Peter Thiel on the Virtues of Monopoly

Thom Lambert —  13 September 2014

PayPal co-founder Peter Thiel has a terrific essay in the Review section of today’s Wall Street Journal.  The essay, Competition Is for Losers, is adapted from Mr. Thiel’s soon-to-be-released book, Zero to One: Notes on Startups, or How to Build the Future.  Based on the title of the book, I assume it is primarily a how-to guide for entrepreneurs.  But if the rest of the book is anything like the essay in today’s Journal, it will also offer lots of guidance to policy makers–antitrust officials in particular.

We antitrusters usually begin with the assumption that monopoly is bad and perfect competition is good. That’s the starting point for most antitrust courses: the professor lays out the model of perfect competition, points to all the wealth it creates and how that wealth is distributed (more to consumers than to producers), and contrasts it to the monopoly pricing model, with its steep marginal revenue curve, hideous “deadweight loss” triangle, and unseemly redistribution of surplus from consumers to producers. Which is better, kids?  Why, perfect competition, of course!

Mr. Thiel makes the excellent and oft-neglected point that monopoly power is not necessarily a bad thing. First, monopolists can do certain good things that perfect competitors can’t do:

A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google’s motto–“Don’t be evil”–is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence.  In business, money is either an important thing or it is everything. Monopolists can think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

Fair enough, Thiel. But what about consumers? That model we learned shows us that they’re worse off under monopoly.  And what about the deadweight loss triangle–don’t forget about that ugly thing! 

So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers’ wallets, and monopolies deserve their bad reputations–but only in a world where nothing changes.

Wait a minute, Thiel. Why do you think things are different when we inject “change” into the analysis?

In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There is no way to win by inventing a better kind of real estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.

Even the government knows this: That is why one of the departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It is possible to question whether anyone should really be rewarded a monopoly simply for having been the first to think of something like a mobile software design. But something like Apple’s monopoly profits from designing, producing and marketing the iPhone were clearly the reward for creating greater abundance, not artificial scarcity: Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation. With Apple’s iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft’s decadeslong operating system dominance.

…If the tendency of monopoly businesses was to hold back progress, they would be dangerous, and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.

Geez, Thiel.  You know who you sound like?  Justice Scalia. Here’s how he once explained your idea (to shrieks and howls from many in the antitrust establishment!):

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices–at least for a short period–is what attracts “business acumen” in the first place. It induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Sounds like you and Scalia are calling for us antitrusters to update our models.  Is that it?

So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what’s easy to model, not because it represents the best of business.

C’mon now, Thiel. Surely you don’t expect us antitrusters to defer to you over all these learned economists when it comes to business.

Thom Lambert

Posts

I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

5 responses to Peter Thiel on the Virtues of Monopoly

  1. 

    competition is create advance in technology and that is a fact, monopoly create competition and we have to understand the synergy. Now can we have a perfection competition and have tech breakthrough i doubt because perfect competion is no competition at all, citing google as a model of what a monopoly can do is a little too far fetched, because if you look at the changed google makes they are targeted to other search engine and that create a competition

  2. 

    Thom – Please take your analysis the deeper, next step. What is your take on the Microsoft monopolization case? What would Justice Scalia say? The case was billed as necessary to ensure that there would be competition for next generation ( and next paradigm) — competition for the next monopoly? Do you agree? Or, do you think it was a wrongheaded, backward-looking case? Do you think that Google would have succeeded, absent the DOJ case?

    For extra credit, please carry out the same analysis for the breakup of AT&T.

  3. 

    It’s funny how charging monopoly prices “only for a short time” tends to become an even longer period of time. Copyrights and Trademarks get extended over and over again in the face of lobbying, businesses like car dealerships lobby for laws restricting entrance and exit in order to “protect their investment”, and so forth. If you’re going to shill for monopolies, then you also have to deal with their all-too-eager willingness to co-opt political and legal institutions to protect themselves when new businesses show up on the horizon to disrupt them.

  4. 

    Perfect competition does not create wealth. Wealth is created by advances in technology, not be creating me-too products. Inherent in perfect competition is the idea that the producers do not create wealth (no economic profits), inherent in perfect competition is a technologically static world, a world where using one’s brain is prohibited because this leads to market advantages or where you are required to give up any market advantages you think of.. Perfection competition is the morality of slavery masquerading as science.

    Using perfect competition to define what is a monopoly is nonsense. It makes every property right a monopoly. It turns the Statute of Monopolies on its head. The Statute limited the power of government and protected the property rights of citizens, perfect competition is used as an excuse to increase the power of government and violate people’s property rights.

Trackbacks and Pingbacks:

  1. Monopoly… no no, not the game | Startup Iceland - October 8, 2014

    […] Peter Thiel on the Virtues of Monopoly […]