Competition and Monopolies

Last month, Peter Thiel wrote a provocatively-titled op-ed for the Wall Street Journal, “Competition is for Losers.” In it, Thiel says that textbooks are all wrong: capitalism has little interest in competition. Rather, capitalism wants monopolies—and this, Thiel claims, is a good thing. He highlights Google as an example of a company that dominates search but uses its vast monopoly profits to fund dozens of worthy enterprises.

I think Thiel is onto something-mostly-but I have some notes of caution. For example, his use of the word monopoly is unconventional. Thiel isn’t referring to the strict legal definition of a monopoly but to a company that has little to no real competition. I also think his description of non-monopolies is unduly bleak, as if these are starving castaways fighting over scraps of meat.

But it’s an interesting topic. Consider: Is Harley-Davidson a monopoly? Well, in the legal sense, of course not. There are lots of motorcycle companies. Yet Harley is a brand so differentiated that it can be thought of as a pseudo-monopoly. Harley buyers would never view their hogs as just another bike. Harley is quite aware of this (a good portion of their revenue is apparel).

Thiel says that true differentiation is often claimed but rarely achieved. I’m not so sure about that. I think I differ from him in that I believe high-efficiency can be enough to differentiate an enterprise. There are some companies that follow the message of the old country song, “Do What You Do Do Well.” But we agree that firms desire to avoid competition, and this can be done by separating themselves from everyone else.

Thiel likes creative monopolies and he gives the example of Apple, but he also lists companies like the old AT&T and IBM in the 1960s, two companies which are no longer monopolies. The idea of a former monopoly should be a contradiction, but it happens quite frequently. Indeed, Thiel writes, “the history of progress is a history of better monopoly businesses replacing incumbents.” I have to agree.

A few months ago, I wrote about competitive advantage, an important topic that’s often discussed incorrectly:

Ideally, you want to have a business with high barriers to entry and low barriers to exit, and you want to differentiate yourself with whatever it is you do. You can do that by exclusivity or by price. That’s your competitive advantage. Once you get that, then you get better managers, better advertising and a stronger brand name. But it starts with a competitive advantage.

I think people often have difficulty with the concept of competitive advantage because they want to see sinister forces at work. And make no mistake: I do believe the tempering forces of free enterprise can sometimes break down and give a particular firm a lasting advantage that has nothing to do with its own inherent merit. It could be that they were in the right place at the right time.

For example, many years ago, the Japanese government gave AFLAC a monopoly on selling cancer insurance, and this translates into a huge market share today. Naturally, this is unsettling to those of us raised on the idea that the world wants a better mousetrap. But the truth is, it doesn’t. It wants the one it’s heard of. Just like in politics, the incumbent holds a lot of power.

Posted by on October 21st, 2014 at 2:51 pm


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