Profit, Monopoly, Competition and Innovation

In this article, we will discuss the relationship between profit, competition, monopoly and innovation using the previously establish Island Town (IT) model.

Between the IT and ML, there is a highly profitable toll bridge (TB) running by Bridge Co.(BC) The profit from the TB attracts competition. Another company Competitive Transportation (CT) decides to build another bridge(AB) and only charge half of the price of the original toll bridge. In order to keep on attracting passengers, BC is forced to lower the price of TB. This hurts the profitability of BC. From this example, we can see, profits attract competition which reduces the profit margin of the industry.

There are a few options for BC to continue enjoying the high profit margin. The first option is to purchase CT and remove/limit the second bridge. This kind of purchase of large scale will often cause suspicions of the violation of antitrust regulations by the government. Indeed, monopoly is unhealthy for the economy.

The second option is to lock in the passenger, so that they cannot easily switch to the second bridge. For example, if the passenger like to ride bus, they can convince the city to route the bus via their bridge instead of the other. Alternatively, if there is a ticket booth for the theme park on the island, they can place the ticket booth at the end of their bridge, so it becomes inconvenient to use AB. This type of customer lock in is in the gray area of the antitrust regulation, you can actually see that here and there once in a while.

The third option is to provide more customer value on the bridge. For example, BC can install festival lights on TB to make it not just a transportation site but also a tourist site. BC can put up some booth for farmers to sell their produce on the bridge which makes the bridge literally a farmers market. BC can set up a car wash machine at the end of the bridge, for those paid the toll, they can enjoy a complimentary car washing service. With all these added values, TB becomes a consumer monopoly. Although BC do not enforce consumers to choose TB, practically, the majority of the consumers choose TB and pay a premium for it. This type of value based consumer monopoly strengthens economy by creating both highly paid jobs and value add on products and services. This is the innovation that we all strive for.