He then contrasts a restaurant business—no matter what type of food you serve; it is a restaurant business—with a company like Google. So if you are planning to start a restaurant, you should instead start a company like Google, where you have little to no competition in your market (depending upon how it is defined, of course). That seems easy enough.
While Peter Thiel illustrates his point with the obvious extremes of perfect competition and monopoly, the advice is quite good and useful when you consider it within the continuum between these points.
That is, if you are planning to start a business or invest in a business, consider where on the competition continuum the business sits: the closer to monopoly, the better the chance of strong profits.
In fact, Warren Buffett and Morningstar utilize this investing approach when they talk about whether a company has an “economic moat.” Does the company have a durable competitive advantage? Another way to think about it is whether the company has a level of market power. A company with a strong brand, like Coca-Cola, for example, has market power in part because its name is so recognizable. A company could have market power for a number of other legitimate reasons as well—it is a platform like Facebook that everyone uses; it has a highly developed distribution network that is difficult to imitate; it has intellectual property rights for a really good idea; and many others.
If you are deciding whether to begin a business or invest in a company, consider the company’s competitive advantages over other companies. Is it solving a problem that other companies are not solving? And if so, could larger competitors quickly move into the market if your company shows strong profits. If they can, then your competitive advantage isn’t lasting and you don’t have a wide economic moat.
If you hold all else equal, the less competition, the more profits.
To illustrate in the real-estate market, my wife and I do some real-estate investing. If we are looking for a prospective property for a great price, we don’t expect that we will find one at the best price by attending open houses for completely renovated homes with a lot of advertising. There is too much competition. Most people are looking for homes that are turn-key, and the advertising and open house will draw in too many buyers.
No, we get excited about the ugly house that nobody has heard about or cares about. Maybe it went on the market on the day of a blizzard—we are from Minnesota, remember. That would be a great day to look at it and make an offer that expires quickly (if the house and price are right). There won’t be much competition. Or even better, perhaps you can find a property that isn’t yet on the market. Even less competition.
The same holds true for the state of the house. The more renovations that are required, the fewer prospective buyers. And if the house has really ugly furniture or wall paper or carpeting, that will turn off many prospective buyers, i.e. competitors. Real estate can be a great place to invest in part because competition is often limited. Many investors are now moving into vacation-rental real-estate investments.
The bottom line is that to make money, you want to minimize competition. Of course, if you engage in certain conduct to limit competition, you might open the mailbox and find a giant antitrust complaint. Or you might hear the knocking of the FTC or Department of Justice on your door.
As an overall system, we encourage dynamic competition, which is not to say that we only sanction perfect monopolies. As Thiel explains, the ideal system encourages competition in a dynamic rather than a static sense. That entails temporary monopolies and and entities with market power that move in and out of the economy as new ideas, products, and services emerge.
What the antitrust laws should try to do is keep the dynamic aspect of competition from getting stuck—competitors manipulating the system to keep these new ideas, products, and services from threatening their monopoly profits. Unfortunately, the most significant cause of “sticking” is government policy that sanctions or supports a monopoly. But that is another discussion.