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Profit and Competition – Stephan Kinsella

Profit and competition are inherently intertwined.

Profit is always being pushed down by competition. So profit is an unnatural thing. So you always have to to think: how can I make a profit? and once I make it how am I going to keep making a profit knowing that I’m going to attract competitors? — Stephan Kinsella, “Your Welcome” with Michael Malice 001 – Intellectual Property with Stephan Kinsella

The above concept is at the very core of profit-driven business strategy.

I wanted to dig deeper into what Kinsella meant by profits being “unnatural” so I pinged him on the twitters. Here was his reply:

Profit is in a sense unnatural–it tends to be driven down to the natural rate of interest as the market tends to equilibrium. Profit is hard to maintain in the face of competition. This is fairly standard Austrian economics AFAIK, though my argument doesnt depend on this insight — Stephan Kinsella

By the way: What he means by the “natural rate of interest” is the interest rate of borrowing money if we only consider the time-value of money and ignore the risk (and therefore increase in interest rates) associated with the borrower defaulting on their loan. Don’t worry if the natural interest rate part isn’t clear – I needed him to explain it to me as well and it’s not the point anyway.

Profit and Competition

More from the podcast:

When you’re selling a good on the market (or a service) you have to think “How can I make a profit on this good?” Because we know from economics [that] profit is – in a way – unnatural because profit is a deviation from the natural rate of interest and as soon as you make a profit you’re going to send a signal through the price system and through your activities to the market and you’re going to tell people “Hey! this guy is doing something that satisfies consumer welfare.. so come in and compete with him.

Kinsella added a few additional tweets as well to further flesh out the relationship between profit and competition:

Every entrepreneur who comes up with a business venture to make profit know that if he’s successful he’ll face competition and his initial profits will start to be eroded, so he has to keep on his toes an keep finding news ways to please consumers. — Stephan Kinsella

That’s why it’s hard to make a profit–you have to successfully forecast for the future in a world of uncertainty. But when you do this you make profit and this attracts competition, pushing down your profit, so you have to keep innovating. — Stephan Kinsella

Thanks Stephan – I appreciate the quick reply and economics lesson! FYI: Stephan Kinsella is the leading authority in the US arguing against intellectual property protection. Follow him on twitter (@NSKinsella) and check out his YouTube channel / podcast.

Hooters "Hooters Girl"

Increasing Hooters Utilization

WeWork has new competition in Tokyo – Hooters. It’s all about utilization.

Hooters in Tokyo’s Ginza neighborhood has teamed up with Spacee – a space-matching service – to rent out work areas during the restaurant’s downtime.

Hooters has over 400 locations worldwide and they, like all brick and mortar businesses, have a utilization problem. After lunchtime traffic at the Hooters in Ginza dies down, 20 seats open up for rent via Spacee until the dinner rush begins.

While WeWork may not be worried about the competition yet, it’s going to be hard to beat the Hooters price. Spacee members pay only 50 yen, or about 48 cents, for a 30-minute work block, and that includes a discount on some beverages and an atmosphere that some will undoubtedly find truly inspiring.

(Oddly enough, students don’t have to pay the 50 yen fee. But if they’re under 18, then they have to be accompanied by a parent or guardian. Glad someone’s thinking about the children..)

Utilization

From an entrepreneurial theory perspective, one enormous path for adding value is to reduce inefficiencies. Low utilization – especially for capital intensive goods – is a huge contributor to inefficiency. And over the past 10 years, a new wave of utilization-focused start-ups have flourished on the shoulders of both the internet and mobile phones.

AirBnB increases the utilization of your spare bedroom or couch. Getaround increases the utilization of your car. Lyft and Uber increase the utilization of your time (and your car).

What’s interesting is that these companies are all marketplace plays. The business is in connecting parties with spare capacity with parties who need capacity. Bring together both parties in a trusted forum and you’ve got yourself an interesting business.

Look around you: What inefficiencies do you see? Where is utilization low? Is the value being squandered worth recovering? Can you create a trusted marketplace? Can you acquire customers at a reasonable price?

PS: In other WeWork news, the company is continuing to expand very rapidly. You may have seen some misleading headlines about $18 billion in leases, but that number is the sum of many years of leases, $13.2 billion of which is for 2023 and beyond. Their 2018 and 2019 lease payments are for $706 million and $984 million respectively. Bloomberg covers the story here and here.

PPS: Hooters and strategy. Strategy and Hooters. Are you not entertained?

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