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How to exploit monopolies and distort markets

Posted by Graeme in Business & Investment,Market failure at 8:57 am on Thursday, 19 April 2007

Here are a few ways in which a company can exploit a strong market position to extend an existing monopoly, eliminate any remaining competition, and extract the greatest revenues at the lowest cost.

Many of the best examples come from high tech sectors: IT, telecoms, and parts of the media. These important because they are growth industries, developments in them have extensive knock-on effects and as technology advances the methods used in them will become usable elsewhere.

Make your product incompatible with those of competitors

This strategy can be used to both eliminate direct competitors to your product that has a dominant market position, and to eliminate others’ complementary products to extend a monopoly to new markets.

The masters of this tactic are Microsoft. The earliest, and most blatant, incident I know of is deliberately making Windows 3.1 incompatible with DR-DOS. It was recently revealed that Bill Gates tried to make the power management system on PCs compatible only with Windows. The latter would have relied on leaning on PC manufacturers, as it was their product mattered. There are many other examples of this strategy (including variants), encompassing most of the company’s major products over many years.

A closely related issue is Microsoft’s current lobbying aimed at preventing government bodies (in particular) from adopting Open Document, which allows interoperability of software from multiple vendors, and provides a guarantee that software will be available to read archived documents even decades in the future.

Impose costs on someone other than your customer

A simple example of this are the termination charges on mobile phone calls. Mobile phone networks compete on charges for outgoing calls, because that is what their customers pay. Very few people will consider the cost of an incoming call to the person making the call. Therefore the latter cost can be raised without losing business. Regulators have been addressing the issue recently, but it took them long enough.

Another example comes from what is likely to happen if telecoms companies are successful in their attempt to move away from network neutrality. At the moment everyone who connects to the internet net pays their internet service provider, who then pays “upstream” providers. Some people have (usually more expensive) connections that allow them to distribute information (e.g., by running a web server) as well as download it.

What telecoms companies would like to do is to be able to charge who wants to be able to distribute information to their websites a fee, otherwise they would block of slow down access to those sites. They will then be able to sell cheap internet access, and make money on charging operators of web sites.

Block competitors’ access to sales channels

Again, the best examples are the actions of Microsoft. When Be Inc. attempted to promote it’s BeOS operating system by allowing PC manufacturers to install it along side Windows on dual boot PCs, it was blocked by Microsoft’s agreements with manufacturers. Be was doing this to work around Microsoft’s blocks on their access to distribution, described in this article by the CEO of Be.

Microsoft’s is currently using a similar tactic to the latter of the above, by using “co-marketing” funding to discourage PC manufacturers from marketing competitive products – especially Linux.

Bundle, bundle and bundle

This is a key tactic. I touched above on how Microsoft does this with Windows. However the beauty of this tactic is that it does not depend on network effects or technological compatibility issues, so it can be applied to any industry. 3M did it with sticky tape and Post-it notes.

Buy-out or or undermine competitors

Google has agreed to buy Double Click. Ironically, the deal is being opposed, on competition grounds, by Microsoft and AT & T.

Google has also announced that it intends to launch a social network service, similar to that run by Stumbleupon. This comes after Google failed to buy Stumbleupon, being beaten by Ebay. With a deep pocketed parent Stumbleupon has become a potential threat to Google, so Google has acted to reduce the threat.


This is a simple tactic, most popular in software. If a competitor has a product out ahead of yours then announce that your product will be launched soon. Even if it is going to take you years to develop, it will hold back the competitors sales in the meantime. You can also exaggerate its features. You can always drop them from the final product.

Do deals with suppliers of complementary products

The most obvious example is any product or service for media distribution (e.g. a new medium for recorded music, a video download service, etc.). You have to persuade the media to use your product or service. This means that you need to offer the service and features (e.g. DRM) that the media businesses want, not what consumers want.

The use of this tactic in IT markets is obvious from what I wrote above.

Patent everything

Patent everything you can. The more aspects of your operations are patented, the harder it is for a new entrant to work around them. Even better, the more patents, the more chance that a competitor will miss one, and you can then sue them. If you are lucky you may even be able to shut them down for a while, or force them to completely redesign their product or processes.

A larger patent portfolio is also useful for cross-licensing with other incumbents, making life even harder for new entrants.

Comments (2)


Comment by How to exploit monopolies and distort markets | Interactive Investor Blog at 10:19 am on 19 April 2007 at

[…] How to exploit monopolies and distort markets – interesting collection of hi-tech business models. […]

Comment by Beyond capitalism? at 1:09 pm on 15 January 2008 at

[…] mean losing some incentives, but given that these incentives are inefficient and encourage the creation of monopolies and the distortion of markets, that is not much of a loss. We also have evidence that other ways of doing things provide better […]

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