What Are We Really Opposing When We Fight Monopoly?

The market is by no means a simple concept, and its definition should not be too broad. Equally important is recognizing that the “correct” definition of the market depends on how the concept is used.

——Jean Marcel Tirole, The Theory of Industrial Organization

Antitrust is widely recognized as a matter of justice, yet the ocean of markets is turbulent, with countless enterprises navigating its waves, making the definition of monopoly exceedingly complex. How is monopoly defined? What kind of monopoly should be prevented? This article documents insights from monopoly-related topics in industrial economics courses. The first half provides a brief review of fundamental economic understanding of monopoly, while the latter analyzes China’s antitrust law reforms.

Review of Basic Economic Knowledge

What is Monopoly?

From a practical perspective, monopoly is generally categorized into the following types:

Natural Monopoly: Monopoly caused by cost subadditivity, specifically meaning “the phenomenon where a single enterprise engaging in large-scale production and operation is more efficient (with lower average unit costs) than multiple enterprises operating simultaneously.” Its characteristics often manifest as resource scarcity or economies of scale. For example, a company reduces production costs by incorporating upstream and downstream manufacturers or acquiring relevant scarce resources as subsidiaries.

A contemporary example: Platform economies exhibit characteristics of natural monopoly—costs consist of substantial fixed costs (infrastructure) and minimal marginal costs (increased platform service volume). When a platform has invested sufficiently in infrastructure, it has strong incentives to expand its service scale, ultimately reducing average costs. This is why industries prone to natural monopoly, such as electricity, gas, telephone services, and long-distance transportation, are often state-controlled or price-regulated.

This is why Coase contemplated that the origin of firms might stem from transaction costs—achieving transactions requires additional costs, and corporate entities help reduce transaction costs. Natural monopoly reduces average costs through corporate expansion.

Administrative Monopoly: The government grants an enterprise exclusive rights to produce certain products or services.

Resource Monopoly: Key resources are owned by a single enterprise.

An Interesting Historical Story

There was a popular childhood game—Monopoly (English: Monopoly, literally translated as “monopoly”). Players roll dice to buy and sell properties on a map to earn money. The game’s original intention was to demonstrate the harms of monopoly.

Causes of Monopoly

Understanding monopoly also provides a perspective on corporate behavior. Enterprises, centered on profit maximization, seek monopoly and achieve collusion, offering another angle to comprehend market operations. Monopoly is a profound subject without a specific, unified framework. Contemporary times still allow for new explanations and models of monopoly causes or more unified understanding frameworks.

• Cost Subadditivity: Cost subadditivity may result from technology or economies of scale.
• Resource Control: Special core resources, not limited to natural resources. For example, in contemporary times, Tencent’s social software possesses vast social user resources. The social nature of Honor of Kings relies on social software resources (most people play while complaining); premium liquor brands like Moutai hold bargaining power over downstream markets.
• Administrative Reasons: Government policies, such as price controls and business licensing systems.
• Corporate Collusion: When conducting research, consider interactions among multiple causes. For instance, government policies may induce corporate collusion. Nobel laureate Tirole’s significant contribution was deeply introducing game theory to analyze market competition, developing industrial organization theory.
• Historical Reasons: For example, a company simply established industry standards favorable to itself first. Although the concept of first-mover economy was only recently proposed by the central government, it can be understood as historical contingency or an extension of first-mover advantage. Diamond brands are typical examples—not just marketing, but the first diamond company shaped the diamond industry’s operation.

The Good and Bad of Monopoly

Why break monopolies? Do all monopolies need to be broken?

The core guiding principle of antitrust is maximizing social welfare or maximizing efficiency.

In perfectly competitive markets, equilibrium corresponds to $MC=P$. In monopoly markets, the profit maximization condition for firms is: $MC=MR$. Pricing above marginal cost and output below the level corresponding to social welfare maximization are considered inefficient.

But does monopoly have no benefits whatsoever? The patent system is a form of limited monopoly. This type of monopoly can foster innovation.

This U-shaped equilibrium frequently appears in markets. What degree of monopoly promotes innovation? At the patent level, the duration of patent protection, patent application fees, and principles of patent protection remain topics worthy of discussion.

