Why and How Monopolies Impede
Technological Advance

Economists have long known that monopolies can be very damaging to an economy and a country as a whole1. Although many ordinary citizens are likewise aware that monopolies can be harmful, they are rarely aware of the full extent of the damage that can occur, in part because monopolists typically make major efforts to convince the public that their existence is actually beneficial.

A monopoly is a company that is the sole producer or supplier of a product (i.e., a good or service), or one that is nearly so2. Among the various ways in which a monopoly can damage an economy and society are by (1) charging higher prices than would otherwise be charged, (2) producing products with quality inferior to what would otherwise be produced, (3) providing services associated with their products inferior to what would otherwise be provided, (4) corrupting the political system in order to perpetuate and extend its monopoly position and (5) slowing down the rate of technological advance.

It is important to understand the relationship between monopoly and technological advance because of both the large influence that monopolies have over the development and utilization of new technology and the crucial role that technological advance plays in economic growth and prosperity. A well-informed public and government will be better able to adopt the most appropriate policies to deal with monopolies.

How Monopolies Impede Technological Advance

Monopolies have less incentive to conduct research and development regarding new and improved technologies than do competitive firms because they already have the dominant market share and are usually highly profitable3. This is in spite of the fact that they generally have much greater funds available to support research and development. Rather, they often devote substantial amounts of their profits and managerial focus to efforts to maintaining and extending their monopoly powers.

Ways in which monopolies typically slow down or stop technical advance include the following:

(1) Conducting less, and/or less productive, research and development than would be the case if the same industry were more competitive. Although the research and development budget for a monopoly can look very large, the size of a budget is not necessarily a good measure of the quality or productivity of the research and development. In fact, it can be purposely misleading.

(2) Holding back on offering or using the most advanced technology, even if it is already available. One reason is that very large expenditures might be necessary to apply the new technology to the production equipment or products; such expenditures might provide little benefit to the monopolist and might merely cut into its profits. Another is that it may make the products so efficient that users will need to spend less on them (e.g., products that are more durable and thus will not have to be replaced as frequently). In addition, a monopolist may want to wait to incorporate newer technologies only in the newest versions of products and thereby put pressure on users to upgrade at additional expense.

(3) Making great efforts to suppress the development and utilization of new or improved technologies by existing and potential competitors. This is because such advances threaten the monopolist's market share and profits. There are a number of techniques that monopolists employ to suppress rivals' innovations including:

(a) Purchasing or otherwise taking control of new companies with promising new technologies.

(b) Hoarding patents, by obtaining large numbers of patents for trivial or obvious ideas and by buying up patents from other companies.

(c) Threatening lengthly and costly legal proceedings (e.g., for alleged patent infringements), which smaller companies usually cannot afford. This can be effective if there is little legal justification for such proceedings.

(d) Using their influence with other companies to discourage such companies, as well as companies doing business with such companies, from developing or supporting technologies that are potentially competitive. These companies include customers, suppliers and companies with which the monopoly has interlocking directorships. An interlocking directorship is the situation in which executives (or their family members or friends) from a monopoly also serve as members of the board of directors of other companies.

(d) Using their influence with government agencies to discourage such agencies from developing or supporting technologies that are potentially competitive. Government agencies can have a great deal of influence in the direction of technological development and utilization both through their purchasing decisions and through their funding of research and development projects.

(e) Acquiring a reputation for taking over or suppressing new technologies developed by smaller companies, thereby discouraging such companies from even trying.

Parallel Propaganda Offensive

A major part of a monopolist's strategy for maintaining and extending its monopoly power is a large-scale and diversified propaganda campaign aimed at convincing the public and government about how much it is contributing to the economy and society as a whole. Among the ways that such a campaign is conducted are through advertising, articles run by cooperative media and the lobbying4 of politicians. Politicians are lobbied not only to promote legislation favorable to monopolies but also to make public statements that favor them, which can be shown on television, used in published articles, etc.

