Short Essay 1_ZHANG Yujia (1155219823)

    At the beginning of week4’s lecture, we mentioned monopoly, which is an intriguing but complex concept. It has historically been depicted in a negative way. In this essay, I would like to give some thoughts on the relationship between monopoly and innovation.    

    According to Nobel Prize-winning economist Kenneth J. Arrow 's replacement effect, when companies become monopolies, they tend to be satisfied with the status quo and rest on laurels. This may result in lack of competitive pressure and innovation, which is evidenced by the bankruptcy of Kodak and the failure of Nokia. Worse still, in order to maintain the existing market order as well as their dominant position, some large enterprises exclude small and medium-sized competitors through unfair competition (e.g. price wars, etc.). Furthermore, as Parkinson's Law put, the complicated staffing structure and lengthy procedures of these monopolies can easily give rise to bureaucracy and other challenges associated with their huge scale, all of which are inherently conducive to innovation.

    However, despite Arrow's negative attitude towards monopolies, monopolies are not always on the opposite side of innovation; instead, they can also facilitate innovation to some extent. This view is supported by the renowned entrepreneur Peter Thiel, founder of PayPal, who put forward in his book Zero to One that “monopolies drive progress because the promise of years or even decades of monopoly profits provide a powerful incentive to innovate”. Indeed, owing to economies of scale and proprietary know-how, which are regarded by Thiel as a reward for innovators, monopolies are able to generate high profits and provide robust and reliable financial support for short and long-term innovation initiatives. For example, the R&D of innovative drugs requires huge investments and long cycles, yet may still face considerable risk of failure. It is only those pharmaceutical companies that enjoy a “monopoly” position, such as Pfizer and Roche, can afford to support these expenditures. These companies used to make high profits by their brand reputation, market channels and exclusivity of products and technologies. And once the innovative drug is successfully developed, they will have strict patent protection and high pricing autonomy. From an economic standpoint, the virtuous operation of a company forms a closed loop, further consolidating its monopoly position through innovation.

    Given the dual impact of monopoly on innovation, antitrust is highly valued and carefully considered by governments. In digital era, the growth of monopoly may be accelerated by the powerful network effect. Consequently, governments are actively engaged in the revisions of antitrust legislation and penalizing unfair competition. The United States introduced the Sherman Antitrust Act as early as 1890, and has continued to enrich its content and maintain its vitality through judicial interpretation and jurisprudence. Moreover, China has issued its antitrust law in 2007 and revised it again in 2022. This September, Google was fined 2.6 billion USD by EU for abusing its monopoly power against competitors. In essence, the antitrust legislation is not designed to impede the growth of enterprises to become industry leaders; rather, it is aimed at preventing those that have already attained a dominant position in specific field from leveraging their scale, resources, technology, and other advantages to engage in unfair competition with emerging businesses, ultimately disrupting the industry ecosystem. Therefore, to a certain extent, anti-monopoly regulations can protect small and medium-sized enterprises and keep market vitality, which indirectly promote innovation.

    In conclusion, it is of vital importance that we undertake a comprehensive understanding of monopoly which is an inevitable economic reality. Nowadays, the majority of companies are not under “perfect competition” nor are they capable of forming an exclusive monopoly. Oligopoly is actually the common pattern, in which a small number of large enterprises exert significant control. For example, the e-commerce industry in China is an overall three-way split among Jingdong, Taobao and Pinduoduo. In order to prevent the domination of any single entity, these firms compete with each other. This enables consumers to possess a wider range of choices at relatively reasonable prices. The relationship between monopoly and innovation is not linear; rather, it is an inverted U-shape, as postulated by the economist Philippe Aghion. If the tangible power of the government (e.g. anti-trust regulation) can be employed in an appropriate manner, it may be feasible to achieve a subtle balance between monopoly and innovation. This could not only facilitate the healthy development of the entire industry and enterprises, but also stimulate market vitality and social creativity to the fullest.