When Do Certain Companies Underplay The Power They Hold And Why Is It Important To Understand?

“Have more than you show, Speak less than you know,” said William Shakespeare. Impressive statement, right? It feels right and makes you feel kind of humble while you still possess the power. In startup domain, it is the opposite of this quote that is in trend. Many a times a naive entrepreneur is seen prone to this kind of herd mentality. Do you ask, when? 

Here it is:
  • While underestimating its competitors
  • While belittling the competitors while pitching to investors.
  • While claiming that there is no competitor in the market at all.

Competition is a very subjective term and varies on even very minute details. Your product could be 10x better than your competition but why harm yourself just for boasting or in many cases due to lack of market knowledge.  

Let’s cut to the chase and understand why certain companies underplay the power they hold with the help of an excerpt from Peter Thiel’s book “Zero to One”  

Peter Theil writes, “What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn’t enough—you also need to capture some of the value you create.”

“This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google , which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined.

The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.”

Perfect competition is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.”

“The opposite of perfect competition is monopoly. 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.”

“Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let’s say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo! , have about 19% and 10%, respectively.) If that doesn’t seem dominant enough, consider the fact that the word “google” is now an official entry in the Oxford English Dictionary—as a verb. Don’t hold your breath waiting for that to happen to Bing.”

Conclusion:

When one is in perfect competition, the company tries to flaunt no matter what it has or has not whereas as a monopoly underplays the power it holds. I hope you got a better insight into the subject. Peter Thiel has his thoughts, please share your, whether you agree with his notions or not and how.

Main Image: ©Tech Animations

Piyush Sharma Written by:

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