(Excerpt from Modern Monopolies by Alex Moazed and Nicholas L. Johnson)
Monopolies are typically viewed as a result of market forces breaking down—the forces of supply and demand aren’t able to keep a company’s market power in check, and it finds a way to capture an unusually large share of the market. However, this view doesn’t hold for networks, where greater size brings more value, more efficiency and greater convenience for users. Platform monopolies aren’t the result of market forces breaking down. They’re the result of markets working correctly, a phenomenon that economists call a “natural monopoly.” Because of this fact, the belief that more competition is always better doesn’t hold in platform markets. As the Alibaba story shows, interplatform competition can create mutually exclusive networks until a clear winner emerges. For consumers, this fragmentation is often an inefficient outcome. In fragmented markets, the potential value that could have been created through network effects goes unrealized.
… modern monopolies aren’t likely to last nearly as long as their predecessors. Barriers to entry in most industries are far lower than they were a century ago, while the boundaries between industries also are much more fluid than they have been in the past. Although networks today do create the strongest and most defensible moats, they don’t create the same barriers to entry as past monopolies that required vast investment in physical infrastructure in order to succeed.
… In the twentieth century, competition happened primarily between rival companies within one industry. Today, it happens across industries.