In terms of economic theory, the dead weight loss associated with monopoly depends upon a downward-sloping demand curve. Demand becomes more elastic with available substitutes, which equates to a flatter (more horizontal) demand curve. With demand elasticity, monopoly sinks in a sea of substitutability.

The Supreme Court addressed the problem of a patent monopoly in its 1965 ruling of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) -

To establish monopolization or attempt to monopolize..., it would then be necessary to appraise the exclusionary power of the... patent claim in terms of the relevant market for the product involved. Without a definition of that market there is no way to measure [the] ability to lessen or destroy competition. It may be that the [patented] device... does not comprise a relevant market. There may be effective substitutes for the device which do not infringe the patent.

This points out that defining a market is empirical, and not easy. Substitution itself tends to make market definition difficult. Here we see the distinction from tidy abstract theory and the way the world really works.

Every valid patent is an improvement on the prior art. From a historical perspective, even many patents representing technological breakthroughs are just an improvement from what was done before. Inventions for which no substitute exists are rare, but only highlight the issues of what resources were required to bring about such an astonishing technological leap, and how can society encourage such efforts.

New inventions, particularly the more valuable ones, consume resources to perfect into commercial products. Prior art products may be a poor substitute for a new product sporting advanced technology; that alone justifies paying a premium for the new product - if it can do more or better, it's worth paying extra for. The price premium that consumers are willing to pay reflects the degree to which lesser substitutes are available at lower cost.

Without patent protection, competitors would readily copy new technologies from innovators, incorporating it into their own products; thus, in short order, driving down the price premium for the new & improved product, as cheaper substitutes become available. What's wrong with this picture?

Part 1 - Monopoly
Part 2 - Substitution
Part 3 - The Inventor's Dilemma
Part 4 - Incentives
Part 5 - Theories
Part 6 - Perspectives