We’ve had some lively debates over the years. Perhaps none more so than the various AMD vs. nVidia and Intel comment wars. This in itself has spawned side discussions in various economic areas, such as whether a monopoly is good or not and how the various elements of industry should coexist (or not). Examples get thrown around and cited with little economics to back them up other than anecdotal armchair economists throwing out comments, which either miss the fundamental points of economic theory, ignore real world scenarios or both. This article delves into the economics of industry with a specific focus on monopolies as relevant to the CPU and GPU sectors.

Monopolies: Are they good for us?

We at Wccftech tend to take an impartial view while reporting news (and rumors!), so for us it’s always interesting to see competing technologies and companies attempt to out-innovate each other regardless of whether that innovation is in GPUs, CPUs, APUs or the latest mobile phones.

It’s true, I’m a finance geek in my spare time as per my profile (actually full time amongst my other endeavors!). But although I studied economics at university, my background in industry is primarily in high frequency, automated derivatives trading rather than the broader economics discussions which take place here on the site. As such, although I have a good grounding in economic theory, for this article I turned to someone better qualified than I.

I have managed to secure for an interview a respected international economist with a long career working as an economist and fund manager. He graduated from the London School of Economics and Political Science with a masters in Mathematical Economics & Econometrics. He has worked over the years in the UK, US and Hong Kong in both the public and private sectors, working for the National Economic Development Office (NEDO) and Quango in the UK public sector, as well as several private sector fund management organizations including Mercury Asset Management, Wellington and most recently (prior to retiring), at Morley Fund Management (now Aviva Investors) as both their Chief Economic Strategist and a fund manager running a Japan fund.

Over the years he has been interviewed by Reuters, Bloomberg, CNN, The Wall Street Journal and others. As such, it’s fair to say that the guy knows what he’s doing.

It’s odd for me to interview such a seasoned professional of the finance industry in my capacity as a journalist for Wccftech however, because it’s fair to say that he’d not normally consider giving an interview to a site like ours given his background. It’s also odd for me to interview this person for another reason. He happens to be my dad! Please welcome John Ip to the virtual offices of Wccftech (actually, this interview takes place at his house!).

The Interview! Economic Theory

Wccftech: Hi John, welcome to the Wccftech interview! Thanks for agreeing to speak to us today. As a makeshift journalist, it’s important to me to try to spread awareness amongst technology aficionados. Let’s get you started with an easy question, just to cover our bases. What is a monopoly?

John Ip: (Laughs) A monopoly is really just a sole supplier of anything. As the sole supplier they obviously have various characteristics like the ability to set prices, which is generally considered a bad thing because being a monopoly with no other suppliers you basically set prices at the level you like and others have no choice if they want your goods or services they will have to pay your price. That’s why a monopoly is generally bad, especially for users of the monopoly’s services.

W: Ok, and now that we have one extreme of the spectrum covered, there must be an opposite, I assume this is perfect competition, what characterizes this market state?

JI: That means there are many sellers of the goods and services. Lots of suppliers and as a result, none of them has a dominant position and are more or less price takers. They can’t set a high price because if they do, others will set a lower price and undercut them and as a result they’ll go out of business. Normally, the cost of the good/service is more or less the marginal cost of supplying the final good or service in question and as a result, consumers generally will benefit because they’ll get the lowest price for that good or service.

W: And presumably the default scenario which we’re taught in economics is still accurate, namely that monopolies are bad for consumers is that fair?

JI: Yeah, that is fair, but in the real world you normally don’t get a pure monopolistic situation nor a pure perfect competition one. Perfect competition, included in that is information as well, perfect information. So in the real world you don’t have these sort of theoretical conditions normally.

W: Is this why many countries have some form of monopolies commission to try to maintain a degree of competition if monopolies in general are not good for consumers?

JI: Yes, that is generally true although not all countries have this sort of thing, but the western world that believes in free trade and free competition. Capitalist societies tend to. As mentioned before, in the real world you don’t always get pure monopolies or pure perfect competition, but there are certain industries that lend themselves to a monopoly and as a result, there are regulations not just to prevent monopolies from happening, but in cases where there are natural monopolies, they will regulate it so that they don’t price gouge the consumer.

W: But is it true that capitalism tends towards monopolistic power being more prevalent?

JI: Yes, there’s always that danger in the sense that monopolists used their market dominant position to drive competitors out and as a result, after they are gone they can start raising prices so one of the things that is needed to safeguard is entry. Is it easy for new business to setup and compete? Because it’s easy for them to cut prices and drive competition out but once they start raising prices, if there is free entry or the cost of entry is not high then people will come back in to compete and prevent them from driving up the prices again.

