In Defense of Competition

Last week, Peter Thiel published an essay on the Wall Street Journal entitled Competition is for Losers. In this essay Thiel outlines his argument for encouraging entrepreneurs to not pursue competition as, in any perfectly competitive market, profits are made smaller and smaller as an equilibrium between supply and demand is reached. In the pursuit of customers, a firm would differentiate itself by lowering margins until it meets this nexus, at which point, profits are just not being created. A firm, over time in this competitive market, will be able to increase profits only as their tiny margins attract more customers but not due to the fact that they have an incredibly lucrative business. Peter then goes on to mention why he thinks that monopolies are to be desired and even better the world. Because monopolies are not just scraping by, they are able to use their resources to create innovative products which they will then deliver to the marketplace, hopefully making customer lives better through this innovation. In a perfectly competitive market, firms cannot even fathom the idea of creating an innovation as they have no resources to pursue the research and development needed for such an innovation. Prices are low, due to perfect competition, but happiness is low as well due to no one trying to create new products for the customer.

This was a shocking read. Not due to the subject matter, but due to my past knowledge of how competitive Thiel is. Let me first say that I idolize Peter Thiel and I don’t idolize many people as I think it’s silly. Having said that, I think he is a genius and his drive and ideals are on point. Thiel has a law degree, founded Paypal, founded an incredibly successful hedge fund, made the first outside investment in Facebook (and many other successful and innovative startups), is a world-ranked chess player, created an innovative data analysis company and has a philanthropic fund that pays college students, with innovative ideas, $100,000 to drop out of school to pursue their venture. Think all that took a bit of competitiveness? I also watched an interview with him where he went to a prestigious NYC chess club, with Garry Kasparov in tow, and had a “friendly” game of chess with the founder. When it was clear, to the founder, that he was being handedly beaten, he offered up a hand to politely call the game. Thiel told him no (on camera during the interview) and continued to trounce him.

Now, I understand what Thiel is getting at with his essay in the WSJ. He is encouraging entrepreneurs to pursue businesses with a true competitive advantage as it will be much more lucrative for them. I mean, who doesn’t want to own a monopoly!? He may also be simplifying the subject matter for poor schmucks like myself to emphasize his point: only compete if you know that you will win. However, I believe this over-simplification may be providing entrepreneurs with a false idea that pursuing a monopoly does not include competition. Let’s consider the idea that you do actually own a monopoly. The competition is not over yet. These huge companies spend an inordinate amount of time and money chasing anyone that is trying to oppose their monopoly. Think AT&T from 1907-1984. They didn’t just sit back and count their money for close to a century. They fought all out wars against smaller organizations that tried to connect to their lines and, Bell Labs, their R&D branch, employed the greatest scientific minds of the time. Do you think there wasn’t some competition, between the scientists, to impress the boss?

Monopolies may be a fantastic addition to society- at least to some degree. Small companies can innovate more quickly, but a monopoly has the resources to attract and retain top talent and weather the tides needed to create paradigm shifting technology. Want to know another thing that is one of the greatest catalysts for innovation? Competition. Think of some of the greatest innovations or events of our time (IE the Space Race). If it weren’t for the human ego and competitor knipping at the heels of these organizations/individuals, we would not have the technological innovations that we have today.

Competition is not for losers. It may not be exclusively for winners but without a game to compete in, there cannot be a winner that takes all. Judging from Thiel’s resume, I can’t imagine that he could disagree.

"Show me a good loser and I'll show you a loser."

--Peter Thiel via Vince Lombardi

--Danny