Looking for monopolies is an open secret in the realm of investing. We can deduce this open secret from scratch. If we consider the purpose of investors, which could be said as looking for the largest amount of profits, we could say that investors look for strong, dominant companies. Hence, looking for monopolies is part of the game when it comes to investing.
With that said, there are arguments against the existence of monopolies. I will be focusing on one aspect of those arguments, namely, the assumed lack of innovation from monopolies. Here, innovation could be broadly defined as doing more with less. Just as we deduced from scratch why investors look for monopolies, we can deduce from scratch why innovation is a good thing: no one wants to break their backs for so little. Innovation, then, could be said to save our backs.
People say that monopolies stifle innovation. Which is only true for bad monopolies. Do not get me wrong, I am with Peter Thiel in this argument as he writes “Bad monopolies deserve their bad reputation.”
Bad monopolies are destined to fail in part because bad monopolies do not do more with less, or in other words, bad monopolies sit on their laurels, stagnant in their position, fooling themselves that their throne is made of stone and not twigs. That is to say that bad monopolies do not add additional value to itself, or see no need to add additional value, and expect customers to pay a premium for stagnant products, and sometimes degrading products if we consider whether the industry itself or the needs of customers change over time. A bad monopoly would use up all of its resources. If that bad monopoly does not innovate, as in doing more with less, it would simply die because it ate all of its resources.
If we inverse the failed logic of bad monopolies, we could deduce the reasoning why good monopolies need to innovate. As a good monopoly watches its resources dwindle, there comes time in which the monopoly must innovate for itself to live. It must discover ways to do more with less and uncover new and untried methods. Otherwise, the monopoly runs out of resources and dies.
Hence, monopolies, the good monopolies—the type of strong monopolies that seek to dominate their industry by providing the highest quality of products at the cheapest possible prices while still maintaining excellent compensation for its own staff—have no choice but to innovate.
Could there exist a monopoly that innovates and still be considered bad? Indeed. And that would deal with regulatory capture—the types of monopolies that lobby for its own existence, using laws and politicians to create artificial barriers against competition and ensuring resources for itself instead of producing for customers ever-better products from monopoly profits.