1. Proprietary technology. This one is straightforward. If you invent the best technology, and then you patent it, nobody else can compete with you. Thiel provocatively says that your technology must be 10x better than anyone else’s to have a chance of working. If you’re only twice as good, you’re still competing. You may have a slight competitive advantage, but you’re still competing and your life will be nasty and brutish and so on just like every other company’s. Nobody has any memory of whether Lycos’ search engine was a little better than AltaVista’s or vice versa; everybody remembers that Google’s search engine was orders of magnitude above either. Lycos and AltaVista competed; Google took over the space and became a monopoly.
2. Network effects. Immortalized by Facebook. It doesn’t matter if someone invents a social network with more features than Facebook. Facebook will be better than their just by having all your friends on it. Network effects are hard because no business will have them when it first starts. Thiel answers that businesses should aim to be monopolies from the very beginning – they should start by monopolizing a tiny market, then moving up. Facebook started by monopolizing the pool of Harvard students. Then it scaled up to the pool of all college students. Now it’s scaled up to the whole world, and everyone suspects Zuckerberg has somebody working on ansible technology so he can monopolize the Virgo Supercluster. Similarly, Amazon started out as a bookstore, gained a near-monopoly on books, and used all of the money and infrastructure and distribution it won from that effort to feed its effort to monopolize everything else. Thiel describes how his own company PayPal identified eBay power sellers as its first market, became indispensible in that tiny pool, and spread from there.
3. Economies of scale. Also pretty straightforward, and especially obvious for software companies. Since the marginal cost of a unit of software is near-zero, your cost per unit is the cost of building the software divided by the number of customers. If you have twice as many customers as your nearest competitor, you can charge half as much money (or make twice as much profit), and so keep gathering more customers in a virtuous cycle.
4. Branding. Apple is famous enough that it can charge more for its phones than Amalgamated Cell Phones Inc, even for comparable products. Partly this is because non-experts don’t know how to compare cell phones, and might not trust Consumer Reports style evaluations; Apple’s reputation is an unfakeable sign that their products are pretty good. And partly it’s just people paying extra for the right to say “I have an iPhone, so I’m cooler than you”. Another company that wants Apple’s reputation would need years of successful advertising and immense good luck, so Apple’s brand separates it from the competition and from the economic state of nature.
Scott Alexander, “Book Review: Zero to One”, Slate Star Codex, 2019-01-31.
March 3, 2019
QotD: Four ways to corporate monopoly
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