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URL:  https://boards.fool.com/you-are-proposing-that-companies-can-not-grow-in-24992289.aspx

Subject:  Re: Here's your chance: Balance the Fed budget Date:  1/3/2007  7:07 AM
Author:  capitanfracassa Number:  200238 of 603841


You are proposing that companies can not grow in the face of competition which I believe is silly.


Technically, it is impossible to grow much faster than the market in a free competition. The reason is that if you produce at your marginal cost, you have no incentive to grow. That is why most small businesses indeed do not grow. Your car mechanic most likely has the same amount of business today that he had twenty years ago. The same goes for your dentist and florist. Some florists go out of business and some prosper. But all this is fairly limited. Overall, florists have business volumes in a a very tight range.

Growing businesses always begin with some kind of a difficult to copy "competitive advantage". That can be a monopoly granted by the government, for example a license, a patent, etc. But it can aslo be a home grown monopoly, a technological innovation, a unique way of doing business etc. This advantage can (but doesn't have to) develop within a competitve markets.

Once a business, however, gets on the growth path thanks to such an advantqage, it leaves the competition behind. The market is restructured into an oligoply, former competitiors are bought, others exit. The few players in an oligopoly have an strong incentive to grow because they have profits that exceed, often by far, their marginal costs, and they generate tons of cash every year. Their growth is limited no longer by their costs but by the size of the market. That is the exactly what overcapacity means.

Of course they still compete with each other and upsets happen, sometimes new players emerge, etc. Competition doesn't disapear. And sometimes even oligpolisitc markets can develop a destructive competition that eats up profits, as airlines and car manufacturers prove. But oligopolistic competition and free competition are two different animals.

Regards,
Capitanfracassa
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