Monopoly – Park Lane or Old Kent Road?

‍

I’m pretty sure most people have played Monopoly at some time in their lives. There are all sorts of different boards in different countries, even different cities. For obvious reasons I very much like the Glasgow one, and can confirm I once had to play the Bucharest version which was nothing if not confusing.

But in the real world – and to an economist – there are two types of monopoly. One is vertical the other is horizontal. To be clear, mergers that get referred to the Monopolies and Mergers Commission are invariably horizontal. So if you have 25% of the grocery market and you try to buy another chain that has 15% you will almost certainly be barred, on the basis that that gives too much power within the grocery shopping horizontal to one entity. In this case, number one might end up with 40% and the next 5 might add to the same amount – not much real competition there. Number 1 will, over time, squeeze the rest and add to its market share (for good or ill, but generally to the benefit of its shareholders and the detriment of its customers.)

So far so good and there is a logic and raison d’etre here.

But what of vertical monopolies? In general terms no one bothers. And why is that? Because it is thought that the customer can only benefit from economies achievable in the vertical. Move along, nothing to see here.

But as an economist, I can tell you that vertical monopolies are every bit as potentially damaging as the horizontals. And why is that?

I was very taken the other day with an article about the worldwide spectacles industry. There was much in it I had no knowledge of, but the essential first step is to know that a company called Essilor in essence controls the whole industry from start to finish.

That is from making and grinding lenses, through to frames and the brands associated with them and insuring them.

You might ask how it achieved this. The answer is very simple – it bought up every designer and manufacturer of spectacle frames. These, after all, are what the customer sees and chooses. The lenses hardly get a mention. So Essilor drove down the prices of the lenses (and spectacle insurance in particular) and increased the price of its branded spectacle frames. The net result is that getting into lens manufacturing or spectacle insurance is not only difficult but almost impossible to make a profit at, because Essilor keeps these as effectively loss leaders. It makes its money (what I would describe as super profits) from the frames and especially from the branded frames. You can’t get into the market for eg Oakley frames because there is no path to achieve that legally. So Essilor will sell you Oakley frames for let’s say £500. The lenses might only be £30 to manufacture but here the Optician can achieve a good mark up and this essentially is where they make their profit. They can’t sell the frames for much more. They can make a turn on the insurance.

So by controlling the vertical Essilor ensures it can make exceptional profits whilst keeping competitors out of the market. And of course, if someone manages to establish a new frames brand (let’s say George Clooney) after a year or two along comes Essilor and buys it out for a ridiculous price which doesn’t even dent their cash flow. Clooney, of course, is an extremely savvy operator and would almost certainly go to Essilor to set up his frames brand for a royalty. No risk, pure profit. And the whole wagon train keeps rolling.

So the next time a vertical monopoly is about to get waved through, I sincerely hope that at least one of the people looking at it looks rather more closely at the longer term effects and outcomes.

On a tangential matter, the election of Zohran Mandani to be Mayor of New York may be the start of the young, not well off wanting their slice of the cake. The entitled, rich billionaires should stop and think before they dismiss this as a one off. In the UK, why would anyone go to University to get into serious debt and then be unable to get a job? I have a friend who owns pubs and he has several PhD – I repeat PhD - people entitled to call themselves Doctor so and so who are working for peanuts. These are not stupid people but they are forced to take whatever they can get because these are the very people that the existing system has near enough excluded from jobs that are appropriate for their qualifications. We oldies better start helping them or their resentment will take our privileges from us and they won’t forgive what has happened to them. Caveat Opulentos.

‍