From Simon Taylor's blog:
Economics students learn early in their microeconomics course that there is a desirable market condition called perfect competition, which consists of large numbers of more or less identical firms competing aggressively to meet the customer’s wants. The competition is so fierce that no firm has any ability to charge a price above the absolute minimum needed to stay in business. So the customer is assured of a low price and the economy makes efficient use of resources, since only the most cost effective companies can survive.
They then learn about how bad monopoly is. That is the opposite type of market in which there is a single supplier who naturally charges whatever the market will bear and has little incentive to be cost efficient or to be attentive to customer needs. A market with monopoly will be inefficient (*), will charge customers more than in perfect competition and probably won’t be innovative or offer a decent service.
The problem with this picture is that very few actual industries are like either case. Perfect competition is a fiction, an “ideal type”. The nearest we get to it is in agriculture and some other basic commodities, where the product is identical and firms have no market power or ability to add any sort of value or service that would merit a higher price. Many markets are competitive but with only a few companies, and the product is usually slightly differentiated.
Take coffee shops. There are plenty of choices for a customer in Cambridge looking for a coffee. There are the three big chains (Costa, Nero and Starbucks) plus various independents. All offer broadly the same product (though for my taste the brown milk that you get in Costa or Starbucks barely rates the name coffee) but they each have subtle differences in ambience, style, service and location. They compete on these features, not on price, but their products are broadly priced the same, which suggests some degree of restraint from competition.
That type of market is called monopolistic competition in economics textbooks because the product or service is not identical and each firm has some degree of influence over demand. Innovation is encouraged in that type of market because a small enhancement can cause customers to switch. But other customers are loyal or just conservative, which means that the coffee shops aren’t relentlessly trying to retain every single customer each day, which is the miserable fate of a company in a perfectly competitive market.
Pure monopoly in the sense of a single supplier is rare except in the natural monopolies of network utilities, where there is a strong cost argument for a single electricity transmission wire or water pipe. Competition would be wasteful and no new entrant would expect to make money. So these industries are inevitably monopolistic and are usually regulated as such.
But quasi-monopolies, in the sense of a dominant supplier, are quite common. And the goal of many businesses is precisely to try to establish such a position. Peter Thiel, the co-founder of Paypal and an early investor in Facebook, taught a course on start-ups at Stanford University in 2012 and this blog provides some notes on the course (it’s written by Blake Masters, Thiel’s co-author of the new book Zero to One so the notes are likely to be a reliable guide to what Theil said). One thing that struck me was his argument that successful capitalism and monopoly are not opposites, as the textbook view of economics might suggest. On the contrary, he argues that a start up should be intending to find or build a monopoly or at least dominant position that it can completely own. Unless a start up has that ambition or potential it’s not worth investing in or working for.
So monopoly is both the goal of a dynamic business and an outcome that reflects success. Perfect competition is neither a good guide to what most business looks like, nor a desirable goal that any business should accept.
Successful examples of quasi-monopolies would include Google, Facebook, LinkedIn and for a while Apple and Microsoft. None of these is or was a 100% monopolist, though Microsoft came very close with the dominance of Windows for a while. And none of them has an unassailable position, because technological change makes new disruptive entrants a possibility, which is why so few companies keep their monopoly position....MORE
