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Comment by majewsky | Hacker News Reader

Why? (Honest question.)

You need to check out perfect competition, monpoly and oligoply.

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.

Why can't there be both perfect competition and one company that serves most of the market? If one company is better at resource allocation than all others, their market share will probably outgrow the competition, until someone else figures out how to do it better.

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.

>Why can't there be both perfect competition and one company that serves most of the market?

This model is called "dominant firm with competitive fringe."

But we're not talking about a monopoly here. For example for cloud hosting, it's competition between Amazon, Google, Microsoft, OVH, and perhaps a few more "big" players.

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.

1 I think we all understand that there are are degrees of monopoly power:one company might be a pure monopoly, a few big players (known as an oligopoly) can behave cooperatively (like a monopoly) or engage in price wars (with the objective of driving out the weaker player).

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.

He specifically said

> That's assuming there aren't artificial barriers put up to prevent competition

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