How many companies are monopolistic? How much is truly competitive?
It’s hard to say because our common conversation about these matters is so confusing. To the outside observer, all businesses can seem reasonably alike, so it’s easy to perceive only small differences between them.
But the reality is much more binary than that. There’s an enormous difference between perfect
competition and monopoly, and most businesses are much closer to one extreme than we commonly
realize.
The confusion comes from a universal bias for describing market conditions in self-serving ways: both monopolists and competitors are incentivized to bend the truth.
Truth of Monopoly
Monopolists lie to protect themselves. They know that bragging about their great monopoly invites
being audited, scrutinized, and attacked.
Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.
Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly. But
is it one? Well, it depends: a monopoly in what?
Let’s say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.). Does the Google look dominant?
But suppose we say that Google is primarily an advertising company. That changes things. The U.S.
the search engine advertising market is $17 billion annually. Online advertising is $37 billion annually.
The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market.
So even if Google completely monopolized U.S. search engine advertising, it would own just 3.4% of
the global advertising market. From this angle, Google looks like a small player in a competitive
world.
What if we frame Google as a multifaceted technology company instead? This seems reasonable
enough; in addition to its search engine, Google makes dozens of other software products, not to
mention robotic cars, Android phones, and wearable computers.
But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012, and its consumer tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it—a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.
Truth Competitive company
Non-monopolists tell the opposite lie: “we’re in a league of our own.” Entrepreneurs are always
biased to understate the scale of competition, but that is the biggest mistake most of the company make including self-employed and startups can make.
The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason.
“We’ll own the entire market.” But that’s only true if the relevant market is the real market. What if the actual market different than the companies claim in general?
These are hard questions, but the bigger problem is that you have an incentive not to ask them at all.
When you hear that most new companies including local bar or restaurant fail within one or two years, your instinct will be to come up with a story about how yours is different.
You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true. It would be better to pause and consider whether there are people in Caen who would rather eat Japanese food above all else. It’s very possible they don’t exist.
If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your product is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
Creative industries work this way, too. No screenwriter wants to admit that her new movie script
simply rehashes what has already been done before. Rather, the pitch is: “This film will combine
various exciting elements in entirely new ways.” It could even be true but not completely.
Non-monopolists exaggerate their distinction by defining their market as the intersection of various
smaller markets and bring there the company in danger zone which not likely to survive.
Monopolists, by contrast, disguise their monopoly by framing their market as the union of several
large markets: for example google
search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars
What does a monopolist’s union story look like in practice? Consider a statement from Google
chairman Eric Schmidt’s testimony at a 2011 congressional hearing:
"We face an extremely competitive landscape in which consumers have a multitude of options to
access information"
In simple word, he said, "we are the smallest fish in the sea".
Problem with competition
The problem with a competitive business goes beyond lack of profits. Imagine you’re running one of
those restaurants in Paris. You’re not that different from dozens of your competitors, so
you’ve got to fight hard to survive.
If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you’ll need to squeeze out every efficiency.
Restaurants aren’t much better even at the very highest rungs, where reviews and ratings like
Tripadvisor star system enforces a culture of intense competition that can drive chefs crazy.
A monopoly like Apple & Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world.
Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of
business that’s successful enough to take ethics seriously without jeopardizing its own existence. In
business, money is either an important thing or it is everything.
Monopolists can afford to think about things other than making money; non-monopolists can’t. 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.
MONOPOLY CAPITALISM
So, a monopoly is good for everyone on the inside, but what about everyone on the outside? Do
outsized 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 old time a only general store or only barber shop close to your house.
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: it’s possible to 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.
Even the government knows this: that’s why one of its departments works hard to create
monopolies (by granting patents to new inventions).
But it’s clear that something like Apple’s monopoly profits from designing, producing, and marketing the iPhone was 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.
The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation.
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 ’60s and ’70s was overtaken by Microsoft’s software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cell phone plan from any number of providers.
If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.
Monopolies 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 to finance the ambitious research projects that firms
locked in competition can’t dream of.
Why are economists obsessed with competition as an ideal state?
It’s 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’s what’s easy to model, not because it represents the best of business.
But it’s worth recalling that 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’s 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. Think of Nokia & Kodak.
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.
We used to hear that "all the rich people are alike; everyone is poor in their own way” Business is the opposite. All successful 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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