Monopolies...

I am copy-pasting a series of discussions a group of our friends were having. The argument is still underway...

Anand Prabhu wrote:

guys,

a nice article.. i agree with this one.

http://www.cooltechzone.com/index.php?option=content&task=view&id=1645

take a look.

Cheers,
Anand



Gokri wrote:

Hi all,

I was interested in MS and monopolies in general. Abt whether it is wrong to love MS, I donno. But monopolies are not good for the customer for two reasons.

1) They dont settle at the lowest price for the customer
2) They do not drive the industry forward, letting the customer pay for inefficiencies.

I got interested and worked some numbers to show why monopoly ends up bad for the customer. I put the marginal cost as zero (neglible, storage medium costs) since there are no production costs once Windows is developed. Hence the only cost is initial.

The same logic works for any monopoly even if the production costs are constant: the company will stop producing beyond a point to keep prices high. Though the competitive price would have been lower. Microsoft could sell more copies of windows if it chose to, but it has kept the prices high for the reason shown in the xl file.

All said and done, monopoly behaviour is exhibited by every first entrant. And I would be very happy to be a monopolist myself :)

But it reduces the pressures on R&D and innovation. We still use the same user interface as did Win95. Also, the monopolist does everything, including taking losses in the short term to bleed a new entrant who obviously cannot stand it for long. Hence the curbs on monopolistic tendencies in the US through Anti trust laws.

And needless to say, the senti part near the end - 'brought computing to ordinary folks like you and me' and all, come on, whom are we kidding ? Its every businessman's dream to end up as a monopolist. I admire Gates' acumen in forging the industry to get that.

Regards,
Gokulakrishnan S



Parthi wrote:
Good one indeed!



Baghu wrote:

The numbers are just too trivial to be correct , Gokri. A lot of things are wrong.1. In a lot of products , esp in software products, the marginal cost is not so much dependent on the cost of production but the cost of selling it. You have completely ignored the cost marketing and the sales force it takes to sell an additional unit, hence all your second column numbers are wrong. Infact the cost of selling one additional unit is known to exponentially increase in certain cases( even when cost of production is on the decreasing trend).2. Also I strongly disagree with your view that monopoly implies less emphasis on R&D. The monopolies infact face a stiffer chanllenge of showing strong YOY numbers. Because they get to grow big soon, the effort it takes to grow even marginally bigger is enormous. 3. Also on your point that monopolies don't settle for the lowest price for the customer - Nobody is doing social service. No market will stay a monopoly for ever ( In fact I always advocate that monopoly is just one stage in the process of evolution of a market), hence it is imperative that you make hay while sunshines. Now, that said, there are sometimes more than enough reason for settling for lower prices, depending on how important this particular customer is for your future ideas. This, also because you have worked so hard to be at a point of sale to a customer, you would not want to give that all away, you want him to buy all the other things you have made! This is called CUSTOMER REUSE ( as opposed to code reuse).Talking about Microsoft, I, for one believe that it has done so far so well, mainly because of its innovative sales and marketing strategies (which includes pricing and bundling) more than anything else. But even this giant is having a hard time with XP adoption levels, raising question or two about prospective Vista adoption levels. My guess is that XP sucked the most marketing dollars, and earned the least ROI, of all windows versions, so far (just guessing though).Also just read somewhere: Linus trovalds once said about Bill Gates, "After meeting him, I came to know that I knew nothing about technology and he knew nothing about business" :)

BAghu.



Murugu wrote:

Good analysis da BAghu.I second ur opinions.




Gokri wrote:

