Globalization and winner-takes-all

The globalization of markets and capitalism has increased the opportunities for businesses with a winner-takes-all model. Such business are characterized by high cost of entry once a dominant player has acquired the bulk of the market. Their rise is explained by the benefits of one-stop-shop found in many services.

For instance, in social media users value the opportunity of having all their friends in the same platform (e.g. Facebook). Typically the providers of such services compete by offering a loss-making free service until they manage to establish a quasi-monopoly. Once they have achieved that, they can monetize their dominant position through advertising or by other means. This is not a natural monopoly nor is it protected by any entry barriers other than capital resources.

This strategy is only possible because of the existence of venture capital funding willing to bet on the various contenders for the market, but once one has been established as dominant it is no longer profitable to try to dislodge him.

Similar cases occur when, due to locational or brand recognition advantages, some businesses rely on the captivity of the final consumer to transfer to their suppliers any demand adjustment costs. These situations occur in industries as disparate as publishing and groceries. For instance, during economic crisis supermarket chains force their suppliers to cut prices or offer discounts to sustain consumer demand.

A somewhat similar situation, but less stringent, occurs in the so-called 20/80 sectors where 20% of the producers have 80% of the market and vice versa. Here, removing the entrenched incumbents is difficult because the market may overvalue them and the entry costs are too high. It usually takes a long period and some new technology to achieve that.

These conditions are more common in global businesses ranging from soft drinks to computers. For instance, Microsoft dominance of operating systems was only challenged by the arrival of the smartphones and tablets.

With the globalization of capitalism these conditions become more common but once the globalization process has been completed their number will subside.

Therefore, overall, globalization and winner-takes-all business models are not lethal capitalism and must be seen simply as a temporary nuisance to market capitalism.