The above article by Peter Thiel is the best business + economics education I have ever received or can ever conceive of receiving. Something about "anti-trust" always rubbed me the wrong way -- now I know what!! In the following, I organize excerpts from his article into named sections and summarize, emphasize and/or annotate (minimally) along the way.
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Creating value isn't enough—you also need to capture some of the value you create.
Airlines create value but run razor-thin margins and are unable to capture the value they create
vs.
Google creates far less value but is able to capture most of it.
MONOPOLY VS. PERFECT COMPETITION
Competition is idealized and monopoly is abhorred -- in academia and among the general public.
"Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business.""If you lose sight of competitive reality and focus on trivial differentiating factors—your business is unlikely to survive."
MONOPOLIES ARE BETTER FOR EMPLOYEES
"The problem with a competitive business goes beyond lack of profits": Small margins incentivize cost-cutting on employee wages & benefits.
However, a monopoly
- has wider latitude to care about its workers
- can think about its impact on the wider world
- is successful enough to take ethics seriously without jeopardizing its own existence
- can afford to think about things other than making money
- can drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance ambitious research projects.
Non-monopolists (i.e. "firms locked in competition") can't [do any of these]. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits."
WHAT ABOUT CONSUMERS? THE REAL WORLD IS UNLIKE THE GAME.
"Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.
In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There is no way to win by inventing a better kind of real-estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up.
But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better."
EXAMPLES
""The dynamism of new monopolies itself explains why old monopolies don't strangle innovation.""
""Apple's monopoly profits from designing, producing and marketing the iPhone were clearly the reward for creating greater abundance, not artificial scarcity: Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decades long operating system dominance. Before that, IBM's hardware monopoly of the 1960s and '70s was overtaken by Microsoft's software monopoly.""
BUT, WHAT ABOUT THE ECONOMISTS?
""So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business. But the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest—also known as the heat death of the universe. Whatever your views on thermodynamics, it is a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place.
Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.""
CONCLUSION
""All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.""
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