Noah Smith at Bloomberg is writing about how monopolies may be worse than we thought, and Apple (AAPL) is used as an object lesson.
A recent paper by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John van Reenen speculates that tech might have enabled the rise of a few “superstar” companies in each industry. The fact that leaders in more concentrated industries also tend to have higher productivity supports this hypothesis. Technology might have simply changed the nature of markets so that the winners take most of the profits.
This could happen because network effects have increased. For example, iPhones are popular in part because of Apple’s large app store, and the app store is large because developers want to write apps for popular phones. Or in finance, having a larger network of counterparties could be more important to banks in the internet age.
A recent paper by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John van Reenen speculates that tech might have enabled the rise of a few “superstar” companies in each industry. The fact that leaders in more concentrated industries also tend to have higher productivity supports this hypothesis. Technology might have simply changed the nature of markets so that the winners take most of the profits.
This could happen because network effects have increased. For example, iPhones are popular in part because of Apple’s large app store, and the app store is large because developers want to write apps for popular phones. Or in finance, having a larger network of counterparties could be more important to banks in the internet age.
I have a hard time getting worked up about monopolies. Reason being, the more profit that is involved, the more incentive a large company from another industry has to invade your territory. If a monopoly takes advantage of their position and starts price gouging their customers to achieve huge profit margins, this does not go unnoticed in the business world.
The false assumption around monopolies is that if one company dominates an industry, another large company from another industry won’t invade their market. This is false because companies are always looking for complementary business in other industries that they can expand into. If your company has a position titled “VP of Business Development”, that’s what they do all day long.
I know, because a fair amount of my career is taken up with analyzing how much I think it will cost my company to produce product X if we were to launch an assault into a new market. We look at markets that dovetail well with what we already do, meaning that it helps us leverage our purchasing power in various commodities or use existing manufacturing assets. And most importantly, it must offer healthy profit margins.
A monopoly that is brought about through what the Bloomberg article describes as “companies who achieve superstar status through innovation” is a temporary position. And worse, companies with monopoly status tend not to stress too much about achieving maximum efficiency. This makes them even more vulnerable to getting undercut eventually by someone else. High profit margins in an environment with little competition is like a bloody fish in shark-infested waters. The predators will come.
The false assumption around monopolies is that if one company dominates an industry, another large company from another industry won’t invade their market. This is false because companies are always looking for complementary business in other industries that they can expand into. If your company has a position titled “VP of Business Development”, that’s what they do all day long.
I know, because a fair amount of my career is taken up with analyzing how much I think it will cost my company to produce product X if we were to launch an assault into a new market. We look at markets that dovetail well with what we already do, meaning that it helps us leverage our purchasing power in various commodities or use existing manufacturing assets. And most importantly, it must offer healthy profit margins.
A monopoly that is brought about through what the Bloomberg article describes as “companies who achieve superstar status through innovation” is a temporary position. And worse, companies with monopoly status tend not to stress too much about achieving maximum efficiency. This makes them even more vulnerable to getting undercut eventually by someone else. High profit margins in an environment with little competition is like a bloody fish in shark-infested waters. The predators will come.
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