> Free markets have a well established, well understood "tendency towards monopoly."
There is actually a lot of debate about what causes this.
The argument on one side is, of course companies unconstrained by laws would collude with each other to fix prices etc.
The argument on the other side is, as soon as they start doing this it becomes profitable for someone else to enter the market. Is the cartel charging $40 for something that should cost $20? Go around to all the customers and tell them you'll sell to them for $25 tomorrow if they agree to a long-term contract today to buy from you at that price. Then you have enough guaranteed customers to pay off your new factory, so you can build it without being bankrupted by the incumbents slashing prices. And because anyone can do this, the incumbents don't collude to charge $40 to begin with because they know they would invite it.
Under this theory, monopolies form because of regulatory capture. The large incumbents don't want to compete in a commodity market, so they pay off the government to erect barriers to entry. Then once no one new can enter the market, they can buy each other or collude or use conscious parallelism without risk of new competitors.
It seems to me that it's kind of both. Without the second one, companies would rarely if ever get big enough that no one could compete with them. But once they are, somebody's got to break them up.
Most importantly, we need to fix the regulatory environment so that it facilitates rather than impairs competition, or it will just happen again.
Entering a market is not free. Suppose you want to start a chip business because the small handful of existing manufacturers have formed a cartel. To be competitive you need hundreds of billions in starting capital and you must be able to survive price dumping longer than the members of the cartel.
This is the purpose of the contract. You have to spend $200B, so you go to several large customers and sign contracts contingent on your ability to supply which will guarantee you $300B in future revenue. Now you can raise funding against the guaranteed revenue and the dumping can't change that because the contracts are already signed.
To prevent this the incumbents could go in and undercut you before you actually build anything, but that's not much of a cartel anymore then. Anyone could "compete with them" just by threatening to raise funding.
> Go around to all the customers and tell them you'll sell to them for $25 tomorrow if they agree to a long-term contract today to buy from you at that price.
This argument seems tenuous. I see the customer's risk. Where is your risk?
A source with details of this argument would also help. If you have are an economist, please mention it - I'll take the argument more seriously on your say-so.
> This argument seems tenuous. I see the customer's risk. Where is your risk?
The purpose of the contract is to reduce your risk. The original problem was that if you built the factory intending to sell for $25, the incumbents could reduce the price to $20 or $15, i.e. below your cost. Then you could never recover your initial investment and the high probability of that happening would deter you from entering the market to begin with.
The customer takes the risk because if you don't enter the market, they're paying $40 to the incumbents.
> If you have are an economist, please mention it - I'll take the argument more seriously on your say-so.
Professional economists have a reputation that compares disfavorably with psychics and astrologers. If an economist gives you your horoscope, make sure to get a second opinion. If the second opinion is from another economist, expect it to be different.
"The track record of economists in predicting events is monstrously bad. It is beyond simplification; it is like medieval medicine." -Nassim Nicholas Taleb
The sector employing the largest number of economists is universities. The second largest is banks. Banks are the things that keep blowing up the economy.
They keep buying them but people keep making more of them.
Where this serves as an instance of irrationality is that the investors in Match keep allowing them to spend money acquiring more products to ruin, as if This Time Things Will Be Different. What they ought to do is spin off what they already own with the hopes that someone less incompetent could potentially un-ruin some of them.
Match.com investors are very clever and rational. Match.com business model is clear. Milk users for money with market segmentation. Building a good product will not make them any money. It will financially ruin them.
The core functionality of these apps is very cheap to build, ideally these apps should be near free.
What match.com does is capture the network. When a new cheap and better network appears, they offer the founders the kind of cash that simply cannot be earned by running their original network. For eg, okcupid was free. There was no way to make money from it. And then as per their plan - they ruin it.
So why are VCs not lining up to create a dozen new dating sites and take all of Match Group's buyout money?
1) Make a non-ruined dating product.
2) Get users. Should be easy because the incumbents are intentionally ruined and turnover is high.
3) Profit. (Match Group buyout)
Worst case they run out of money and you have a successful dating product which continues to siphon their users because it's the non-ruined one.
Not sure why it's so hard to make money from something like that. Sell flowers and chocolate and movie tickets to a captive audience. Do promotions for entertainment venues. Be Groupon for dating stuff.
You can't click your fingers to produce a dozen new dating sites every year because of network effects. There can be at most one new successful dating site every year, which the 30B$ match group can buy out for 300M$.
> There can be at most one new successful dating site every year, which the 30B$ match group can buy out for 300M$.
Then why aren't they asking for more money? Match Group to maintain their $30B enterprise has to buy you out or you by being a non-ruined dating site will destroy their entire company by out-competing them. That should be worth substantially more than 1% of the company. (It also seems to be that it is; Tinder got $3B.)