W: So, we have our two theoretical extremes of monopoly and perfect competition. You mentioned earlier that most markets fall somewhere in between… That’s fair to say?

JI: It’s fair to say that. Some industries tend to lend themselves to monopolistic setups like power distribution, you can’t have several power grids setup and competing, that would be very inefficient and very complicated for example so they are naturally a monopoly, a grid covers a whole country and as a result, they are regulated by the government so generally they are called regulated industries and then at the other end you can say that there are lots of markets that look like perfect competition, prices are very low but even then they are not quite perfect competition. Selling oil on the world markets is easily substituted, most people trading it know what the good is and information is reasonably widely available for example.

W: Because perfect competition assumes perfect information right? What does that mean?

JI: That means do you know who is selling and what prices you can get at etc, even then, OPEC is an attempt to try to manipulate the oil market, sometimes they succeed, sometimes they don’t like now for example oil prices are very low because they don’t have the market power to set prices. Even for oil, sometimes there are monopolistic suppliers like OPEC in the 70’s they managed to dominate.

W: So even though a company isn’t a monopoly, can it still wield monopolistic power and is that why we look at these extreme scenarios to identify these things?

JI: Yes of course. In a sense, business loves monopolies, they always try to differentiate and say “oh, nobody is supplying the goods or services that we’re providing” so they always try to create a niche where they have some degree of monopolistic power.

W: So are there industries/businesses where there is some degree of competition, but the leader in that industry is so widely demanded for whatever reason that they have some degree of monopolistic power even though it’s not an actual monopoly?

JI: That’s definitely the case, you need some other competitor. Look at Intel and AMD for example, but for AMD to do their job, they need to be at least getting close to Intel’s level of performance. You can look at aerospace, Boeing was quite dominant until Airbus. Boeing would claim Airbus is a government supported entity, but the existence of Airbus ensures that Boeing stays sharp and on their toes. Even though there isn’t perfect competition in the case of aircraft it’s kind of a duopoly but that is ok, it’s not bad because you have competitors that keep each other on their toes. As long as they don’t collude, they will keep on innovating. Competition in duopolies can be pretty savage, every bit as savage as perfect competition.

W: The other thing that I think about when I think of monopolistic enterprises is that innovation can suffer, is that normal and why would you say that is if so?

JI: Yes, basically because you sit on your laurels. It’s about incentive isn’t it? If you’re profitable and no one is anywhere close to you, yeah, you sit on your laurels, you just milk the consumer for money because at the end of the day they are not building GPUs or whatever just for the sake of it, they’re there to make money and if they’re making money and no one is coming close, what’s the point of spending money on research and technology. Even if they spend money in these areas, there’s none of the urgency that comes with the knowledge that if you don’t innovate you’re not going to survive.

W: If you measure under normal circumstances over time from point A to point B, in a market where there was competition. Over that fixed period of time you would expect to see a higher degree of innovation in a competitive market over that period of time vs. a monopolistic scenario?

JI: Yes, definitely. In fact, one of the key reasons why Europe became so dominant in world affairs up to the 19^th/20^th century is because of competition in military technology and it advanced faster in Europe than elsewhere because there were all these nation states competing with each other so they kept innovating. This enabled them to go and colonize places all around the world simply because of superior military technology and that technology was a result of competition within Europe. Elsewhere for example, in China you had a large dominant country so when the European powers went to China, it was no match for the Europeans militarily. The same is true in industry, competition sharpens your innovation and as a result enables you to dominate.

W: Now to another point of economic theory, for the benefit of our readers, what does “Economies of Scale” mean?

JI: Economies of scale means a lot of things but the effect is that it’s cheaper to make more stuff. Take the car industry, if you need to setup machinery to stamp your panels etc, investing in this sort of machinery to stamp panels is spread over the production run of 100,000 instead of 1,000 then of course, it’s cheaper. Basically, it’s cheaper to produce more stuff than to have a limited production run. The unit cost of production is lower when you have a larger production run and generally economies of scale come with larger companies, but it also depends on the industry because of course the holy grail of industry is to create a low cost way for producing a limited run. 3D printing is an obvious example of this.

W: But surely that would mean that monopolies are more efficient because they would have vast economies of scale. Or is there such a thing as diseconomies of scale?

