boxes of ten.

Buyers were happy to pay a little extra. The clever sellers started to gain what economics defines as 'market power', sell above the average market price. An extreme case of market power is a monopoly. In economics, a monopoly or a firm with market power is usually looked at with suspicion. 

A state monopoly emerges because the government wants one firm to supply piped water, immunization or print its money for social or security reasons. A private monopoly arises when a firm gains an edge, for example a patent to manufacture a particular medicine. This edge allows the firm to enjoy profits for some time.

This edge also ensures new firms find it difficult to enter the market. Alas! Economics has focused more on the abuse of market power than the potential market power has in improving choices and opportunities. Let's return back to the orange bazaar in Sylhet and see why a monopoly or a firm with market power needs to be creative if it wants to stay alive.

The clever orange sellers in Sylhet keep on making profit. They now have surplus to invest in new ideas. After packs of ten, they introduce home delivery and fresh orange juice in tetra packs. With funds to invest in research they develop more and more orange varieties for which Sylhet is famous. Are the buyers happy? They probably are. Although they have to pay extra for each of the new products, they now have a wider range of products to choose from and also a convenience the orange bazaar could never have offered. Now arises a critical moment.

Gaining monopoly power through creating an edge gave the clever orange sellers an incentive to think about new ways to sell oranges. The success of the sellers doesn't go unnoticed. Less clever orange sellers see the possibility of making profits. If these sellers can also do what the clever orange sellers are doing, soon the clever orange sellers will see their profits evaporating. They won't have the additional funds to launch new ideas. If the clever sellers want to preserve their monopoly power, they need to be creative so that new firms genuinely find it difficult to enter the market. Creative monopolies do this for their own sake by adding value through innovation. Think about Apple and Samsung mobile phones.

Over time, both Apple and Samsung have created a base of loyal customers by creating value through genuinely good products. A certain percentage of their customers will therefore always remain with them. What about the customers in the middle who are undecided? How do Apple and Samsung attract or keep them? Again, by creating value through innovation. Apple and Samsung flagship phones have to have something genuinely new to offer. Otherwise undecided customers may not want to stay with them. Even worse, if the new features aren't good enough, other companies will see the prospect of making their own versions and attract the undecided Apple and Samsung customers.

Monopoly firms can and do abuse their power, but they also have to be creative if they want to stay in business. This second side of monopolies is almost always overlooked in a Principles of Economics course.  A good monopoly has to be a creative monopoly. Otherwise, they'll  become fossilized like the dinosaurs.

Asrar Chowdhury teaches economic theory and game theory in the classroom. Outside he listens to music and BBC Radio; follows Test Cricket; and plays the flute. He can be reached at: asrar.chowdhury@facebook.com