The misunderstood "Creative Monopoly"

I recently read an article on LinkedIn titled “Peter Thiel couldn’t be more wrong”. The article discussed Peter Thiel’s views in his book, Zero to One. The author claims that Thiel’s beliefs would hurt society and business. But as I outline below, that is not the case.

Phil, who wrote the article, misinterpreted Thiel’s connotation of the word monopoly. Thiel wrote Zero to One to describe the principles a startup company needs to follow in order to survive and succeed. In his book, Thiel writes that the monopoly definition we are taught in school (which Phil is referring to) is negative for business/society. Thiel says that the education community uses that definition of monopoly because it is easy to teach for the teacher, and it is easy for the students to understand.

But, Thiel uses the term monopoly in a different connotation. Thiel encourages a company to create a product or service that is 10x better than the current product/service. By that definition, the company would be creating a “monopoly” because the new product/service is exponentially better for consumers than the current product/service.

Additionally, Thiel uses the term, monopoly, as a way to point out the negative effects a perfectly competitive environment has on a company. Perfect competition drives profits to zero. This perfectly competitive environment causes a company to focus on defeating its competition, in order to remain profitable in the short run, rather than creating innovation (10x improvement).

Thiel writes that a company should create a “monopoly” through innovation. The “monopoly” (10x improvement) allows the company to earn healthy profits. Thiel then says since the company is earning healthy profits, it can focus on increased innovation (benefiting the consumer and society), rather than “defeating” its competitor in the short term. According to the beliefs he describes in the book, Thiel would look at Gillette’s business decisions negatively. He would actually praise Dollar Shave Club for creating a service that is 10x better (or less expensive) than buying a Gillette razor every month.

The entire premise of the book, Zero to One, including the title, is that a company should strive for innovation by taking a current product/service (Zero) and improving it 10x (to One). Gillette has done the exact opposite. Gillette rested on its huge market share and raised prices to earn huge short term profits. Gillette did not use its short term profits to focus on innovation for the shaving business, creating an opportunity for Dollar Shave Club and Harry’s.

In summary, both the author of the article and Thiel believe that “bad” monopolies have a negative impact on society. But, when Thiel encourages a company to create a monopoly, he is referring to the creation of innovation (10x improvement). Not the “fat and lazy” monopolies we learn in Econ 101 and that the author refers to in his article.