Additionally, firms in perfectly competitive markets lack pricing power—price is an exogenous variable. Monopoly markets grant firms some pricing power, often leading to discussions about price discrimination. Although “price discrimination” carries negative connotations in Chinese, in economic concepts, it is a pricing strategy. In some cases, if price discrimination effectively expands transaction volume, social welfare may increase.

Monopoly Behavior

• Price: Includes price discrimination (first-degree price, second-degree quantity, third-degree object preference).
• Market Power: Can be subdivided with many hypotheses: consumer market or producer market? Products or factors? Homogeneous or heterogeneous products? Upstream or downstream? Domestic or international market? Price leadership or quantity leadership? What is the sequence of the game? Is the game static or dynamic? Does it involve information asymmetry?

During economic downturns, the transmission of corporate power and costs is gradually becoming a research hotspot.

How Governments Combat Monopoly: A Brief Discussion of Antitrust Law

Governments generally employ the following measures—price controls, preventing mergers, taxes, fines, administrative penalties, and antitrust laws.

The earliest antitrust law in the United States was the Sherman Antitrust Act.

China’s first antitrust case was the 2008 Coca-Cola Acquisition of Huiyuan Incident.

Domestic private enterprise Huiyuan wanted to sell the company to Coca-Cola. Public opinion tended to oppose selling domestic enterprises abroad. International opinion suggested that preventing Coca-Cola’s acquisition of Huiyuan reflected overly stringent market behavior regulation in China.

Ultimately, China’s State Administration for Market Regulation ruled it involved monopoly. After the transaction failed, Huiyuan Juice’s stock price plummeted, and the company’s operational conditions continued deteriorating. Regarding this case, Chinese economist Lang Xianping believed Coca-Cola lost because it was too arrogant.

What Are We Opposing in Antitrust?

In 2009, the Ministry of Commerce of the People’s Republic of China issued Announcement No. 22 of 2019 regarding the Coca-Cola acquisition of Huiyuan case:

1. After the concentration, Coca-Cola Company would have the ability to extend its dominant position in the carbonated soft drink market to the juice beverage market, producing exclusionary and restrictive competitive effects on existing juice beverage enterprises, thereby harming the legitimate rights and interests of beverage consumers.
2. Brand is a key factor affecting effective competition in the beverage market. After the concentration, Coca-Cola Company, by controlling the two well-known juice brands “Minute Maid” and “Huiyuan,” would significantly enhance its control over the juice market. Combined with its existing dominant position in the carbonated beverage market and corresponding transmission effects, the concentration would significantly raise barriers for potential competitors to enter the juice beverage market.
3. The concentration squeezes the survival space of domestic small and medium-sized juice enterprises, inhibits domestic enterprises’ ability to participate in competition and engage in independent innovation in the juice beverage market, adversely affects the effective competitive landscape of China’s juice beverage market, and is detrimental to the sustainable and healthy development of China’s juice industry.

The core idea reflected here is: “Antitrust opposes monopoly behavior, not monopoly position.”

From the perspective of basic economic knowledge, we have two angles to judge whether an enterprise is a monopoly.

1. Market Share. If a company becomes a behemoth in the market, we can consider it a monopoly.
2. Monopoly Behavior. Our concern is that when a company’s share is sufficiently large, it may cause harm to other enterprises or consumers. The worry is not the monopoly position itself, but the monopoly behavior that may arise in the future.

But how large must a company’s market share be to constitute a monopoly? For example, the 2001 United States United States v. Microsoft Corp. case determined Microsoft engaged in market monopoly based on its operating system promoting the Internet Explorer browser, which won the browser wars.

Microsoft’s defense was that Internet Explorer was a feature of the operating system, not a separate product. Ultimately, Microsoft was still found guilty of monopoly, though the federal government and Microsoft reached some compromises.

Viewing Internet Explorer as an additional feature of the operating system, Microsoft’s operating system market share did not constitute monopoly. This also explains why Microsoft at that time had not yet developed strong bargaining power.

Market share is a difficult variable to calculate. China defined both Coca-Cola and Huiyuan Juice as “carbonated soft drinks” to calculate market share.

There are other examples in China, such as Moutai and Wuliangye.