A large component of this propaganda war consists of an effort to convince the public that the monopolist is actually a great innovator. This is designed to obscure the facts that the monopoly may have little interest in (or capability for) innovating and/or may actually be actively suppressing innovation. Reasons for this effort by monopolists to exaggerate their role as innovators include:

(1) Reducing dissatisfaction with the monopoly and thus lessening public pressure to enforce antitrust laws (i.e., regulating the monopoly or dismantling it). Perceiving a monopolist as a major innovator creates the fear that interfering with it would slow down technological advance and thus have detrimental effects on the economy.

(2) Facilitating the monopolist's sales, particularly of new products and upgraded versions of existing products, because they are made to seem more advanced in terms of function and/or performance than they really are.

(3) Making it easier for monopolists to acquire other companies, move into new product lines, etc. This is because the stifling effect that such extensions of monopoly power have on innovation will be less obvious, and it might even appear that the monopolist will apply its perceived technological superiority to the new product lines or companies that it acquires.

Monopolists will often cite as evidence of their creativity the large expenditures that they make for research and development. However, they are often reluctant to provide details of how such funds are actually used. Indeed, such expenditures could easily be in large part used for purposes other than promoting truly innovative research and development. That is, they could be used for such things as (a) developing improved techniques to discourage competition, (b) developing techniques to encourage users to upgrade to new versions of their products, (c) searching for potential new rival technologies to acquire or suppress, (d) paying lawyers to intimidate firms with potentially rival technologies and (e) lobbying.

One measure that is sometimes used to measure the effectiveness of research and development expenditures is the cost per patent. There can be huge differences in this figure according to the company. For example, Microsoft's expenditure to generate each of its patents is reportedly the highest for technology-oriented companies, and more than four times that for IBM5. Moreover, the usefulness of most such patents is highly questionable, as many experts are convinced that many of them are developed mainly with patent hoarding in mind and that the center of gravity of innovation in the computer and related fields is in smaller companies such as Google and Apple and in organizations and individuals focusing on free software.

1For example, Adam Smith (1723-1790), generally regarded as the father of modern economics, was apparently well aware of monopoly and the damage that it could inflict on a society. The devastation that monopolies could cause became increasingly obvious to virtually all segments of the population in the U.S. in the latter part of the nineteenth century as a result of the monopolies that were formed in most major industries during that period, the most notorious of which was Standard Oil.

2Monopolists often tolerate a token amount of competition in order to attempt to convince the public and regulatory authorities that they are not really monopolists and thus to discourage the enforcement of antitrust laws.

3The notable exception to this was AT&T, the former U.S. telecommunications monopoly, whose Bell Labs was widely regarded as the most innovative research organization that ever existed. A major reason for the establishment of Bell Labs was to strengthen AT&T's monopoly position by making it more difficult for the government to break it up. Although AT&T was certainly innovative, some critics were convinced that a competitive telecommunications industry would have been even more innovative, and this view was a factor in the monopoly's eventual dismantling by the U.S. government in 1984. For example, AT&T expressed little interest in the Internet, at least in its earliest stages. The blossoming of the telecommunications industry, including the rapid decline in distance charges, the addition of new services and the emergence of the Internet are cited as examples of how dramatically the situation could be changed by replacing a stodgy monopoly with a competitive industry.

4Lobbying can be a good thing if it is used to explain some concept or point of view to government officials. However, it frequently is much more than this and is often some type of bribery. The bribery can be subtle and can take many forms, such as a business providing free travel or entertainment for a legislator or giving a high paying job to a legislator after that legislator retires from politics. Monopolists are in a much better position to undertake such activities, and to engage in them on a much more massive scale, than competitive firms because of their usually large profits and their influence over other firms (e.g., customers, suppliers and subsidiaries), which they can easily convince to participate. Such lobbying corrupts the political system and undermines democracy; it is also inefficient for the economy because it impedes competition based on price and quality, thereby slowing economic growth.

5According to Microsoft spends a bunch on patents, but is it worth it?, USA Today, April 2004, in 2003 Microsoft spent approximately US$9.5 million to generate each of 528 patents, whereas IBM spent only about $1.4 million per patent. Moreover, despite its far lower expenditure per patent, according to The 30 Greatest Computer Advances, The Linux Information Project, June 2006, IBM has contributed at least two of the 30 most significant advances in the computer field whereas Microsoft has contributed none.

Created June 12, 2006.
Copyright © 2006 The Linux Information Project. All Rights Reserved.