You have probably often heard that competition is the driving force behind progress. Is this statement always true? Until recently, I believed so. However, in the book by one of the creators of PayPal, Peter Thiel, the author demonstrates that this belief is often mistaken. While I usually express my own opinions in my articles, this one will be largely based on quotes and arguments from Peter.
Perfect competition is both an ideal and a basic state in the simplest model of economics. The so-called ideal market reaches equilibrium when the supply from producers matches the demand from buyers. Companies in a competitive market do not differ from one another; they sell the same products. Since no company has power over the market, all of them are forced to sell their goods at the price dictated by it.
Monopoly is the complete opposite of this scheme. While a firm operating in a competitive environment is compelled to sell its product at the market price, a monopoly, having control over the market, sets its own price. Since it has no competitors, it produces the product in quantities and sets a price to maximize its profit. For an economist, all monopolies are the same—regardless of whether it involves a company that uses unscrupulous methods to eliminate competitors, one that holds a license granted by the government, or one that occupies its unique position through its own innovative developments.
Monopolies drive progress forward, as the prospect of earning monopoly profits for many years and decades serves as a powerful incentive for innovative practices. Once a company occupies a monopoly position in the market, it continues its innovative activities. Monopoly profits allow it to make long-term plans and finance ambitious research projects that companies struggling in the throes of competition can only dream of. So why are economists so obsessed with competition? Why do they consider it the ideal state of the market? This is merely a historical relic. Economists model their calculations on the ideas of 19th-century physicists, treating people and companies as interchangeable atoms, denying their uniqueness. Their theories describe the ideal equilibrium of perfect competition, not because it represents the ideal of business, but because this state is easy to model. However, it is worth remembering that the state of prolonged equilibrium predicted by 19th-century physicists is one where energy is distributed in strictly equal proportions and gradually dissipates. This state is also known as the heat death of the universe. Regardless of whether you grasp the basics of thermodynamics, you must agree that this is a strong metaphor: in business, equilibrium leads to stagnation, and stagnation means death.
Competition is characterized by the absence of profits, a lack of any significant differences between market participants, and a constant struggle for survival. So why is competition considered more meaningful? The answer is simple: competition is not just an economic concept, not merely a minor inconvenience that individuals and companies face when entering the market. First and foremost, competition is an ideology that permeates society from top to bottom and distorts our perception. We exalt competition, sincerely proving its necessity and adhering to its dictates. As a result, it becomes a trap from which we cannot escape: the more actively we participate in the competitive struggle, the less we earn.
Imagine a play titled "Gates and Schmidt," a script inspired by "Romeo and Juliet." The Montagues represent Microsoft, while the Capulets symbolize Google. Two equally respected families, led by great computer geeks, are doomed to clash with each other due to their own similarities. However, as in any good tragedy, the conflict seems inevitable only when we assess it in hindsight. If you think about it, avoiding the conflict wasn't all that difficult. These families originated far from one another. The Montague family focused on developing operating systems and office applications, while the Capulet family created a search engine. What could they possibly have to fight about? Quite a lot, if you think about it. When both families were just starting their businesses, they could easily afford to ignore each other and grow independently. But as they became more powerful, they began to watch each other more closely. The Montagues grew increasingly concerned that the Capulets were preoccupied with the existence of the Montagues. So what was the result? A showdown between the Windows and Chrome operating systems, the Bing and Google search engines, the Explorer and Chrome browsers, the Office and Docs office applications, the Surface and Nexus standards. The war took children from the Montague and Capulet families, while for the corporations Microsoft and Google, it cost them market dominance: in the end, Apple emerged on the scene and triumphed over both. In January 2013, Apple's market capitalization was $490 billion, while the combined market cap of Google and Microsoft was only $466 billion. Just three years earlier, Microsoft and Google individually were worth more than Apple! War is an expensive affair.
In some cases, competition simply appears absurd and distracts participants from their goals. Let’s recall the truly Shakespearean conflict between Larry Ellison, co-founder and CEO of Oracle, and Tom Siebel. Tom was the top salesman for Oracle software and an Ellison protégé—until he left the company in 1993 to start his own firm, Siebel Systems. Ellison hated Siebel for what he sincerely considered an act of betrayal. Siebel, in turn, felt disgust for his former boss for having spent many years in his shadow. The two were very similar—tough and aggressive Chicago natives who loved the art of sales and hated losing—and this only fueled their mutual animosity. Throughout the second half of the 1990s, Ellison and Siebel spent their time trading blows. At one point, Ellison even sent trucks full of ice cream bricks to Siebel's headquarters, trying to convince the employees to abandon their boss. Each brick was wrapped with the message: "Summer is coming! Oracle is here! Let your day and your career shine brighter!" Strangely enough, Oracle deliberately made enemies for itself. Ellison's theory was that it was good to have an enemy large enough to seem like a threat (thus motivating the staff), but not so large as to actually threaten the company. Therefore, it is quite possible that Ellison was very pleased when, in 1996, a small database company, Informix, put up a billboard near Oracle's headquarters in Redwood Shores that was directed against the famous corporation. Another billboard, this time on Highway 101 heading north from Oracle's headquarters, read: "You just passed Redwood Shores. So did we!" Oracle responded with a billboard suggesting that the programs developed by Informix crawled slower than snails. After that, Informix's CEO, Phil White, decided to get personal. Learning that Ellison was a strong proponent of Japanese samurai culture, he rented another billboard, placing the Oracle logo crossed out by a broken samurai sword. This image was not aimed against Oracle as a company, nor did it concern potential consumers. It was a personal attack against Ellison. However, it seems that White spent too much time and energy battling competitors; while he was eagerly coming up with billboard ideas, Informix was rocked by major financial scandals, and soon White found himself in federal prison on charges of securities fraud.
If you can't beat a competitor, merging with them might be the best solution. I founded the company in 1998 in partnership with Max Levchin. By the end of 1999, when we developed the PayPal software, Elon Musk's company X.com was already nipping at our heels. The program created by X.com mirrored ours down to the smallest details. By the end of 1999, we were in a state of total war. Many employees at PayPal were working up to 100 hours a week. Undoubtedly, this was unproductive, but real productivity was of no concern; the main goal was to defeat X.com. In February 2000, both Elon and I were much more worried about the rapidly inflating dot-com bubble than about our mutual competition: the impending financial crash threatened to bury both our companies before we could figure out who was going to win. So in early March, we met on neutral ground—a café located equidistant from both offices—and agreed to merge on equal terms. Even after the merger, it wasn't easy to calm the tensions, but compared to the previous issues, this seemed trivial. As a united team, we were ready to successfully weather the dot-com bubble burst and build a thriving business.
By avoiding competition, you can create a monopoly. But even a monopoly becomes a truly great business only if it can last long enough.
Conclusion: I can't say that I fully agree with the author's statements, but this is a rather interesting perspective, especially as it is backed by real examples and personal experience. Therefore, competition is not always the driving force behind progress. As we have seen above, sometimes competition merely hinders the development of progress, as market participants focus on fighting each other more than on making scientific discoveries.