Hi rams,
M. cost is manufacturing cost. M. revenue is marginal revenue, the revenue one gets by selling the last product produced. Benefit to the seller is the total benefit accrued to him, (Total Revenue - Total cost) His gross profits, so to say. I shudnt hav been called it Marginal, its total Benefit. In competition, new entrants will come in as long as this is +ve.
Baghu,
1) The nos I sent were for demonstrating a monopoly business which makes an initial investment of 1000 Rs and sells goods at 1500 etc.. Obviously Not Microsoft ! True the marketing and sales expenses would be there. My example was overly simplified. But with any nos thre, the social inefficiency of monopoly would hold. Read these links which explain:
These links would help:
http://www.econlib.org/library/Enc/Monopoly.html - very good article by a famous economist, Stigler.
http://ingrimayne.saintjoe.edu/econ/Monopoly/Overview15mi.html
> 2. Also I strongly disagree with your view that monopoly implies less> emphasis on R&D. The monopolies infact face a stiffer chanllenge of showing> strong YOY numbers. Because they get to grow big soon, the effort it takes> to grow even marginally bigger is enormous. Do they have a stiffer challenge to show YOY nos, when they have no competiiton to compare to ? and
If the effort to grow marginally bigger is enormous when u are monopolist, you would shut shop and run if there is cut throat competition ! Though some economists argue that monopoly is beneficial for R&D since nobody reinvents the wheel, it has not been accepted. There are some misconceptions about R&D and microsoft like this one:
http://www.thehoya.com/viewpoint/111699/view4.htm
But, plz see no R&D is big enough that it hurts society to be reinvented twice. Eg. Boeing and Airbus, The only two commercial aircraft manufacturers. Both are on their toes developing newer aircraft because of the other. New aircraft design techniques are reinvented twice on either side of the Atlantic.. also both have partnered and set up Joint ventures to develop some technologies. This has worked. Intel has innovated to keep ahead of its competition.
And its easy to be content with today's technology. Economists say perfect compeititon is the best driver of R&D and innovation.
> 3. Nobody is doing social service. No market will stay a> monopoly for ever ( In fact I always advocate that monopoly is just one> stage in the process of evolution of a market), hence it is imperative that> you make hay while sunshines.
Totally agree. Am in business, not an NGO. thats why I want to be a monopolist.
> Now, that said, there are sometimes more than> enough reason for settling for lower prices, depending on how important this> particular customer is for your future ideas. This, also because you have> worked so hard to be at a point of sale to a customer, you would not want to> give that all away, you want him to buy all the other things you have made!> This is called CUSTOMER REUSE ( as opposed to code reuse).
These kinda customers you have to agree will have to be a small chunk of your business, small enuff not to hurt your profits. And in any case, the monopolist wouldnt have to sell for less because the essence of being a monopolist is that there is a demand at a price and you are the only guy producing that product.
Read the Stigler article closely... would clear up misconceptions about monopolies. The sheer size and achievements of any monopolist (e.g. Indian Railways) overshadows the inefficiencies to society.
There are no 'evil monopolists', only good businessmen. Would say Gates knew a lot more about the s/w business than Linus Torvalds knew about the kernel.
Regards,
Gokulakrishnan S



Rams(I) wrote:

This is turning out to be an interesting affair. Regarding Baghu's comments>"Also I strongly disagree with your view that monopoly implies less> emphasis on R&D. The monopolies infact face a stiffer chanllenge of showing> strong YOY numbers. Because they get to grow big soon, the effort it takes> to grow even marginally bigger is enormous"I don't think so. The emphasis on R&D will be significantly lesserwhen u r a monopoly than when u r in perfect competition. Best knownexample is IE. There was no innovation in IE when it was factuallyestablished that 99% of the computers in the world use IE as theironly browser. . But Ican confidently state that it was only after Firefox's encroachmentinto the browser market that IE7 team was built and now IE7 has beenrolled out with Vista.R&D will still be there in a monopoly, so as to promote newer featuresand products, but the intensity wouldn't be the same as when you arein perfect competition.Another example I can quote is the shattering down of the monopoly inthe Indian airways by the privatisation adn consequential opening upof the market for the private players. The rest is history. You cansee the dramatically spiralling down air fares. Though this exampledoesn't have much with R&D in particular, it does deal with monopolyand the customer benefit. This ratifies Gokri's stand that customersbenefit from the minimum prices in a perfect competition.




Murugu wrote:


There can be quite some exceptions to this as well. Take the case of Intel R&D. Intel has a share of 84% (AMD -15%) inthe overall processor market making it a monopoly, but it doesn't meanthat it does not invest in R&D. Infact Intel is know to be one ofhighest investors in R&D every year. R&D is the basis for a technology company. You need to invent newthings every now then, to make sure that u grow every year. YoY newtechniques and processes make the cost of the processors coming down,which is ultimately going to help the customer.For eg: When we bought computers in our college days, the old P3ones,used to cost around Rs.50K. Now, P3's are out of market. Allthese changes happened in over 3 years. Now u get very good systemsfor Rs.20K. Is this not a benefit for the customer?? How will this bepossible without R&D?If Intel had thought against R&D, it wud have just had the P3 andpolished it every now and then, and tried to sell it at the same cost.I'm sure even then, it wud have out-beaten AMD. But, Intel didn't. I agree with BAghu comments :>"Also I strongly disagree with your view that monopoly implies less> emphasis on R&D. The monopolies infact face a stiffer chanllenge of showing> strong YOY numbers. Because they get to grow big soon, the effort it takes> to grow even marginally bigger is enormous"Competition will just add fuel to it! Without R&D, every technologywill dig its own grave. U need to differentiate from others, to makeur products selling and retain the customer market share.If u r going to sit still, someone will eat upon ur market share,dethroning u from ur top spot.So, I cannot completely agree with the point that monopolies do notinvest in R&D! R&D is their backbone.
Regards,
Murugu.



