On Competition, Monopoly

via Peter Thiel:

Perfect Competition:

Pros:

  1. Easy to model
  2. Efficient in a static world
  3. Politically salable

Cons:

  1. Psychologically unhealthy
  2. Irrelevant in a dynamic world
  3. Preempts question of value

Monopoly:

Pros:

  1. Incentive to innovate
  2. Stable, long-term planning
  3. Deeper project financing
  4. Symptomatic of creation

Cons:

  1. Lower output, higher prices
  2. Price discrimination
  3. Stifle innovation
  4. Tying

Even thinking through these things in simple terms can help one understand, a little bit more precisely, how free markets and capitalism really works.

Perfect competition doesn’t exist but many startup founders believe that it’s either true or should be true. Rather, you should always head toward monopoly while competition is, as Thiel says, “for losers”.

The goal is to capture value:

A business is an entity that creates X dollars of value and captures Y% of X. X and Y are independent variables.

Peter Thiel

The independence is a fascinating instrumentation. Start small:

It’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.

Characteristics of a monopoly?

  1. Proprietary technology
  2. Network effects
  3. Economies of scale
  4. Branding

Success Cases:

  • Vertically integrated complex monopolies: Ford, Standard Oil, Tesla, SpaceX
  • Software: Economies of scale, low marginal cost, high adoption rate

Definitely stuff to think about.