The Perks of Market Dominance
A monopolistic position may potentially present significant competitive advantages for the company that holds it. These include:
- Pricing Power - Often, a monopolist can dictate prices and other terms due to its market dominance. Instead of being a "price taker" that is influenced by market forces, it can be a “price maker.”
- Higher Profit Margins and Supernormal Profits – Because of their price-setting power, monopolists may often achieve higher profit margins than companies in competitive markets.
- Economies of Scale – Monopolies often operate on a very large scale, potentially allowing them to achieve significant economies of scale. This cost advantage can make it virtually impossible for new, smaller competitors to enter the market and compete on price, further solidifying the monopoly's position.
- Substantial Resources for Research and Development (R&D) – The substantial profits generated by a monopoly may potentially provide ample capital for investing in R&D. This can help a company maintain its market dominance.
- Barriers to Entry – Monopolies tend to benefit from high barriers to entry. Typically, the sheer investment required to compete with an entrenched monopolist is prohibitive to entering the market.
How a Monopoly Can Create an Economic Moat
One of Warren Buffett’s most famous concepts is the “economic moat.” This is a competitive advantage that stops competitors from stealing market share and protects a company’s profitability. Often, a monopolistic market position can lead to an economic moat. Here are some factors that can play a role:
- Cost Advantages - A monopoly might have a cost advantage due its economies of scale or access to unique resources, making it difficult for competitors to match its prices.
- Intangible Assets – A monopoly may hold valuable intangible assets that are difficult for a competitor to replicate such as patents.
- Control of Essential Resources/Infrastructure – A monopolist might control a critical raw material, a unique distribution channel, or a vital piece of infrastructure (like a train network or an electricity grid), making it impossible for others to operate without their cooperation.
- Brand Loyalty and Reputation – Over time, a monopolist can build strong brand recognition and trust, making consumers hesitant to switch to unproven alternatives.
- Switching Costs – Customers might face significant switching costs when moving from a monopoly's product or service to a competitor's, making them less likely to switch.
Note that a monopoly does not automatically guarantee an economic moat. To create a moat, the company must leverage its monopolistic position to build and sustain competitive advantages that protect its profitability.
How Monopolies Are Created
Monopolies can arise as a result of a number of factors. These include:
- First-Mover Advantage - Being the first to introduce a groundbreaking product or establish a widespread network can lead to a dominant market position that is hard to disrupt.
- M&A Activity – Companies may acquire competitors, consolidating market share and reducing competition.
- Technological Superiority and Intellectual Property – Breakthrough technologies, patents, or proprietary systems can sometimes grant a temporary or long-lasting monopoly.
- Control of a Scarce or Essential Resource – A company can establish a monopoly if it gains exclusive control over a critical input necessary for production.
- Network Effects – In certain industries, the value of a product or service increases with the number of users. This can create a powerful self-reinforcing cycle that leads to market dominance.
- Granted Monopolies - Governments may grant a business a monopolistic market position.
- Natural Monopolies - Industries requiring massive initial investments in infrastructure (like utility companies) often become natural monopolies because the economies of scale are so significant that it's more efficient for a single entity to provide the service.
Monopoly Case Study: ASML
ASML is a European company that specializes in the manufacturing of photolithography machines. These machines are critical for producing the semiconductors that power electronic devices such as smartphones, laptops, and electric vehicles.
While ASML has a large market share in DUV (Deep Ultraviolet) lithography systems, which are used to produce a wide range of chips, it is the only company that manufactures Extreme Ultraviolet (EUV) lithography machines, which are used to produce the smallest and most complex chips.
Factors that have led to ASML’s monopolistic position in the EUV market include:
- Technological Complexity - EUV lithography technology is extremely complex. This complexity means that the market has high barriers to entry.
- Decades of R&D Investment – ASML has invested billions of euros over several decades to bring EUV technology to commercial viability.
- Strategic Partnerships – ASML has formed crucial partnerships with key players in the semiconductor ecosystem including the likes of Intel, Samsung, and TSMC.
- Acquisitions – ASML has strategically acquired companies to bring critical expertise in-house and accelerate development.
- First-Mover Advantage – By being the first (and only) company to successfully commercialize EUV, ASML has built a loyal customer base.
An oligopoly is where an industry is dominated by just a few companies. A rule of thumb is that an oligopoly exists if the top five businesses in the market account for more than 60% of total market sales.
A key feature of oligopolies is a high degree of interdependence between the different businesses. In this type of market, each company's decisions are heavily influenced by the actions and reactions of rivals and a strategic move by one firm can significantly impact the other businesses in the industry.
Monopolies: The Potential Benefits for Investors
Investing in monopolistic companies can offer several benefits for investors due to the unique economic advantages these companies often have. These benefits include:
- Stable Revenues - Monopolies often face little to no competition, which can lead to highly stable and predictable revenue streams.
- High Profit Margins and Returns on Capital – Due to their pricing power, monopolies can often generate superior profit margins and returns on capital compared to companies in competitive markets.
- Funding for Innovation and Growth – The significant profits generated by monopolistic companies can often provide ample capital for substantial investment in research and development (R&D), which can lead to further growth.
- The Potential for Capital Returns – Given their financial strength, monopolistic companies often have the financial capacity to return capital to shareholders through dividend payments, share buybacks, or a combination of both.
The Themes Natural Monopoly ETF
Investors seeking portfolio exposure to companies with monopolistic market power may wish to take a look at the Themes Natural Monopoly ETF (CZAR). This seeks to track the Solactive Natural Monopoly Index (SOLNMONN), which identifies the top five companies within 19 different sectors that have high sales, stable profitability, stable return on equity, operational efficiency, and reinvestment of profits.
Footnotes:
1 StatsCounter GlobalStats, Search Engine Market Share Worldwide Apr 2024 – Apr 2025, as of April 2025
2 Tom’s HARDWARE, AMD grabs GPU market share from Nvidia as GPU shipments rise slightly in Q4, as of March 7, 2025
3 Increv, Uber Statistics: How Many People Ride with Uber? – Increv, as of May 2025
4 Polaris Brighterir, Rightmove plc, the UK's largest property portal, today announces its audited results for the year ended 31 December 2024, as of February 28, 2025
5 NationalGrid, How we’re regulated, as of May 2025
6 PatentPC.com, as of May 2025
7 LSEG Data & Analytics, An overview of Australian Securities Exchange (ASX), as of May 2025