Competition or Monopoly: Which one will you choose?

‘Competition is for losers’.

This was said by Peter Thiel (Paypal founder, investor in Facebook, Space-X), who admired the power of monopoly. He is a well-known and successful investor and has published a book entitled Zero to One on starting up a company . In this book, he stated:

‘Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business’ (Thiel, 2014).

Does reality accord with what Peter Thiel said?

Figure 1 (Sources: http://oldfieldeconomics.wikispaces.com/efficiency)

The topic of competitive and monopoly market has been discussed in economics lectures; it seems that the competitive market is the ‘perfect’ and desirable market we want rather than a monopoly market. Figure 1 shows the graphs of competitive and monopoly market. It can be seen that when there are monopolists in the market, there will be a deadweight loss to a whole society, which is the area abc; while in the competitive market, there is no deadweight loss that indicates the resources are well allocated. Therefore, from a theoretical point of view, the competitive market should be preferable compared to the monopoly market, because resources are allocated efficiently which can benefit the whole society in this situation.

However, from an empirical point of view, things might be different. Peter Thiel has emphasised that monopoly will encourage firms to make innovation in technology, products and even the ways of management (Thiel, 2014). They will try every method to lower their costs and improve their efficiency so that they can make themselves unique and then make a great profit.

Being a monopolist can ensure a supernormal profit, which will lead to an unequal distribution of income. But meanwhile, monopoly has its advantages. Firstly, a firm can gain the power of monopoly when it is the most efficient. This is to say, monopoly can be seen as an encouragement of efficiency. Take Google as an example. It has the power of monopoly because it offers innovative new products every year, which make them different from other firms and unique in the market. Also, monopoly can encourage more investments in Research & Development (R&D), which might benefit the whole society. Industries such as medical drugs is a good example, With the motivation of supernormal profits in the monopoly power, firms will invest more money and human capital in the development of new drugs.

Additionally, although there are some drawbacks associated with monopoly, but one of the factors of monopoly has truly played an important role in the development of the world, that is ‘innovation’. With the motivation of supernormal profits, monopolists lead to the development of innovation worldwide, which is beneficial to the overall economy. In an article written by Drew Marshall (Marshall, 2010), he has quoted Joseph Schumpter’s words ‘Entrepreneurial profit is the expression of the value of what the entrepreneur contributes to production’ and supported that innovation acts as an economic mover.

As a consequent, monopoly might has its negative impacts to the whole society. But for entrepreneurs, they are encouraged to pursue the power of monopoly because this is a way for them to win in the market. And moreover, to be a successful monopolist, one should seek to make innovation in their products, management, technologies or resource allocation so that the firm can be a unique entity in the market as well as benefiting the development of the overall economy.

Reference:

Marshall, D., (2010) ‘Innovation Economies & The Benefit Of Creative Destruction’, Primed Associate LLC. Accessed: http://thinkprimed.com/blog/innovation-economies-the-benefit-of-creative-destruction/. (Accessed date: 10/02/2017).

Thiel, P., (2014) Zero to One. Crown Business: New York.