Article 14 of the Antimonopoly Law explicitly prohibits business operators and trading counterparts from “reaching agreements that restrict the minimum price for resale to third parties.”

The evidence that Wuliangye and Moutai constituted monopoly was:

Wuliangye and Moutai issued marketing supervision and handling notices stating: A very small number of Wuliangye brand operators and Wuliangye specialty stores acted willfully, disregarding rules, ignoring the overall situation, and lacking broad perspective, engaging in low-price, cross-regional, cross-channel improper sales of Wuliangye.

From the perspective of Moutai and Wuliangye, they were engaged in normal price negotiations as manufacturers with downstream distributors, combining their production costs for pricing. Other distilleries also had their own stipulated prices, representing normal market competition behavior.

In this case, China defined Moutai and Wuliangye as “premium liquor brands” to calculate market share and subsequently determined monopoly.

Defects of Market Share as a Monopoly Standard

As seen from the above cases, using market share as a monopoly standard results in varying market shares depending on conceptual definitions, making unified standards difficult.

Two Nobel laureates, Friedman and Krugman, explicitly opposed the Microsoft monopoly case, viewing it as government interference harming market freedom.

The corresponding theoretical basis is a Chicago School concept—"Contestable Market."

Assume a market with only one firm holding 100% market share, but market barriers are low, allowing other firms to enter and exit the market at low cost. In such cases, antitrust action is unnecessary. Similarly, if a firm achieved its position solely through normal technological progress and does not directly hinder other firms’ technological advancement through its position, such monopoly position need not be opposed.

Such environments might have been rare historically, but in today’s highly developed digital economy, such cases are not difficult to find. For example, although Tencent occupies the vast majority of the social software market, due to low barriers in the internet social software market, antitrust action is unnecessary. This also explains why JD.com challenged Meituan this year—for JD.com, combining its own logistics fixed capital investments with reliance on platform economies results in relatively low market entry barriers.

However, the contestable market theory also has drawbacks. For instance, firms might first use below-cost pricing to capture market share, then raise prices. Lei Jun once criticized his subordinates, saying what he wanted was not profit but market share. This strategy involves using low prices to capture the market first, then gaining dominance, which is why international trade opposes dumping.

Another example: Due to geographical factors, Shanxi people favor Fenjiu liquor. Should such substantial market share be subject to antitrust action?

Antitrust Law

Finally, let’s examine China’s antitrust law reforms. Before 2008, China had no antitrust law, relying only on anti-unfair competition and consumer rights protection for relevant enforcement.

Anti-Monopoly Law of the People’s Republic of China (2022 Amendment)

• Article 1: This Law is enacted to prevent and restrain monopoly conduct, protect fair market competition, encourage innovation, improve economic operational efficiency, safeguard consumer interests and social public interests, and promote the healthy development of the socialist market economy.

The relationship between monopoly and innovation follows an inverted U-shape. The 2022 amendment added “encourage innovation” as an objective in the general provisions. Article 1 also clearly states that antitrust opposes monopoly behavior, not position.

• Article 3: Monopoly conduct as referred to in this Law includes:
  • (1) Monopoly agreements reached between business operators;
  • (2) Abuse of dominant market position by business operators;
  • (3) Concentrations of business operators that have or may have effect of eliminating or restricting competition.

The concept of concentration of business operators is thought-provoking, also involving the qualitative direction of industrial chains.

• Article 6: Business operators may, through fair competition and voluntary association, implement concentration according to law, expand business scale, and enhance market competitiveness.
• Article 7: Business operators with dominant market positions shall not abuse such positions to eliminate or restrict competition.

Clarifies that antitrust opposes monopoly behavior, not position. At least monopoly positions driven by innovative technology are not problematic. Subsequent provisions also allow exemptions for reasons involving foreign trade, crisis rescue, and social responsibility.

• Article 8: For industries where the state-owned economy holds a controlling position and are related to national economic lifelines and national security, as well as industries legally subject to exclusive operation and monopoly sales, the state protects the lawful business activities of their operators, and exercises supervision and regulation over their business conduct and the prices of their commodities and services according to law, safeguarding consumer interests and promoting technological progress.

