Marco responds to my post on monopolies with some counterarguements.

In summary, his points are:

1. Economies of scale
2. Standardization
3. Nationalism (although I don’t really understand this point)

I think the first two are good points, although I think that they generally favor larger organizations, and not necessarily monopolies.

Try drawing a line graph of the market benefits of larger organizations. As a organization gets bigger, they can enter markets and gain efficiencies (via economies of scale) that they couldn’t have before. The curve slopes up.

Now draw another graph of the market benefits associated with increased competition. As organizations have less competition, they tend to be more more concerned with themselves and less concerned with their market. That curve slopes down.

Stack those two graphs on top of each other. Somewhere along the size line the benefits of scale are offset by the problems of complacency. The peak of the graph typically won’t be at the monopoly (ie: extreme organization size) end; it’ll be somewhere towards the middle. The sweet spot will vary by industry: take a look at the size of the corporations in any particular market and the answer will probably be quite clear.

I don’t quite buy the idea of a natural monopoly. The key is innovation: without competition and risk there’s little incentive to improve. All things being equal, the larger organization’s stagnation should allow new competitors to find a niche and gain a foothold… thus causing a virtuous cycle. Of course, using non-market forces (ie: legislation) to quash the smaller players is a way around that: one that’s very destructive, undesirable, and should be prevented.

My brother Scott writes about the telephone monopoly in our home province of Saskatchewan:

The crown corporation formulated to give its customers the best service possible clearly wasn’t and now has been thrown into the world of competition.

Monopolies are based on the idea that a few people can manage a market better than multiple competing companies (at least when they’re not outright graft). The problem is that history and theory have shown that this is not the case almost all of the time. Markets are far too complex to be managed (that is, understood) by a few brains. The Wisdom of Crowds talks about this extensively. Distributed Knowledge + Self Interest usually gives better results.

Saskatchewan has been a socialist type of place for a very long time; any industry of significance (agriculture, mining, energy, telecom, insurance, medical, education) is run by a government-controlled entity (crown corporation). Alberta, the neighboring province and my current home, has a more liberal inclination, especially in the past decade or two. Alberta has had much higher prosperity than its prairie sibling for a very long time. I don’t think that you can attribute that exclusively to oil (of which Saskatchewan also has plenty); a lot of it is owed to the entrepreneurial environment that Alberta has, and which (by and large) Saskatchewan doesn’t.

PS3 Supply Exceeds Demand

I saw this firsthand at Best Buy in Connecticut while I was there. Two days after Christmas, they had perhaps 2 dozen PS3s stacked up against the wall behind the customer service desk. I asked the clerk if those were the real deal or just empty promotional boxes; she replied that they were legit, and had been sitting there for a while.
I then asked about their Wiis; those were still selling out immediately. Laura and I have been trying to get one since they launched, and had no success (granted we’re not fanatic about it; we just ask every time we happen to be in a store).
I think this is a very bad portent for Sony. A lot of people have been talking about how the PS3 has become a make-or-break product for Sony; gaming is now a large portion of Sony’s overall revenues, and the Blu-Ray player was an important strategic move for the movie division. The fact that the PS3 has gotten such a “meh” response in comparision to the Wii (and to a lesser extent, the XBox 360) I think is very telling.

Still, there’s Japan to consider (they’re a major Sony stronghold), and of course the units may start selling faster once a major software title comes out (Final Fantasy is the poster boy for that). On the other hand, Sony is already losing money on the units, and so if they’re forced to cut prices to compete with the less-expensive Wii and Xbox, then they’ll be in murky waters, even if they can get the production prices down.

So, time to short Sony stock?

I definitely think so. Unfortunately the amount of money I’d be willing to put on a bet like that is so small that I don’t think it’s worth the effort/fees… so I’ll keep my investment virtual for now ($47.69/share on January 12 2007).