February 16, 2022 • 2 minute read
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The importance of
definitions and ratios.
You might have wondered earlier: why are monopoly, perfect competition, and monopsony only considered theoretical? The answer comes down to definitions and ratios.
Monopoly and monopsony either exist or do not exist depending on how vague or specific you are with the product’s definition. As former Microsoft CEO Steve Ballmer once said, “We don't have a monopoly. We have market share. There's a difference.” PayPal founder Peter Thiel is even more blunt in his book Zero to One, “Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked.” On both a technical and practical level these two men are right. It is very easy for a monopolist and monopsonist to simply loosen up the definition of a product and thereby say, “See! We’re not the only seller! Look! We’re not the only buyer! We have competition!”
A market category will also break down as the ratio of buyers to sellers increases or decreases by a significant amount. This is inevitable as a market nears perfect competition. Rare but extreme wealth accumulation happens in foreign exchange as a result. If those markets were to remain fixed in a perfectly competitive state, speculators would avoid them. The sudden but uncommon forex billionaire is only made possible by a dramatic change in market category.
The spectrum thus allows us to categorize markets for all things sold or bought—however vague or specific they are defined, or however much supply and demand fluctuate.
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Value is always relative.
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But it bears repeating, no matter what category exists along the market spectrum, a primary rule always stands firm. Value is always relative. It must exist between two parties—a buyer and a seller. No buyers? Then whatever product the seller decided to create has no value. No sellers? Then whatever product the buyer intended to acquire has no value.
The most optimistic seller of rectangle motorcycle tires, no matter how hard he works, will find no buyers. It is simply not useful. And the wealthiest buyer of an interplanetary teleportation device, no matter how useful, will find no sellers. Labor cannot build it. Therefore, neither product has any worth. No exchange between a buyer and a seller will ever occur even if we assigned a price to each of these products.
In summary, the purchasing power of all products always derives from the forces of supply and demand—the sellers and the buyers—however few or many of them there may be.
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