​Innovative Monopolist vs Defensive Monopolists: | tutor2u Economics
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​Innovative Monopolist vs Defensive Monopolists: Monopoly Power in the United Arab Emirates

We often champion monopolies for their dynamically efficient behaviour, and how they contribute to long run static efficiencies through their invention and innovation made affordable by high profits.

Image by Chickenonline for Pixabay

Google in particular took a hit of $802 million in its recent results due to its investment in driverless cars and internet wearables such as Google Glass, which it describes as "moon shots"

Read Google 'moonshots' increasingly expensive

The ability of dynamic capitalist economies to "creatively destruct" existing technologies is often cited as a compelling argument to not fear the power of monopolies.

If a monopolist enters a staid phase it’s likely new innovators will rise up and seize its crown. It’s this pressure that keeps a monopolist "pushing the envelope" in our societies – just like Google.

This is clearly good for growth and standards of living.

However, academics and policy makers do fear the monopolist who, after an exciting and dynamic period, will become staid and defensive.

Tim Wu, a lecturer at Columbia Law school, wrote an excellent book on economic history in which he highlighted how the behaviour of past monopolists, eg AT&T and telecoms, can become defensive and actually stifle innovation.

Wu cites the case of the answerphone machine, which AT&T suppressed for many decades.

Watch this excellent interview Tim Wu on Communication, Chaos and Control

I was reminded of his interesting thesis when considering the behaviour of the UAE’s telecoms industry.

Here in Abu Dhabi we have a duopoly with large incumbent firms Etisilat and Du sharing the market.

They both represent a private-public partnership as the UAE government holds a majority stake in both organisations – with between 40% and 20% listed on the UAE stock exchange, respectively.

It's interesting how defensive these organisations are being by limiting the use of voice over the internet (VoIP) technologies in the UAE and Morocco.

Calls for them to open up access to VoIP for applications such as Facebook, SnapChat, FaceTime, etc. have been unsuccessful – the incumbents seem reluctant to give up their monopoly power.

This action forms a good example of an artificial barrier to entry. The huge incumbents are unwilling to give "piggy back" access of new entrants to VoIP without their permission – they are effectively stopping new "destructive" technologies, freely available elsewhere, from entering the UAE and Moroccan telecoms market.

Meanwhile domestic and foreign owned firms, as well as consumers based in the UAE, have to suffer higher costs than their competitors and consumers overseas.

Interestingly, Morocco is experiencing the issue due to Etisilat owning a controlling stake in their telecoms operator.

This also highlights an issue with privatisation of former state-owned utilities falling into the control of foreign shareholders.

Ultimately, these artificial barriers to entry will cause a loss of efficiency and competitiveness to both the UAE and Moroccan economies. They are also a very good example of the fact that high prices and reduced output can’t always be defended by their ability to innovate.

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