For the Next Time You Teach Monopolies

Here’s a very good article from The Economist on substitutes and why monopolies don’t have absolute power in the marketplace. (Thanks to Carpe Diem for the pointer.)

I know I’m constantly dealing with the perception that monopolies have ultimate pricing power. I face it with my high school students, my undergraduate students, and occasionally even with graduate students. 

They seem to forget a factor in demand is the availability of substitutes.  And as prices rise, the search for substitutes often gets more intense. Once those substitutes are found and economies of scale can kick in, (this can be a significant period of time) the monopoly may suddenly find itself the victim of creative destruction.

There are other factors to pursue, of course. But this has the potential be a great discussion starter or an anecdote to toss into discussion.