Comment by run4yourlives | Hacker News Reader

Comment by run4yourlives | Hacker News Reader

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I'm talking about markets on the whole, not any particular business.

Let's say you have 5 players selling car tires. There are 1000 cars in the area, and only one brand of tire to buy. For the most part, these 5 players compete on something other than price, since the market is mature. They have 20% of the market each.

Let's introduce 3 new players into this market. They bring nothing new to the market per se, but by default they get some sales (maybe they are closer to the car owner's homes, maybe they have a hot chick at the front desk). Nothing major, let's say they share 10% of the market overall, and the 5 incumbents lose 2.5% of their sales each.

The incumbents panic and look to counter this threat, and one of them happens upon the fact that if you change the formula for the tire a little, you can get a 50% increase in performance and a 20% increase in lifespan with only an extra 5% in manufacturing costs.

Now everyone scrambles: Some into R&D, some into improving customer service, some into death. The overall value of this market increases, because of the 5% increase and corresponding price increase... inflation, if you will.

This innovation happened completely and only because of the dreaded saturation of the market you are complaining about. The quality of the noobies is irrelevant, since the incumbent did the innovation. Point is the innovation happened, and wouldn't have happened without the new entrants creating pressure through competition.

Sure, I understand the idealized theory; it just doesn't match what actually happens in most complex systems (take fluid flow, for example, where increasing pressure increases flow rates... until a critical threshold at which flow becomes turbulent). I don't think markets are well-understood enough to apply this idealized theory without empirical evidence that assumptions aren't violated. It's not a priori clear to me that there don't exist situations where increasing market participation leads to decreased market efficiency as friction effects or internal market dynamics start dominating.

This is not a theory - it's exactly what happens.

Even a case where an innovation decreased market efficiency (of this does happen - all players would love to have a monopoly), the trend is for the market to work towards increased efficiency.

I'm no hard-core libertarian, but unless you have outside interference in a market - big tire 5 use government to mandate a tire-selling license that presents a barrier to entry - or one of those markets that lead itself to creating natural monopolies, this is the way things work.

That's just an assertion based on idealized economic theory; not evidence that things work that way in particular situations. In particular, you haven't explained why there are either a priori or strong empirical reasons to believe that greater market participation never produces adverse effects. Evidence from nearly every other complex-systems discipline, ranging from hydraulics to meteorology to ecology, points in the direction that such "well-behaved" systems characterized by general relationships, valid in all regimes, are quite uncommon; and instead "phase-change" type thresholds at which behavioral regimes change are the norm.

>greater market participation never produces adverse effects

I never said it didn't.

I said greater market participation increases innovation by default, regardless of the quality of said participation. You are the only one equating the behaviour of the markets to being either "good" or "bad". The reality is that these are not concepts the market understands or cares about.

Innovation can and does destroy entire markets all the time. But unless you feel innovation itself is horrible and we should be writing these arguments with typewriters and cabling them to each other, you simply have to accept the reality that innovation will occur all the time in every direction.

You make a leap in the story there when you assume that the incumbent will discover the innovation. It is so subtle too: and one of them happens upon the fact

I don't think its that easy, and the story could have turned out a number of different ways and you chose the one that supported your argument (much like I did in my other reply to you).

Increased competition could lead to a race to the bottom, with each competitor slashing prices, engaging in expensive marketing wars and predatory acquisitions. With so much heated competition, R&D budgets get slashed by short-term thinking managers. There is no innovation for a decade, only decreased profits.

There is no innovation for a decade, only decreased profits.

Decreased profits are an innovation. Clearly the market was overpriced. It's the same as buying a new machine and decreasing your costs.

Creating wealth is not "building something" directly. I think this is where you are confused. Creating wealth is "acquiring something". This could be a physical item or something nondescript like time.

> This innovation happened completely and only because of the dreaded saturation of the market you are complaining about.

False. This happens with or without the 3 new players. Those 5 players are going to be vying for a bigger piece of the pie. They're trying new marketing, new formulas, etc. Over time an increasingly large part of the company will be dedicated to growing it, (especially if they're not growing!). Some of them might invest in or partner with the car companies and secure a contract for new cars. They might work together to increase the size of the market. Markets that are stable are not so because players idle, they are stable because everyone is innovating at a similar pace. When one of these guys makes the mistake of thinking he can take it easy and sit on his 20%, the others will take it as fast as possible.

(I'm not disagreeing that new entrants to a market are a bad thing, just saying that it's not for this reason)

No, this simply isn't true. If it was, oligarchies would never become established.

Failing a strong leader that can create monopolistic conditions in a market, oligarchies are the norm. The reason for this is that the status quo is often more desirable than the risk required in advancing your position.

What you are suggesting will only happen if for some reason, competitors view themselves as enemies. The reality is that it is often the opposite, and nobody wants to rock the boat - except for the upstart.

It's for that reason that new competitors are almost a requirement, never mind a benefit.

You're created a bogus thought experiment and tried to pretend it reflects what happens in the real world. A extrapolation fault common to many academics and startup owners.

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