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Perfect competition is a term of art referring to a specific competitive scenario with no product differentiation, no economies of scale, no barriers to entry,

by rscale 14y ago

Perfect competition is a term of art referring to a specific competitive scenario with no product differentiation, no economies of scale, no barriers to entry, and a huge number of well-informed buyers and sellers. The net result is that the sellers become "price takers", accepting whatever the market will give them. An example of this effect near an extreme is in the securities markets, where you sell stock for whatever price the market will give you. You can't reasonably argue that if my shares are selling for $600 that somebody should purchase yours for $601. When you think of competition, it's quite likely you're envisioning monopolistic competition in which products are differentiated, and aimed to appeal to slightly different buyers. This is a form of competition where profits are possible, but they're hard to sustain without continued innovation, and the establishment of new differentiating factors. A monopoly is the other end of that scale, where they have substantial pricing power and that power is quite durable over time, even without substantive innovation. But I absolutely agree with Thiel that perfect competition is terrible if your goal is to turn a profit.

huherto 14y ago
Is this what happens to airlines? I was wandering that air travel is a very valuable service yet companies seem to struggle to survive. Thanks for the explanation, I wasn't familiar with the term.
- rscale 14y ago
  It's a good question, but I believe airlines would be classified either as monopolistic competition, or a non-collusive oligopoly. There's an identifiable difference between a flight on Virgin America and one on American Airlines, so at least some of the competition occurs on a dimension other than price. There's a model called 'Porter's five forces' that is often used to evaluate the strength of business models, and Thiel's choice of language seems to indicate that he's familiar with and supports at least some aspects of this model. It looks at five major factors: 1) threat of new competition (new airlines) 2) threat of substitutes (WebEx, high-speed rail) 3) bargaining power of buyers (you and me) 4) bargaining power of suppliers (Airbus, Sysco Foods, Airports, Labor, Fuel) 5) Intensity of competition Thinking quickly about airlines, my thought is that items 2 and 5 are the largest problem areas. Item 2 because if prices rise too much, businesses can shift some travel to email/webex/conference call, and pleasure travelers can pick alternate destinations either on lower-priced (likely less profitable) routes, or can simply not fly to their destination. Item 5 because if A creates a profitable flight, there's a fairly strong incentive for B to start offering a very similar flight and competing (in part) on price. This is likely to eventually drive the profit generated from that flight down to zero. After all, even if A and B managed to reach a profitable equilibrium, C is likely to notice and compete on that flight, and this is likely to continue until everyone's revenues are just meeting their expenses.

by rscale 14y ago

huherto 14y ago

Is this what happens to airlines? I was wandering that air travel is a very valuable service yet companies seem to struggle to survive. Thanks for the explanation, I wasn't familiar with the term.

rscale 14y ago
It's a good question, but I believe airlines would be classified either as monopolistic competition, or a non-collusive oligopoly. There's an identifiable difference between a flight on Virgin America and one on American Airlines, so at least some of the competition occurs on a dimension other than price. There's a model called 'Porter's five forces' that is often used to evaluate the strength of business models, and Thiel's choice of language seems to indicate that he's familiar with and supports at least some aspects of this model. It looks at five major factors: 1) threat of new competition (new airlines) 2) threat of substitutes (WebEx, high-speed rail) 3) bargaining power of buyers (you and me) 4) bargaining power of suppliers (Airbus, Sysco Foods, Airports, Labor, Fuel) 5) Intensity of competition Thinking quickly about airlines, my thought is that items 2 and 5 are the largest problem areas. Item 2 because if prices rise too much, businesses can shift some travel to email/webex/conference call, and pleasure travelers can pick alternate destinations either on lower-priced (likely less profitable) routes, or can simply not fly to their destination. Item 5 because if A creates a profitable flight, there's a fairly strong incentive for B to start offering a very similar flight and competing (in part) on price. This is likely to eventually drive the profit generated from that flight down to zero. After all, even if A and B managed to reach a profitable equilibrium, C is likely to notice and compete on that flight, and this is likely to continue until everyone's revenues are just meeting their expenses.