A monopoly does not mean that a product can be sold at any price, no matter how high. The price of a product offered by a monopolist must meet only one criterion: to ensure maximum profit for the producer. On one hand, there is an interdependence between supply and demand in the market, meaning that the higher the price of a product, the fewer people will want to buy it. On the other hand, there is a relationship between production scale and the cost of goods. A monopolist, by producing more, is forced to lower the price to ensure demand. Therefore, they will never operate at full capacity but will choose an equilibrium state that allows them to achieve maximum profit.
This means that, unlike in a competitive market, a) the monopolist earns economic profit, and b) this profit is maximized.
The situation in which there is competition, but each supplier or seller is different from the others, is called “monopolistic competition.” In marketing, this is commonly referred to as differentiation, and the well-known marketer Jack Trout even titled his book “Differentiate or Die.” As shown above, this is pure mathematics. Economic profit can only be achieved by selling goods whose added value is formed, in part, due to unique competitive advantages.
Jack Trout discusses classical marketing principles when it comes to mass sales, entire markets, and large production volumes. His recommendations are useful in situations where the cost of informing consumers about a company’s competitive advantages is relatively low when compared to each unit of product produced.
But if we go down to the level where ordinary sellers operate, and the world is made up of many small companies, we will find that these companies not only lack the funds for mass advertising, but it is also not beneficial for them at all. After all, if we assume that one billboard, which costs the advertiser $300 a month, increases sales by 0.1%, then sales volumes would need to exceed $300,000 for a rational businessman to even consider placing a billboard.
Is differentiation important for small and medium-sized businesses, or is it more relevant for large businesses with infrequent sales? Let’s consider a simple example. Suppose you bake bread. You have two options — to bake regular bread or to bake… green bread. Yes, by offering green bread, you would be a monopolist. But what is the level of demand for green bread? After all, if you adopt a monopolist strategy, you would want to sell green bread at a higher price than white bread, which means you should anticipate a corresponding level of demand. Is it worth the risk to allocate the company’s resources to focus specifically on producing green bread if there is no demand at all until someone starts offering green bread?
An obvious strategy for a baker would be to sell white bread. It’s a safer choice: the demand is clear, the market is clear, and the consumer is clear, but so is the competition. You won’t be discovering anything new by starting to sell your bread to the residents of nearby houses. They were already buying it somewhere else before you arrived. This means you’re entering a competitive struggle, as mentioned earlier. In finance and investing, there’s a golden rule: the more reliable the option, the less profitable it tends to be. Green bread is a riskier product, but potentially more profitable as well. To determine whether it’s worth starting its production, you need to identify who might actually need it.
For sellers of green bread, we have good news: the demand for knowledge and information is being met better every day. People are increasingly skeptical of the news and more trusting of blogs. Pie recipes are discovered on “Odnoklassniki,” and travel agencies are chosen after reading reviews about them on online platforms. Out of 7 billion people, there will always be a couple of hundred thousand “nonconformists” who will specifically want green bread. That’s just 0.003% of the population. Even if only a fraction of these people is physically reachable for you, you can still produce 200 loaves of green bread a day. And they will buy them only from you as long as the price for “greenness” remains reasonable. By the way, customers will purchase unusual bread because they learn about you: through word of mouth, Facebook posts, or bloggers’ notes. If they need green bread, they will open a search engine and, with a couple of clicks, find your website. You won’t need mass advertising with billboards; you are already capable of being more successful than large producers who previously relied on economies of scale to bombard consumers with expensive advertising for their brands and products. Moreover, if these big corporations realize that there is interest in green bread and start mass production, you will simply switch to baking red or blue bread. But the most important thing is that such corporations will find it uninteresting to produce green bread, as the actual demand for it is lower than the minimum production volume required to make it profitable.
It is precisely the move into niches, where your slice of the pie becomes inaccessible to large competitors, that allows small breweries, artisanal bakeries, and furniture stores to survive. The high production costs are more than compensated for by the relative monopoly on supply. Of course, this is contingent on having demand for that supply at such a price.