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Monopoly as the Efficient Model

Mentor CEO Wally Rhines gave a keynote presentation at the recent U2U event and, once you connected all the dots in the presentation, he seemed to make a startling suggestion: that industries with monopolies are more efficient than those with many competitors.

Of course, that’s not exactly how he said it. Rather than talking in terms of monopoly versus competition, he worded it as specialization versus generalization, and the point is that specialization is more efficient.

He used Alcoa as an example. At one time, there was no one but Alcoa for aluminum. Then Kaiser and Reynolds came into the picture, and he showed a graph indicating that production cost reductions – couched as “learning” – slowed once there were multiple significant players. And he said there were numerous such historical examples.

He was making this point while addressing the aftermath of the Japanese earthquake. Because of increased specialization – that is, less industry redundancy and increased single-company dominance – a single missing critical component or material could conceivably jeopardize an industry. And he voiced a concern that companies might take a lesson from the event and back off of the high levels of specialization in the industry today.

He proceeded to showed how, in EDA, each specialty is dominated by one particular player (no segment had a top supplier with less than 40% share), and, in most cases, the dominant guy was one of the big 3. In fact, together, the big 3 hold 73% share overall. The sense was that “this is a healthy setup.”

It seems to me like there are two levels at which this discussion holds. An individual company might decide to specialize – or focus – on a single segment. And you can debate whether that’s good for the company (and I’ll leave that for another time). Then there’s the industry as a whole: is it better with one specialist, or will things be more efficient with more than one player (with each of those players possibly being a specialist)?

I’m sure that there are examples of benevolent monopolies. In the case of Alcoa, apparently the competition with non-aluminum alternatives like copper served to goad them on to greater efficiency. But, given the abuses of monopolists of the robber-baron past (not to mention the much more recent too-big-to-fail calamities), it’s hard for me to believe that too much dominance is good for anyone but the monopolist in the long term. No one can look at an unguarded cookie jar for that long without deciding that it’s really okay to have one… or perhaps another… Someone pays the price, whether customers or taxpayers.

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