Rams(I) wrote:

Murugu,The point is NOT "Monopolies don't invest in R&D".They defnitely do invest as stated in my argument
>"R&D will still be there in a monopoly, so as to promote newer features
>and products, but the intensity wouldn't be the same as when you are
>in perfect competition."

It is the intensity of innovation that is the question. If you are a monopoly, there is no need to bet ur fortunes in R&D. But when u r inperfect competition, u'll be kicked off the field if u dont hav a newinnovative selling point when compared with ur competitors.

BTW, I am not sure of what the precise definiton of monoply is...I wud go by the notion that market share >95% is monopoly. So, by my notions, intel doesn't hav a monopoly.

Intel is investing heavily in R&D as it doesn't want waht happened to64 bit computing where AMD had the lion's share.

Also, u shudn't be seeing monopoly only from technical companiesperpective...Wat gokri wanted to say was from a more generic perspective.More responses inline in CAPS...


> R&D is the basis for a technology company. You need to invent new
> things every now then, to make sure that u grow every year. YoY new
> techniques and processes make the cost of the processors coming down,
> which is ultimately going to help the customer."

IT IS COMPETITION THAT IS REDUCING THE PRICE....NOT R&D DIRECTLY. WHOMADE THESE NEW TECHNIQUES EVOLV---->R&D--->WHO MADE R&D MORESIGNIFICANT--->COMPETITION;FEAR OF LOSING MARKET SHARE.EVERY BUSINESSMAN IS PRIMARILY CONCERNED ONLY IN HIS MONEY. NO ONE ISDOING PUBLIC SERVICE BY REDUCING THE COST OF THE PRODUCTS. BY REDUCINGTHE PRICES THEY CAN GET MORE PRODUCTS SOLD AND HENCE GREATER IS THEIR ROI. HENCE THEY DO ALL THIS."

"> For eg: When we bought computers in our college days, the old P3> ones,used to cost around Rs.50K. Now, P3\'s are out of market. All> these changes happened in over 3 years. Now u get very good systems> for Rs.20K. Is this not a benefit for the customer?? How will this be> possible without R&D?"

DEFINITELY R&D PLAYED A SIGNIFICANT ROLE AS U SAY. BUT THE REASON R&DWAS DONE , IN MY POINT OF VIEW, WAS COMPETITION IN ALL SECTORS(READ ASHARDWARE, SOFTWARE, PERIPHERALS....) ANDTHE CUSTOMERS BENEFITTED THE MAXIMUM FROM THE NEUTRAL PLAYING GROUNDS.


"> If Intel had thought against R&D, it wud have just had the P3 and> polished it every now and then, and tried to sell it at the same cost.> I\'m sure even then, it wud have out-beaten AMD. But, Intel didnt

"NO COMMENTS. I HAVE MY SOFT CORNER FOR AMD. TO SAY \'IT WUD HAV OUTBEATEN\' , IT MIGHT BE PARTLY TRUE IF ONLY THE REVENUES OF THE NEXT FEWYEARS R CONCERNED. BUT MANAGERS PLAN AHEAD (IN LONGER TERMS). HADN\'TINTEL INVESTED IN R&d AND HAPPILY SAT SATISFIED WITH THE TURNOVERSTILL 2008, IN 2010 AMD WUD HAV REPLACED INTEL. AMD IS THE GROWING FIREWHICH HAS SPARKED RECENTLY, INTEL KNOWS IT HAS TO STOP THIS FROMTURNING INTO A FOREST FIRE AND HENCE THE BILLIONS OF DOLLARS THAT GO INTO RESEARCH."

"> If u r going to sit still, someone will eat upon ur market share,> dethroning u from ur top spot."

BY "SOMEONE" U R ACTUALLY MEANING \'COMPETITION\' ;-)"



So, I cannot completely agree with the point that monopolies do not> invest in R&D! R&D is their backbone.",1]

NO ONE SAID MONOPILIES DONT INVEST IN R&D. IT CAN ONLY BE INFERREDFROM THE ABOVE ARGUMENTS THAT PRESSURE AND INTENSITY ON R&D IS REDUCEDIN A MONOPOLY.

LET\'S FIGHT MORE "
RAMS.