Good monopoly and bad monopoly
In a previous post I quoted from Peter Theil's book Zero to One the definition of a good monopoly. I repeat it here for easy reference:
Good monopoly is a useful abstraction, but there is rarely in pure state. For example Briggs Myers tests are also an abstraction. One can not reduce the planet earth human population to 16 personality types only.Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. To an economist , every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top.In this book, we’re not interested in illegal bullies or government favorites: by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
The "good' monopoly concept is not newPerhaps Peter Theil got the inspiration from a grocer turned author, Leonard E. Read (1898-1983) who described the concept in 1960 article Good and Bad Monopoly
There are two ways to attain an exclusive position in the market, that is to say, there are two ways to achieve monopoly. One way is not only harmless—indeed, it is beneficial; the other is bad. The beneficial way is to become superior to everyone else in providing some good or service. The bad way is to use coercive force to keep others from competing effectively and also from challenging one’s position. Rise above others by excellence, or hold others down by coercive force!This visionary article was written 54 years before From Zero to One publication.
Here are a few examples of good monopolies which turned out to be a mixture with bad monopolies
Lyft and Uber
Thiel writes on page 103 of his book:
We read in New York Times today:
Uber tried to eviscerate its rival, Lyft, by aggressively poaching drivers, sabotaging its fund-raising and ordering and canceling more than 5,000 fake rides.
Then last week, a media storm was set off when an Uber executive revealed that the company had spied and tried to dig up dirt on journalists who wrote negative things about it.
And, the cherry on top, the company admitted it could geo-track any Uber consumer with an internal tool called “God View.”Peter Theil is an investor in Lyft and declared that Uber is “the most ethically challenged company in Silicon Valley,”
So we distinguish two Peter Theils: (1) Peter Theil the thinker and insightful author and (2) Peter Theil the businessman and entrepreneur who must defend his business and do whatever it takes to succeed.
The book says:
This not always possible, and we read today. Mike Kail left Netflix in August, and took a position as CIO in Yahoo reporting directly to CEO Marissa Mayer. Immediately Netflix sued him for fraud.As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
... revealed that it had manipulated the news feeds of over half a million randomly selected users to change the number of positive and negative posts they saw. It was part of a psychological study to examine how emotions can be spread on social media.Why not. Facebook has 1.3 billions guinea pigs, you and I, which is 20% of the world population
The bad monopolies would not stop in using confidential information against individuals who cross their interests - like investigative journalists, bloggers, or executives from rival companies. In a blog in New Times
The idea of a showing up to a meeting with a JPMorgan executive and hearing, “I notice you were late on your mortgage payment last month,” is just unfathomable, so great are the protections in the financial industry between access to consumer data and the executives and public relations people who tend to deal with reporters. The same could be said for any number of other industries where big companies have access to private data.The good monopoly concept from Zero-to-One book still stands. Before Peter Theil's, we were fighting to neuter monopolies. Now we watch every excess monopolistic practice and try to perform a kabbalistic repair (Tikun Olam, the repair of the world) and keep the goodness without destroying the good monopolies.