JI: Yes, there are diseconomies of scale too. We talked about the car industry as an example of where a production run is helped by economies of scale, but General Motors is a case which was so huge at one point that they ran into a diseconomies of scale scenario with bureaucracy etc limiting their ability to be nimble.

Coordination, communication, systems to manage information, processes and infrastructure etc, the cost of this coordination starts to rise again.

W: So economies of scale benefits as an argument for being a good reason for monopolies (interrupted vehemently!)

JI: NO! It’s not so much just about the cost of production, it’s about how much of this lower cost of production is passed onto the consumer. At the end of the day, monopolists do not have any incentive to pass on these lower costs of production to the consumer.

W: The consensus among our readers seems to be that monopolies are bad, however some take a contrary view and think that monopolies are good, citing China as a country that has experienced explosive growth due to having a lot of state backed monopolies. Is that a fair assessment?

JI: Not fair, no. Although China has a lot of government backed monopolies, that’s not the source of growth. The source of growth in China is actually private enterprise like manufacturing. If you look at the statistics coming out of China you will find what are called the State Owned Enterprise (SOE’s) share of the economy has been diminishing during the fast growth period over decades getting smaller and smaller all the time.

W: Is that why they’re now starting to struggle do you think with the markets recently being in turmoil because of alleged slowing growth in China, if someone said “Ah well, Chinese growth is slowing because SOE’s are now a smaller share of the market?”

JI: NOOOOO! Slow growth has many many factors, it’s not so easily pigeonholed. A lot of China’s growth originated by urbanisation, you take someone who works at a farm earning next to nothing and move them into industry earning a wage and exporting, there’s a lot of these productivity improvements going on with workers moving from a low productive sector into a higher productive sector and suddenly you will have this sort of growth and that by its nature is finite, you can’t just keep moving people from a rural area to an urban area and also China is now no longer the cheap source of labour, originally everyone turned to China because their wages were very low, China’s wages are not so low these days and there are all these other countries now where wages are lower like Vietnam for example, companies are moving to Vietnam now. There are always many factors.

W: Ok, so would you say that cheap labor was a large part of the driver historically for decades of growth in China moving farmers from rice paddy fields into factories to make iPhones etc?

JI: Yes, that has been a very key driver of growth in China and also don’t forget partly it’s because they relaxed communist rule and people can now have private enterprise. That transition must not be underestimated from people who have not a lot of say in what they produce and how much they keep to having absolute say about how much effort they put out and how much of the fruits of their labors they can keep. That incentive is quite powerful.

W: Ok, so cheap labor contributed a lot, but other countries have cheap labor too. So what you’re saying is that China’s long growth period as a result of cheap labor is now slowing down?

JI: Yes which is why the Chinese currency weakened a little bit, they’re trying to keep it going because if you are getting more and more expensive, how do you make yourself competitive again? Well, if you can manipulate your currency, you can do that!

W: Ok, so just so we’re clear, China’s growth over decades is not down to government backed monopolies and telling businesses that they can only use certain state backed monopolies, banks, industries etc?

JI: That's right. There is one area that is still important which is the Chinese control of the finance industry, they allow foreign banks now but through their control of credit creation, they have managed to either provide a stimulus or slow down an overheated economy so if going too fast they can tell the banks stop lending so much now, this is still centrally controlled.

W: So if I want to start a business in China and build a factory, the Chinese government won’t say to me you must use company XYZ which is a state owned company otherwise you can’t?

JI: By and large, no, although there are also many levels of bureaucracy in China and corruption is a major problem, there are stories, none of which can be definitively verified of course where some of these corrupt officials need payments etc. This is a problem, but of course information from China is not that easy to come by.

W: But even though there is state control over lending, that’s not the cause of the explosive growth in China has seen?

JI: Not initially, but I do think that after 2008, there is evidence to suggest that the government's relaxation of credit and stimulating the economy much like the West has helped, but because the accounting isn’t as transparent as in the West, there are suspicions of a big black hole there that can blow up at any time, we basically don’t know if it’s there or not.

W: So looking at the technology market. In CPU’s we have 2 main players in Intel and AMD, in the GPU market we also have 2 main players in nVidia and AMD. AMD is the less dominant player in both areas by a significant margin. Given this scenario, is it likely that Intel and nVidia have some degree of monopolistic power over their relative industries?

JI: Yes they do and there is reason to support AMD so that they can keep the other two in check. If we lose AMD as a business, I think the innovation that we see from Intel and nVidia may start to slow down.

