The local government watchdog has been asked to investigate after Brighton and Hove councillors refused to grant a sex shop licence.
The council's licensing committee last month turned down an application by The Adult Shop in St George's Road, Kemp Town.
Councillors stuck to a previous decision that there should be only one sex shop licence for the whole of the city.
This has been held for many years by The Private Shop in Surrey Street near Brighton Station.
The Adult Shop has opened but does not sell videos and aids which would require it to have a licence.
Joint proprietor Daniel Bianciardi said: "We are asking the Local Government Ombudsman to look at this decision.
"It goes against the laws of competition and it is unfair for one shop to have a monopoly."
Mr Bianciardi said the new shop had restored an empty building and provided a service but could do more if it had a licence.
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