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Theil’s begins by pointing out that profit = sales * markup, continues by defining “winners” as those who are able to keep sales growing and/or the markup rising, and concludes that striving for monopoly(-read-power) is the best way of achieving both.
Is this all there is to his insight, or am I missing something?
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Airlines vs Google
I think the comparison between US domestic airlines and Google is a bit disingenuous (aside from the fact that to describe Google as simply ‘a search engine’ is an oversimplification). For one, the key takeaway is not necessarily that Google is the ‘winner’ because investor are valuing Google’s superior markup over the airlines’ superior revenue. The airlines’ net profit is = $0.39bn while Google’s net profit is $10.54bn so going off of total profit alone – you could argue that Google could be justified in having a market cap which is approx. 27 timses greater than that of the airlines. Tech companies are also always likely to have higher P/E ratios in any case because they rely more heavily on intangible assets and have a higher perceived ‘ceiling’ in terms of future revenue generation and profitability potential. A comparison between two companies in similar industries, with similar book values and profits but with very different markups would be a more helpful comparison to make.
Economy of extremes
Regarding Thiel’s assertion that there is “shockingly little between perfect competition and monopoly”, I’m not sure if the data supports that…
“Concentration varies considerably across industries in the United States. In the household laundry equipment, breakfast cereal, and cigarette industries, the four largest companies produce well over 80 percent of the industry’s product. At the other extreme the four largest firms in wooden household furniture, fur goods, and women’s and misses’ dresses sell well under 20 percent. For all U.S. industries the average four-firm concentration ratio is 37 percent. Weighted by industry sales, it is 36 percent. This average has been quite stable for a long time. In 1935 the average four-firm concentration ratio for U.S. industries was 40 percent; weighted by sales it was 37 percent. In 1977 the average was 37 percent, while the weighted average was 39 percent. In other words, there has been no discernible long-run trend toward concentration of industry since the Great Depression. ” Source: https://www.econlib.org/library/Enc1/IndustrialConcentration.html
We can contextualise that with the following rule of thumb: “The concentration ratio ranges from almost zero for perfect competition to 100 percent for monopoly. A ratio that exceeds 40 percent: indication of oligopoly.”
Monopolies as dominators
“It is easier dominate a small market than a large one”
While this is almost certainly true, it may not be such a great evil . If we consider the social value of a market in terms of consumer surplus, we know that this surplus will always be smaller in a monoply than in a perfectly competitive market. However, there are small, new markets (most commonly in tech sectors) which are entirely underserved. A monopoly in the short-term may actually generate greater surplus value by concentrating power and allowing a firm to enter the market with a new and useful product. The hope is that over time, this power will be eroded since the market will grow, attracting new entrants who can take some market share away from the first mover.
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