On a different note, it's interesting how the presence of the giants affects the startup world. I am reminded of a passage from No Exit by Gideon Lewis-Kraus [0]:
'All the while, Martino’s ultimate warning—that they might someday regret actually getting the money they wanted—would still hang over these two young men, inherent to a system designed to turn strivers into subcontractors. Instead of what you want to build—the consumer-facing, world-remaking thing—almost invariably you are pushed to build a small piece of technology that somebody with a lot of money wants built cheaply. As the engineer and writer Alex Payne put it, these startups represent “the field offices of a large distributed workforce assembled by venture capitalists and their associate institutions,” doing low-overhead, low-risk R&D for five corporate giants. In such a system, the real disillusionment isn’t the discovery that you’re unlikely to become a billionaire; it’s the realization that your feeling of autonomy is a fantasy, and that the vast majority of you have been set up to fail by design.'
If you consider markets to be an optimization strategy for resource allocation, I think an industry being owned by a small number of successful companies represents a signal that a local maximum has been reached. That's assuming there aren't artificial barriers put up to prevent competition--there often are and I consider a patent an artificial barrier.
If your mission is to generate billions of dollars of value where there was none before, a mature industry is not where you should be looking. "The next google" is not a search engine company as we understand the concept today.
It's not that consolidation makes it hard to compete, it's that the value has fundamentally been wrung out already. In fact, that "value being wrung out"/profit-growth-at-the-top-of-the-sigmoid-curve is what drives consolidation in the first place.
It isn't.
Briefly, with (textbook) perfect competition, profit maximising firms will price their goods at marginal cost and produce a socially optimum amount.
A company with a monopoly will sell at a higher price and sell less than the socially optimum amount.
There are also dynamic effects:competition acts as a spur for innovation.
This is the text book argument against monopolies.
But if everyone is essentially running the same strategy, the biggest player will win by force of momentum. (See also the reasoning behind dozens of copycat food delivery startups trying to "growth hack".)
Either way, you end up with a few players dominating the market with their locally optimal resource allocation.
This model is called "dominant firm with competitive fringe."
Like in many technology fields, you have high fixed costs that are distributed over all of your customers, and economies of scale. It is much cheaper for Google to add 10 000 new servers to their datacentres, compared to starting up a new hosting company, building small datacentres on five continents, and rewriting all the software that Google Cloud offers on top of servers.
So seems plausible that a highly concentrated industry with a few big companies each having >10% market share is more efficient (and can offer lower prices) than a market with thousands of small artisanal hosting companies with <0.1% market share.
2 There are lots of businesses with high fixed costs and low marginal costs - tech is not that different from others in that regard.
3 Tech, does have one key difference - the network effect. In other words, a company's history in building up a large network of customers may matter more than how efficiently it operates today
4 The dynamic effects of concentrated industries (as I mentioned earlier) are complicated. There is no guarantee at all that the result will be optimal.
5 We have nice examples of this in collusive behaviour by the major tech companies in their hiring policies.
6 There are other alternatives to the status quo than, as in your example, of reducing companies to one hundredth of their former size.
> That's assuming there aren't artificial barriers put up to prevent competition
Me> If you consider markets to be an optimization strategy for resource allocation ...
Optimization strategy as mathematicians use it means something similar to "optimal resource allocation" as economists use it, but the tools and thought processes are very different. For instance, economists are often not aware of the concept of "local maximums" vs "global maximums"--that in large state spaces, like an economy, there probably is no globally optimal allocation. They're mostly not aware of what "state spaces" are or what logistic regression is. But yes, I think of markets as an optimization algorithm for resource allocation, not dissimilar to gradient descent.
Me> ... an industry being owned by a small number of successful companies represents a signal that a local maximum has been reached. That's assuming there aren't artificial barriers put up to prevent competition
For my specific point of "concentration points to an industry local maximum", "law of diminishing returns" is probably the most applicable concept taught in econ 101, but I'm saying more than that. "Law of diminishing returns in mathematical optimization" is a real thing, I didn't make it up. It applies to many complex systems, an economy being one.
So yeah, I stand behind what I said; I think I understand econ just fine; maybe in the future you can just open with your point instead of being a dick, it saves time.
Companies with monopoly power do not allocate resources optimally (for society) because they choose to optimise resources optimally for themselves.
Because they have pricing power, profit maximising behaviour does not allocate resources optimally.
Why do you think that?
I mean, easiest example is probably cars. Sure, Elon started Tesla, but they're tiiiiiny compared to other auto manufacturers. They're also doing some things very differently, so it's not quite the "same industry" now. In 1908 there were 253 auto makers, in 1929 only 44, and now there are ~10? So what happened?
There was an initial boom (lower half of the sigmoid curve/hockey stick), followed by lots of competition from startups (because they can compete on method there's some nice profit margins there), followed by brutal competition and diminished profit margins (as best method is adopted and firms sell against each other, things get cheaper), followed by consolidation (because when profit margins are shrinking, next step is consolidation and "belt tightening"), followed by an industry no one wants to touch anymore (because it's run by a bunch of idiot middle managers). If you wait long enough, those idiots eventually miss some major developments and this creates a new opportunity to do things very different (eg Tesla). Or nothing really changes, as in the case of air travel.
Also, history of all kinds of consumer electronics.
Also, how many companies on the fortune 100 50 years ago are still on it? Nothing lasts. If you're lucky and successful, you eventually hit the top of the sigmoid curve.
Also, software (yes, it's true)
What industry does this trend not apply to? What's the argument for "I think an industry being owned by a small number of successful companies represents a signal that a local maximum has NOT been reached (there's tons of opportunity there, just have to unlock it!)"?