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> with the idea of profiting later on via the surviving monopoly I don't understand...if you undercut your competitors so you're the sole survivor, I don't see

• mrkurt 7y ago
  It's more complicated than that. When you're the sole survivor, you have a lot of options. In Amazon's case, what they have is immense leverage over the whole supply chain. Amazon extracts higher margins from manufacturers, shipping, etc, etc. And they have enough influence that people pay them $80/year for the privilege of being a customer.
  • perl4ever 7y ago
    Is Amazon really much more than an arbitrage on people's desire for "free shipping" at this point? The last time I wanted to buy something online, the price plus shipping elsewhere was noticeably cheaper than with free shipping on Amazon.
    • cosmie 7y ago
      The majority of shoppers do not actively price shop. If they do at all, they do so passively in the form of selecting a retailer based on perceived prices (i.e. they may not compare pricing between Target and Walmart on specific items, but they may choose to go to Walmart due to the perception of Target being more expensive). At this point, Amazon is riding on the momentum created from their previous habituation. They built up a (true) reputation for being incredibly cost competitive for the products they carried, and enabled minimally delayed gratification in the form of 2, 1, and same day shipping. Because of this, they became the retailer of first choice and people only went elsewhere if Amazon didn't have the product they wanted. Then they widened their inventory to items that weren't as capable of being efficiently shipped in individual units with last mile residential delivery. They also shifted more and more to holding less inventory on their own books and having third party sellers fill that void. And then had to start collecting taxes nationwide so they could more easily build out their distribution network without tax-related geographic constraints. All of which led to more and more price inflation. But Wikipedia says it best[1]: "New behaviours can become automatic through the process of habit formation. Old habits are hard to break and new habits are hard to form because the behavioural patterns which humans repeat become imprinted in neural pathways,[7] but it is possible to form new habits through repetition." As long as consumers default to Amazon, they'll never notice how uncompetitive some of their product pricing has become. And as long as Amazon's inventory keeps expanding and they get closer and closer to instant gratification from compressed delivery timelines, consumers will have little reason to look beyond Amazon and change their habits. [1] https://en.wikipedia.org/wiki/Habit https://en.wikipedia.org/wiki/Habit
• Udik 7y ago
  Maybe markets would just correct themselves later, but in the meanwhile a lot of people went broke and a lot of businesses closed, because a company was giving out free meals (payed by someone else who is also going to lose money). In the end who profits? Only the "charlatans" who managed to convince others to give them absurd amounts of money. Everybody else comes out with a bloody nose. And yes, of course the strategy might work if there is a substantial network effect. But if there isn't, such as in the case of Uber, or WeWork, or even maybe Netflix, then the whole operation can only end in losses.
• dllthomas 7y ago
  If you can maintain a credible threat that you'd do it again (and win), competitors shouldn't be expected to enter the market even as you're extracting rent. This is amplified by any barriers to entry.
  • scarface74 7y ago
    See cable companies.
    • perl4ever 7y ago
      What do you conclude from cable companies? On the one hand, competition is legally restrained. On the other hand, the cable companies are still somewhat constrained by imperfect substitutes - for instance, wireless is not a great substitute for cable, but it's enough for me to live without it.
      • scarface74 7y ago
        Not as much as they use to be from what I understand. Other providers can get right of way access via the city, but building out infrastructure is not easy and is costly and as soon as they build out the incumbent will reduce their prices low enough to not make it worth switching. The only company that can compete with the cable company at scale is usually the local phone company.
• legitster 7y ago
  This is a big topic in business school - never compete on price for that exact reason. Although things like Uber may be a different beast. They basically got big enough that cities were willing to push aside all of these special interest rules that kept the taxi industry crappy. So by dumping their product and acquiring customers, they were able to change the legal environment and infrastructure around them. But they are also at a huge disadvantage because they changed it for everyone behind them as well. Lyft doesn't have to burn money as fast and gets all the same benefits for scale. Under their current market position, the minute Uber starts raising prices, they die.
  • clairity 7y ago
    > “This is a big topic in business school - never compete on price for that exact reason.” no. business school teaches you that you can compete on price (cost strategy), or on value (differentiation strategy). if you compete on price, you’re betting that you are, or will be, the most efficient provider in the market (e.g., walmart and its supply chain dominance). it’s completely viable/acceptable to compete on price. what you don’t ever want to do is price on cost, rather than on value provided. you can also compete on being better in many other dimensions, which is lumped into the broad differentiation strategy category. you are then betting that you are better on your dimension and that customers really value that dimension (more than price).
    • anongraddebt 7y ago
      Technically it's not competing on price. It's competing on cost, a result of which is often, but not necessarily, a lower price point. Business strategy courses explicitly teach you that simply competing on price (that is, simply lowering prices in hopes that you'll beat the competition), will blow up in your face. A classic example (presented to my MBA class) was the two adjacent pizza parlors in NYC competing on price and driving the selling price of a pizza down to less than a dollar, whilst a shop a block away and around a corner was able to keep normal pricing.
      • airstrike 7y ago
• deleted 7y ago
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• jgon 7y ago
  This assumes that starting up a competitor is frictionless and has zero-overhead. If the market which is now dominated has a large enough barrier to entry the monopoly can temporarily return to their loss-making tactics to starve you out. Capital will rightly look at your business and ask why they should invest in it when they can just get onboard with the current monopoly and get those profits instead. There's a reason that we had to deal with monopolies largely through regulatory means, and it's not because we were afraid of letting the market correct itself, it's because, by and large, the market does not correct itself once a stable monopoly has been erected.
