No business can survive in a perfectly competitive market. Radical. When a company has no market power (synonymous with monopoly power), it must sell its products at the price that the market dictates.
If this company makes money, more companies will enter the market, driving the price down until the price equals the marginal cost of production, at which point, no more companies will enter the market.
No company can sustain itself long term at this break even point. So what is the alternative?
There is this company called Google that many people think of as a monopoly. The thing is though, that Google only has a monopoly on something that it doesn’t make any money on.
Google is in (at least) two main industries. The first is the business of search engines. Google hands down has the best search engine and nothing comes close to the practically and resources that Google offers.
Google is now a verb in the dictionary and I am sure that you probably navigated through it at least once to find this page. That said, Google doesn’t make any money from providing the best services out there that everyone and their dog uses.
This behemoth makes its money in the second industry: advertising. Okay, you probably knew this.
In 2014, the U.S. search engine advertising market was $17 billion annually. If Google completely monopolized this market, they would still only have 3.4% of the entire global advertising market (Peter Thiel: Competition is for Losers, WSJ, 2014).
This puts things in perspective. Google is able to make more money from a tiny share in the advertising industry (95% of its total revenue) than the entire airline industry makes, without being a monopoly in said industry.
Growth And Innovation
Few people seem to understand that monopolies are what spurs our economy to grow and what encourages innovation to occur.
It is incredibly tempting as a startup to view your market as a narrow field that you dominate. This makes you feel more successful and influential. The reality is that your market is more crowded than you think, and your “originality” wears off rather quickly.
Companies that are actually monopolies tend to understate their monopoly power because they don’t like to draw too much attention.
A company like Google that certainly has a monopoly in search engines doesn’t have to spend all its time worrying about competitors and fighting to survive, so it is able to focus on innovating products and developing new markets.
On the flip-side, companies that might be considered competitors to Google have to thinks of ways to work around it. They have to think of new and different angles on a product or service since they are unable to compete directly with the king of them all.
This forces a great amount of innovation that would not occur. The allure for each new company to someday obtain monopoly power is enough incentive to get people to enter the marketplace.
If the best that was possible was perfect competition in the market place, starting a business would not be worth the effort.
What Actually Is A Monopoly?
What does it mean to be a monopoly though? Are all successful companies a monopoly of a sort? Let’s look at a business in the scheme of time.
Firms (with very few exceptions) innovate or they die. It’s a rule that all businesses know. The vehicle for innovation is technology. Without technological advances, innovation is severely limited.
How a company applies this innovation determines its monopoly power. This company will have a unique product that no one else has if it plays its cards well, but only for a short time, until others start invading the market.
A company such as Mercedes Benz will always have a monopoly on a segmented market.
Due to the reputation that they have spent a century building, they have a local following. They have built a market for themselves that no one else can step on because no one else can build a Mercedes Benz.
As long as Mercedes continues to build cars that reflect their vision for innovation and luxury, they will always own their market and maintain monopoly power.
But this year’s car will stop selling next year, and without constant innovation and development, Mercedes would go out of business.
So, without the allure the monopoly, no business would be able to thrive. Monopolies, allow for new products to constantly emerge. Not all of them succeed, but I am glad that people are always trying to make something new.
I am glad that there’s the possibility that I might create a company that has a unique and irreplaceable impact on the market, and by doing so create an impact upon the world.