Tuesday, September 16, 2014

Monopolies Are A Consequence, Not A Benefit

My friend Peter Sims recently wrote about how he disagrees with Peter Thiel's "Competition is for Losers" editorial.  Thiel argues that monopolies are good for society, and Peter respectfully disagrees.

My own take is fairly nuanced--monopolies are a sign of a healthy market, because they tend to result from innovation in "winner-take-most" markets, but they shouldn't be viewed as a positive.

Even some of the famous monopolies of the past, such as J.D. Rockefeller's Standard Oil Trust resulted from innovation in a new industry.  Yet as the case of Standard Oil illustrates, Lord Acton's axiom that "Power tends to corrupt, and absolute power corrupts absolutely," applies to corporations as well as people (after all, corporations are people too!).  Counting on the benevolence of a Steve Jobs, Bill Gates, or Larry Page is a risk I'd rather not take.

Yet we can't simply say, "monopolies bad, Hulk SMASH!"  It's a delicate balance.  Regardless of how much we like to pretend that entrepreneurship isn't about the money, it plays a significant role. The returns of winning a "winner-take-most" market help convince many others to start their own companies.

On the other hand, competition is what keeps people honest. Apple innovates because of Google, and vice versa. Microsoft was able to avoid innovation because it lacked real competition in the desktop OS market.

Bottom line: Monopolies are a sometimes unavoidable consequence of healthy market structures and innovation, but ironically enough, they aren't good for innovation (or the consumer).

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