Startups are among the most important aspects of a healthy and robust economy. Without these daring new companies, markets become stagnant. In the world of economics and finance, stagnation results in poor competition.
Monopolies and Competition
This state of stagnant competition can cause several situations for consumers. The most infamous situation involves monopolies. With few competitors in the market, one company can restrict its production of goods and services to force consumers to pay exorbitant prices. The people who enjoy the monopoly privileges benefit from this situation, but consumers are harmed.
Cartels may also rise in a stagnant market. Without a large number of competitors, a few companies can work together to behave as one large monopolistic entity. OPEC is a modern example of a cartel. Cartels restrict output to raise prices for consumers. With limited competition, cartels are able to profit from abnormally high returns.
It is important to note that monopolies and cartels are not defined by size. Instead, they are defined by behavior. In general, a company with monopolistic behaviors will restrict their productive output while they increase prices. Companies of any size can exhibit monopolistic behavior if they face limited competition. Therefore, the remedy to monopolistic behavior is competition.
How do policymakers create competitive markets? To explore this question, it is helpful to consider the factors that remove competition from markets. Some economists argue that natural monopolies develop as companies consistently defeat their competitors. Amazon is often classified as a monopoly. However, Amazon does not exhibit classic monopolistic behaviors. Instead, the company reduces prices while increasing global output. The natural monopoly explanation is flawed because it addresses the size of companies. While Amazon is a large company, its CEO understands that potential competition exists across the globe. This rational fear of unknown competition causes Amazon to regularly compete on the grounds of price, quantity, and quality.
According to the economist William Baumol, potential competition is as valid as current competition in markets. If companies can freely exit and enter an industry with new ideas, current companies will be forced to increase output while decreasing prices. If these current companies decide to earn high returns with monopolistic behaviors, competitors will enter the industry. These new competitors will notice the abnormally high returns, and they will attempt to profit from the opportunity. This increased competition will cause the prices to decrease over time.
To ensure that potential competition exists in markets, policymakers must ensure that the flow of competitors to and from industries is not restricted. To prevent barriers to entry, the government must limit the reach of its regulatory arms. While policymakers often have good intentions when they propose new regulations, their result often stifles competition. Consider the example of Microsoft. In the 1980s, new regulations proposed by the lobbyists of Microsoft’s competitors threatened to stifle competition in the technology industries. Sensing the threat of regulations, Bill Gates redirected company funds to lobbying efforts. Microsoft was able to use the regulations to restrict the entry of competitors. When regulations enter the equation, companies respond with lobbying efforts. Instead of creating competitive markets, government regulations increase the occurrence of monopolistic behaviors. The government should not attempt to regulate competition in markets. Instead, policymakers should focus on eliminating all barriers to entry.
Innovation Stimulates Competition
While the industrial organization is an important topic for economists and policymakers, one should also consider the role of innovation in markets (http://www.businesswire.com/news/home/20060530005503/en/Doral-Financial-Corporation-Names-Glen-Wakeman-President). Competition decreases prices, but innovation allows new companies to enter the fray. The economist Joseph Alois Schumpeter understood the role of innovation in competitive markets. Per his theory of creative destructive, Schumpeter argued that innovation allows small firms to challenge the large companies in the market. With innovation, small companies can overcome the extensive resources of large corporations. In today’s world of business, these small innovative firms are referred to as startups.
Startups can earn large profits in the markets by testing new ideas. If successful, these startups will replace similar companies. This process is known as creative destruction. Consider the progression of energy. In the early stages of history, humans relied on wood and dung for lighting. Eventually, humans progressed to whale oil and other early forms of liquid fuel. Due to the entrepreneurial efforts of Rockefeller, whale oil was replaced by kerosene. Today, humans rely on electricity that is generated by coal, natural gas, or nuclear fission energy. These modern forms of fuel will eventually be replaced by green energies. This pattern of technological improvement is credited to the competition of innovators.
It is clear that the innovations of new companies are necessary for the advancement of humankind. After all, the ideas of these new competitors result in lower prices and better technology. Unfortunately, small companies cannot defeat large corporations solely with great ideas. Savvy CEOs must use their wits and resources to craft business plans that will ensure their company’s longevity. Without adequate capital, ideas never become real products. Foolish business plans have destroyed many companies that were built around great ideas, so new CEOs should learn from the mistakes of their predecessors.
Learn From the Mistakes of Others
Learning from mistakes is a vital part of creating a business plan, but CEOs do not have to fall into the traps that frequently destroy startups. Instead, they can learn from the experiences of smart professionals. Glen Wakeman is a finance expert who is familiar with the challenges that hinder small companies. Wakeman leads LaunchPad Holdings. This company creates software products that help entrepreneurs use present business plans. These plans help entrepreneurs raise capital, sell products, and collect revenue. Glen Wakeman offers a unique perspective to early-stage entrepreneurs. Instead of focusing on sales, Glen Wakeman emphasizes the importance of long-run success. Glen Wakeman helps companies create long-term models that will result in success on numerous time horizons.
Glen Wakeman’s products are tried and trusted. The software of LaunchPad Holdings is used by Fortune 10 companies. It has been used for hundreds of large-scale financial transactions. In addition to great products, Glen Wakeman offers a multi-step formula for success. First, he focuses on execution. He ensures that entrepreneurs follow every aspect of the business plan. This disciplined approach allows Wakeman to make business decisions with scientific precision. After the execution stage, he focuses on governance. This grants Wakeman the flexibility to make changes according to current results. He also emphasizes human capital, leadership, and risk management.
Glen Wakeman studied finance at the University of Chicago, and he has over 20 years of experience with banking and investing. He is recognized as a global growth expert.