Innovation and monopolies

Is there a link between innovation and being a monopoly? Without data this is only going to be hypothesizing, but here goes.

Quite the contrary, I would argue, small firms are more incentivized to innovate to gain reputation, whereas monopolies tend to cash in on it.

Big, long-term plans can certainly be fulfilled by collaboration between many companies and/or agents, because at each step in the way, more value is added.

Take the story of a pencil:
  • Someone mines and sells graphite for profit.
  • Someone cuts timber for a profit.
  • Someone extrudes graphite lead for a profit.
  • Someone shapes pencil wood encasings for a profit.
  • Someone puts the lead in the wood and sells it to you for profit.

No "grand" planning was needed. Perhaps graphite lead is also used directly by artists, or maybe new kinds of mechanical pencils appeared, reducing demand for wood encasings in favor of plastic/metal. Everyone acting at every level has the incentive to innovate, and perhaps are better suited to it, since they can focus on their own job. Monopolies rely on managers instead.

The same can happen for lots of things. Did you make something you don't know what to do with? Sell it to whoever buys it. The coal miner doesn't know or care whether his coal will become a pencil or electricity. He just cares that he's making a profit - aka, his work is deemed useful and encouraged by his clients.
Did you research something that can offer competitive advantage? Become a consultant. Did you notice something other people find hard to do but you can do easily? Start doing it and selling it to them.

A monopoly is often blind to things like these, not noticing that people work on useless things (Google employees manually editing maps, for example (I just invented this, it isn't true)). The market would quickly replace them with people who can do it more cheaply/efficiently (say, freelancers instead of using $150k/year employees). The market is much more modular than a monopoly.

Sure, Google for instance innovates. But does, say, Comcast innovate? Comcast just uses lobbyists to make sure people can't compete with them. The only innovation is in convincing the government to make laws in its favor and in manipulating the masses.

And that's the only advantage of a monopoly - being able to deal with red tape. Because you need large groups of people to become a majority, and lots of money to lobby in favor of your laws - laws against potential threats to your insane profit margins, laws friendly to the "competitors" on whose turf you secretly agree not to step.

Some monopolies tend to have a global reach (like Google or Coca-Cola), which means they do well irrespective of laws - perhaps they're better.
Others (like Comcast or Electrica) do well strictly in their own country, probably because they control a large amount of what is going on in it (like owning the media and manipulating people, or having relations with certain well-placed officials).

This is my brain dump. It is by no means final, just my belief so far. Please attack it! :)

No comments:

Post a Comment

Share your insights!