Match Group owns more than 45 subsidiaries. Obviously the size of the network necessary to be viable would support more than one other challenger. But if there were 15 each of size similar to their own subsidiaries, they'd still have to buy all of them or whichever ones they didn't buy would continue to eat their market share by being non-ruined, and then have to be bought for a higher price later.
I am not really sure where you are going with this, but the reality speaks for itself.
Match makes shitty products optimized for revenue. Good dating products optimized for users have low revenue and valuation. Match acquires virtually all of them and keeps its monopoly alive and thriving.
The premise isn't that someone with a lot of money can't buy up all the existing participants in a given market. It's that if they do, new competitors will keep appearing. Which we see happening.
The question is, how does that turn out? The theory says people should keep creating dating products to make Match buy, because it costs less to do than they have to pay. That doesn't mean it happens instantaneously. It doesn't mean they can't buy some of them. But it's an evolutionary process. They buy the ones they can buy, until one shows up they can't. Maybe because there are too many of them. Maybe one gets too big too fast. Maybe the owners are some stubborn purists who refuse to sell. It hasn't happened yet doesn't mean it won't.
Apparently Facebook is getting into the dating game. They already have the network effect and Match doesn't have the money to buy them. Facebook sucks, but now where's your monopoly?
You are arguing using a hypothetical future which doesn't even remotely exist.
And what's to stop FB dating from sucking. So the final solution is to replace one monopoly with an even bigger one? That's just talking out of both sides of the mouth.
> The argument on the other side is, as soon as they start doing this it becomes profitable for someone else to enter the market. Is the cartel charging $40 for something that should cost $20? Go around to all the customers and tell them you'll sell to them for $25 tomorrow if they agree to a long-term contract today to buy from you at that price. Then you have enough guaranteed customers to pay off your new factory, so you can build it without being bankrupted by the incumbents slashing prices. And because anyone can do this, the incumbents don't collude to charge $40 to begin with because they know they would invite it.
The Phoebus cartel[1] existed for quite some time, and its operation contradicts this argument. They captured the world-wide light bulb market with agreements between manufacturers. It took WWII to put a dent in it.
Today, you can look at the price fixing that happens in the mobile app store and payments markets. 99% of each market is dominated by a two company duopoly. Prices in those markets have remained steady for over a decade, and any changes to pricing and terms are adopted in lockstep between Google and Apple. They've effectively captured 15% to 30% of all revenue collected in mobile apps.
Neither cartel relied on regulatory capture, but both cartels recognized that without collusion, it would be a race to the bottom if they compete on price, so they became complicit in ensuring that doesn't happen. It only costs so much to make a light bulb, download an app or process payments.
> The Phoebus cartel[1] existed for quite some time, and its operation contradicts this argument. They captured the world-wide light bulb market with agreements between manufacturers. It took WWII to put a dent in it.
They had intended the cartel to last for thirty years (1925 to 1955). The cartel ceased operations in 1939 owing to the outbreak of World War II.
So they didn't actually last all that long.
Both organisations co-ordinated the trading of patents and market penetration.
Patents are a government-granted monopoly.
> Neither cartel relied on regulatory capture
This is not remotely true for Apple and Google. The laws are written to allow them to exclude competitors. Why doesn't Amazon buy a bunch of iPhones and modify the software to include the Amazon App Store and then sell them to customers? Laws prohibit this.
And then it's the same situation again -- copyright too is a government-granted monopoly. Finding that a monopoly exists where the government prohibits anyone from competing with them was the original theory. Let's have 14 year copyrights again and see how the monopoly holds up when Apple has to compete with a fork of the original iPhone which would be out of copyright by now.
There is actually a lot of debate about what causes this.
The argument on one side is, of course companies unconstrained by laws would collude with each other to fix prices etc.
The argument on the other side is, as soon as they start doing this it becomes profitable for someone else to enter the market. Is the cartel charging $40 for something that should cost $20? Go around to all the customers and tell them you'll sell to them for $25 tomorrow if they agree to a long-term contract today to buy from you at that price. Then you have enough guaranteed customers to pay off your new factory, so you can build it without being bankrupted by the incumbents slashing prices. And because anyone can do this, the incumbents don't collude to charge $40 to begin with because they know they would invite it.
Under this theory, monopolies form because of regulatory capture. The large incumbents don't want to compete in a commodity market, so they pay off the government to erect barriers to entry. Then once no one new can enter the market, they can buy each other or collude or use conscious parallelism without risk of new competitors.
It seems to me that it's kind of both. Without the second one, companies would rarely if ever get big enough that no one could compete with them. But once they are, somebody's got to break them up.
Most importantly, we need to fix the regulatory environment so that it facilitates rather than impairs competition, or it will just happen again.