You> You asserted that a highly concentrated industry is evidence of optimal resource allocation.
Me> If you consider markets to be an optimization strategy for resource allocation ...
Optimization strategy as mathematicians use it means something similar to "optimal resource allocation" as economists use it, but the tools and thought processes are very different. For instance, economists are often not aware of the concept of "local maximums" vs "global maximums"--that in large state spaces, like an economy, there probably is no globally optimal allocation. They're mostly not aware of what "state spaces" are or what logistic regression is. But yes, I think of markets as an optimization algorithm for resource allocation, not dissimilar to gradient descent.
Me> ... an industry being owned by a small number of successful companies represents a signal that a local maximum has been reached. That's assuming there aren't artificial barriers put up to prevent competition
For my specific point of "concentration points to an industry local maximum", "law of diminishing returns" is probably the most applicable concept taught in econ 101, but I'm saying more than that. "Law of diminishing returns in mathematical optimization" is a real thing, I didn't make it up. It applies to many complex systems, an economy being one.
So yeah, I stand behind what I said; I think I understand econ just fine; maybe in the future you can just open with your point instead of being a dick, it saves time.
But we're not talking about a monopoly here. For example for cloud hosting, it's competition between Amazon, Google, Microsoft, OVH, and perhaps a few more "big" players.
Like in many technology fields, you have high fixed costs that are distributed over all of your customers, and economies of scale. It is much cheaper for Google to add 10 000 new servers to their datacentres, compared to starting up a new hosting company, building small datacentres on five continents, and rewriting all the software that Google Cloud offers on top of servers.
So seems plausible that a highly concentrated industry with a few big companies each having >10% market share is more efficient (and can offer lower prices) than a market with thousands of small artisanal hosting companies with <0.1% market share.
1 I think we all understand that there are are degrees of monopoly power:one company might be a pure monopoly, a few big players (known as an oligopoly) can behave cooperatively (like a monopoly) or engage in price wars (with the objective of driving out the weaker player).
2 There are lots of businesses with high fixed costs and low marginal costs - tech is not that different from others in that regard.
3 Tech, does have one key difference - the network effect.
In other words, a company's history in building up a large network of customers may matter more than how efficiently it operates today
4 The dynamic effects of concentrated industries (as I mentioned earlier) are complicated. There is no guarantee at all that the result will be optimal.
5 We have nice examples of this in collusive behaviour by the major tech companies in their hiring policies.
6 There are other alternatives to the status quo than, as in your example, of reducing companies to one hundredth of their former size.
Why can't there be both perfect competition and one company that serves most of the market? If one company is better at resource allocation than all others, their market share will probably outgrow the competition, until someone else figures out how to do it better.
But if everyone is essentially running the same strategy, the biggest player will win by force of momentum. (See also the reasoning behind dozens of copycat food delivery startups trying to "growth hack".)
Either way, you end up with a few players dominating the market with their locally optimal resource allocation.
