The business version of our paradoxical question is why isn't a large company building its image? This question is tougher than it looks, because your company can create more value even if it is undervalued. Simply creating value isn't enough—you also need to own some of the value you create.
This means that very big businesses can also be bad businesses. For example, American airline companies serve millions of passengers every year and earn hundreds of billions of dollars. But in 2012, when the average airfare was $178, airlines were only making a profit of 37 cents per passenger. If we compare them with Google, which makes less money but more profit. Google earned $50 billion, or 21% of its revenue, in 2012, compared to airlines' $160 billion in revenue in 2012 – 100 times the airline industry's profit margin. Google alone makes so much money that it is more than three times the profit of all the airlines in America combined.
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 position in Economics 101. When a competitive market is balanced, producer supply and consumer demand are equal. In a competitive market, each company sells its products at the same price. Since a firm has no market power, they have to sell their goods at market determined prices. If there is money to be made here, new companies will enter the market, increase supply, drive down prices, and thus eliminate the profits they were previously making. If too many firms enter the market, they will suffer losses, some will close, and prices will fall back to lower sustainable levels. Under perfect competition, no firm can make economic profits in the long run.
Monopoly is the exact opposite of perfect competition. A competitive company has to sell its goods at a price determined by the market, but a monopoly owns the market, so it sets its own prices. Since there is no competition, the quantity and price of its products remain in harmony, which always keeps its profits high.
To an economist, every monopoly looks the same, even though it acts according to the rules, prudently eliminates rivals, and carves its own way by staying at the top. In this book, we're not talking about illegalities or government favoritism: by "monopoly", we mean a company providing a good or service that no one else can provide in the near future. Go to 0 to 1 Google The best example is that it has had no competitors since the early 2000s in the field of search engines, it is certainly very different from Microsoft and Yahoo!
Americans have given us the myth of competition along with saving us from socialist thinking (thinking about earning). In fact, capitalism and competition are the opposite. Capitalism is based on the accumulation of capital, but under perfect competition all profits are lost. The lesson for entrepreneurs is clear: If you want to build a sustainable valuable business, don't build an already defined commodity business.
How monopolitic is the world really? How competitive is it really? It's hard to say, because our general thinking on these matters is muddled. To an outside observer, all businesses may appear similar, so it's easy to spot only minor differences between them.
But the reality is much more binary than that. There's a big difference between perfect competition and a monopoly, and most businesses are usually closer to one than we usually realize.
The fallacy comes from the bias of describing market conditions in multiple ways: both monopolists and competitors are encouraged to bend toward the truth.
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