W: Let’s say for example that if we’re Intel and we’re approaching the limit of silicon shrinks, they’re still working on it but Intel used to have their Tick-Tock cadence and now is shifting to a Tick-Tock-Tock cadence lengthening out the node shrink cycle. The point is of course that in the old days it was easier for them to gain performance. So if your top end was a lot better than your nearest competition, I would be thinking “what is the point of trying to innovate and push more and more when I can make slower progress and milk the consumer for longer.”

JI: I think being a bit paranoid, Intel would think if they don’t, someone else will which is why AMD is providing a valuable service even though people like Intel CPUs, there’s definitely an argument that you have to keep AMD alive because without AMD, they will slow down, but with AMD in the frame, they can’t afford to too much because this is still a competitor although they have been weakened, they’re still there. Again, going back to Boeing and Airbus, without one do you think the other would be as keen in their pricing? No, so you say that European governments pumping money into Airbus are actually providing a service to worldwide airline travel consumers because that’s what they do to keep Boeing on their toes.

W: What if someone were to say to you that a monopoly is better because it means a single firm is better off and profiting from an industry that might otherwise be at risk of failure due to strong competition?

JI: I don’t think strong competition always means a failure in the industry, strong competition is actually the sign of a healthy industry simply because it is an industry that provides goods and services that are in demand, which is why people want to jump in and supply that industry, demand is there and the industry is healthy, otherwise why would people go and provide the goods and services because if it’s not profitable to do so they will eventually stop. Some industries, of course, may have a high barrier of entry like airlines again as an obvious case and success or failure is sometimes very iffy so yeah, government support of Airbus Industries is a clear case.

Look at the Trabant with its 2 stroke oil polluting engine the East Germans used and they had no choice but to queue up to buy that thing, but once the wall came down they could buy other cars but then *laughs*, they were no longer competitive, so a clear case where a monopoly doesn’t really serve the interests of the consumer and you can see that once competition was introduced they went under.

W: So in this scenario, the market should balance itself to the point of profitability for competitors to the benefit of consumers by virtue of there being competitors?

JI: Yes of course and if the market fails to provide that balance, a lot of the time, governments will step in like I said before for regulated industries. If some industry lends itself to a monopolistic situation and it’s very difficult for others to step in due to the high barriers of entry, governments tend to step in and regulate them to provide a balance between profits for the producer and reasonable prices for the consumer.

W: What about the argument that supernormal profits of monopoly enable competition and innovation in other industries which they can only do because they are a monopoly in the first?

JI: Now you’re talking about cross subsidies between industries. There is discussion about that with all the Japanese industrial conglomerates and Koreans that are big in one sector and get their fingers into all the different pies, but as long as there are others doing the same thing and competing, they can keep each other sharp. It’s not an argument for a monopoly because you still have detriment to the customer because the monopolist producer’s gain is a loss and the loss is to the consumer.

On a welfare perspective, if you look at the overall economy as to who gains more and who loses more, the monopolists gain is far less than the consumers loss so from an economic welfare standpoint, monopolies are still detrimental overall.

W: So from another standpoint, if someone is saying, well a monopoly is good because they have supernormal profits and provide jobs and housing and a good standard of living for employees and that sort of thing. That argument from an overall welfare perspective doesn’t hold up?

JI: No, it doesn’t hold up.

W: And on the other example in graphics cards where nVidia has a high degree of monopoly power, but is still pushing to innovate against underdog competition, they can afford to invest and innovate more but increase prices significantly as the competition is behind them in the release cycle?

JI: Now, to the extent that for a brief period of time, the Titan is the top performing video card, that is a monopolistic situation which is what businesses are always trying to create all the time, so that for the early adopters, if you want that performance, you have to pay the price, otherwise you will have to wait for others to catch up and then you can get that sort of performance for a more reasonable price. That’s absolutely a monopolistic power situation. These are the kinds of situations that companies want to be in until the advantage gets competed away, which is why consumers like perfect competition and businesses like monopolies.

W: So what about people who say that the supernormal profits of monopolies allow greater investment in research and development for the betterment of the industry and efficiency?

JI: Well, it’s all back to the incentive point isn’t it. If there’s no competition, there is no incentive.

W: So in general it sounds like it’s fair to say that monopolies are good for the company which is a monopoly and competition is good for consumers?

JI: Yep!

W: Thanks very much for your time today John!(/Dad). It’s been a very informative interview.

So, to conclude. Still think monopolies are a good thing? Go to jail! Go directly to jail! Do not pass go! Do not collect $200! Competition helps us all in our capacity as consumers.

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