• bluetwo 7y ago
  Volume. Lose on every sale but make up for it with volume. :-)
  • DebtDeflation 7y ago
    The issue is fixed vs variable costs. The scale argument requires very high fixed costs and very low variable costs. Then, once the initial hurdle is cleared, marginal costs per incremental unit of revenue are very low while barriers to entry against competition are very high. WeWork is the exact opposite of this as their leasing costs (variable) are like 90% of rental revenue.
    • petra 7y ago
      But leasing becomes ownership - and than it's a "high fixed costs, low marginal costs" situation.
      • imtringued 7y ago
        If WeWork had ownership claims to the properties it rents out then it wouldn't be in trouble. It's value would be equal to how much real estate it owns.
• munificent 7y ago
  > When you return prices to market value wouldn't competitors just appear again. No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out. Relatively unregulated capitalism works OK when the product area naturally approaches a perfect market: - Simple easily compared products - Consumers have easy access to accurate product information - Low startup cost for producers to enter the market - No costs for consumers to switch to a different producer Very few markets actually resemble that. In order to keep non-perfect markets functioning efficiently, it takes a lot of strong, enforced regulation. This is increasingly true as we transition to the Information Age where products are increasingly data and services. For those, network effects are powerful, which further entrench the dominant player. > I'd assume the market would just corrects itself later? How? "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.
  • WalterBright 7y ago
    > No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out. For the larger company to do that, their losses would be correspondingly larger. This is why it's pretty hard to find a case history of this strategy being successful.
  • pdonis 7y ago
    > "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere. Neither is regulation. While it is true that "market failures" (imperfect markets) are common, it does not follow that regulation will improve them. In fact regulation usually makes things worse due to a combination of imperfect information (the regulators can't find out what they need to know to regulate efficiently) and regulatory capture (the regulators end up acting in the interests of the regulated industry instead of the consumers).
• throwaway744678 7y ago
  As said in siblings comments, it depends on the barrier to entry of your market. Once big (and profitable) enough, you can also just buy out any threatening competitor.
• Wowfunhappy 7y ago
  > When you return prices to market value wouldn't competitors just appear again. No, because at this point the barrier to entry is substantial. And, if a competitor does come in, the incumbent with a huge warchest can just drop the price again temporarily to drive them out.
  • hef19898 7y ago
    In the case of WeWork the warchest is streched by a price war. And the barrier to entry is basically office space in the interesting locations. Just what is an interesting location changes, and real estate is plenty. So the barriers aren't probably that high. Generally speaking the point can be valid so.
    • Wowfunhappy 7y ago
      I agree in the case of WeWork.
  • crumpets 7y ago
    >No, because at this point the barrier to entry is substantial. Not really. Unless the product has a powerful network effect, people can easily enter. If that weren't the case, starbucks would have run every coffee shop out of business by now.
    • unreal37 7y ago
      OK, well then go open book store. Online or brick and mortar. There's no money in it, because Amazon has such as HUGE advantage in mindshare, pricing and delivery that you can't compete. Does a book store have a network effect? No. But it's hard to sell something for more than the dominant competitor without a compelling reason.
      • phlakaton 7y ago
        My mother-in-law did just that and is doing fine, thank you very much. May not be the world-beating "money in it" as you define it, but for the small business she's running it's viable.
• rossdavidh 7y ago
  It depends on how hard it is to get going in that business. For example, in some markets (e.g. computer operating systems), it takes a big ecosystem of 3rd party companies making applications for your OS to be viable, so if you drive Blackberry out of business, you can own the smartphone market and crank up prices later. But, Google saw that coming and sponsored Android to prevent it, because they recognized that pattern from the PC market. In the case of retail office space, it would depend on how much of the available office space you had locked up in long-term leases. If you have locked in most of the office space in long-term leases, but you are renting short-term, you can crank up your rates and in order to compete your would-be competitors would have to build an office builing, which is not impossible but is not quickly or easily done. Not saying this was likely to work for We, just saying that's the theory.
  • eldavido 7y ago
    I don't know why this is so hard for people to understand (you obviously seem to get it). WeWork is basically a hybrid bank/retailer. They take big, complex, slow-moving long-term commitments, just like a car rental company or a bank, and repackage them into shorter-term, small commitments, while managing risk and adding a bunch of value-added services. I don't know about all this governance stuff or their growth rates, but on its face, that activity clearly DOES add economic value, and might be a viable business if executed well.
    • perl4ever 7y ago
      Doesn't an REIT (that "might be a viable business") fit your description as well?
      • eldavido 7y ago
        No, it's a completely different thing. A REIT owns real estate assets. WeWork doesn't need to own assets, they're an intermediary that does something economically useful.
• golergka 7y ago
  For example, when you reach that scale, you may have enabled some economy of scale for you that is unavailable to your smaller-sized competitors (like Amazon). Or, may be, there's some friction for customer to switch when you stop selling a dollar for 90 cents, like with american internet operators (I don't live in US but I constantly hear horror stories about Comcast here on HN, and I assume it's similar).
• MaysonL 7y ago
  Go look at the history of Diapers.com, now owned by Amazon.
  • dantheman 7y ago
    Diapers was purchased by Amazon -- not run out of business.
    • MaysonL 7y ago
      Purchased by Amazon after being nearly run out of business by predatory pricing.
• AdrianB1 7y ago
  I work in a sector where to build a single factory it takes many billions of dollars and half a decade; if you wipe the competition, for the next 5 years you are free to ask for any price you want, by the time competition appears you are loaded with cash to kill them again.
• vintermann 7y ago
  Competing with a monopolist takes a lot of capital. Where would those competitors get it from? Investors would probably prefer to hold stock in a company that can extract monopoly rents, all else being equal.
• imtringued 7y ago
  The monopoly benefits from economies of scale. The future competitor has to make every investment that the monopoly made.
• deleted 7y ago
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