Naval: The important concepts in modern microeconomics are: monopolies, network effects, supply and demand, cumulative advantage, moats, lock-in, marginal costs, consumer and producer surplus, price discrimination, pricing power, viral networking, viral adoption, and economies of scale, among others.
Most of the valuable businesses are natural monopolies. VCs write about it, but they do it in a subtle way because they don’t want to come out and say, “We’re building natural monopolies.”
You can learn about monopolies and these other concepts in economics textbooks or Peter Thiel’s famous book Zero to One. You can read up on mental models and complexity theory. You can follow Andrew Chen’s blog and subscribe to Ben Thompson’s newsletter Stratechery, which offers an MBA level education for $10 a month.
Monopolies need to be checked
Are monopolies bad for society? They could be—even without anti-competitive or illegal behavior.
Monopolies need to be checked for rent-seeking and regulatory capture. Regulatory capture is when companies work with lobbyists to get regulators to lock them in. Rent-seeking is when you park yourself in the way as a toll taker and don’t innovate at all.
Companies that fail to innovate will get displaced
Even monopolies with network effects transfer enormous benefits to the consumer. Then they get defeated or displaced when there’s a platform shift.
Facebook displaced MySpace; Instagram displaced Facebook, to a lesser extent. Google knocked Microsoft off its perch. Microsoft used to be everyone’s starting point, with the Windows Start menu; now you start on Google, Google Chrome or Apple.
The technology industry is very dynamic and innovative. Look at how Apple came back to beat the Wintel empire. Just because a network effect monopoly is winning today doesn’t mean it will win forever. But they can win for a decade or two—long enough to harvest a lot of profits.
The best companies are run by paranoid founders. Companies that capture a great position but fail to innovate will get displaced.