State-monopolized industries possess special characteristics.

• Article 9: Business operators shall not use data and algorithms, technology, capital advantages, platform rules, etc., to engage in monopoly conduct prohibited by this Law.

Special background of the digital economy era.

• Article 24: Under any of the following circumstances, a business operator may be presumed to have a dominant market position:
  • (1) The market share of one business operator in the relevant market reaches one-half;
  • (2) The combined market share of two business operators in the relevant market reaches two-thirds;
  • (3) The combined market share of three business operators in the relevant market reaches three-fourths.

Quantitative standards for monopoly position. The Coca-Cola and Huiyuan acquisition case standards relate to this.

• Article 25: Concentration of business operators refers to the following circumstances:
  • (1) Merger of business operators;
  • (2) A business operator acquiring control over other business operators by obtaining equity or assets;
  • (3) A business operator acquiring control over other business operators or being able to exert decisive influence on other business operators through contracts or other means.

Concentration of business operators. Subsequent provisions also exclude equity situations and subsidiary-related companies.

• Article 27: Under any of the following circumstances, concentration of business operators need not be declared to the State Council’s anti-monopoly enforcement agency:

  • (1) One business operator participating in the concentration holds more than fifty percent of the voting shares or assets of every other business operator;
  • (2) More than fifty percent of the voting shares or assets of every business operator participating in the concentration are held by the same business operator not participating in the concentration.

• Article 33: When reviewing concentration of business operators, the following factors shall be considered:

  • (1) The market share of the business operators participating in the concentration in the relevant market and their control over the market;
  • (2) The degree of market concentration in the relevant market;
  • (3) The impact of the concentration on market entry and technological progress;
  • (4) The impact of the concentration on consumers and other relevant business operators;
  • (5) The impact of the concentration on national economic development;
  • (6) Other factors affecting market competition that the State Council’s anti-monopoly enforcement agency deems should be considered.

Comprehensive examination of monopoly share and monopoly behavior.

• Article 57: Where a business operator violates this Law by abusing a dominant market position, the anti-monopoly enforcement agency shall order it to cease the illegal conduct, confiscate illegal gains, and impose a fine of not less than one percent but not more than ten percent of the sales revenue of the previous year.

The fine standard is 1%–10% of the previous year’s sales revenue. This shows the investigation team has substantial discretionary power, with even 1% typically involving hundreds of millions in funds.

Summary

Why is the monopoly topic so important in industrial organization theory? Because industrial economics originates from the pursuit of corporate profit maximization. Corporate objectives shape interactions between enterprises (competition or cooperation). When we incorporate government and social welfare analysis, the entire market’s interactions gain clearer context and structure.

What are we really opposing when we fight monopoly? In a nutshell—we oppose monopoly behavior, not monopoly position. Only when an entity possesses market power, holds a dominant position, and abuses that dominant position to interfere with the market does monopoly occur.

We have long grown accustomed to the sins of monopoly, but how large must market share be to be considered large? What hidden distortions might policies bring? In reality, antitrust still has much space for exploration. Monopoly resembles a cycle of dragon slayers becoming dragons themselves—historical cycles seem unavoidable. Precisely for this reason, monopoly may be that key to understanding market behavior.

New Issues in the Digital Economy Era

Involution

Regarding involution, it can be defined as:

• Increased input, decreased output (diminishing returns to scale)
• Increased input, decreased product quality (quality, technology, materials, etc.)

Are price wars caused by involution a monopoly problem? Price wars generally represent market mechanisms; the key judgment lies in the outcome of price wars.

Ideal price mechanisms should form differentiated competition, increase product diversity, and promote innovation.

If involution’s price wars lack the step of differentiated competition, they represent undesirable competitive outcomes.

Platform Economy

Meituan forcing users to choose between food delivery software definitely constitutes monopoly, but if Ele.me only has 30% of the food delivery market share, does forcing users to choose between platforms constitute monopoly?

Therefore, traditional physical markets need further analysis to understand digital markets and platform economies. Traditional monopoly focuses on inter-platform power (Company A vs. Company B), but further exploration is needed regarding intra-platform power (platform vs. users).

The power dynamics among platforms, operators, users, and consumers.