For reasons that remain unclear to me to this day, back in college when I was majoring in economics, one of the fields I became fascinated with was that of industrial structure.
Antitrust lawyers swim in the sea of industrial structure, whether or not they think of it that way, but “industrial structure” is simply the descriptor for the study of how companies populate the landscape of an industry.
Some industries are natural monopolies, such as regional utilities or, say, the Port of Los Angeles or the O’Hare Airport Authority. Other industries are atomistic, with no sizable players and no meaningful prospect of sizable players (classically, wheat farmers; more currently, artisanal anything). Many industries exhibit increasing returns to scale, which exert a strong gravitational pull towards monopoly or oligopoly (global aircraft manufacturers, pharmaceuticals, railroads and ocean shipping, petroleum, low-cost retailing, mining and extraction).
Other industries (or more precisely markets), particularly in today’s hyper-networked world, are “winner take all”, or virtually all. They’re markets which exhibit “network effects,” meaning the more participants there are the more valuable the marketplace is to everyone, and the less valuable rival marketplaces, less densely populated, are. EBay is the obvious example: Everyone wants to sell stuff there because that’s where the most buyers are, and likewise everyone wants to buy stuff there because that’s where the most sellers are.
But most industries have none of these innate features.
Which brings us to our next to last category of firm in the taxonomy: The Hollow Middle. This should be a shoo-in to win, place, or show in the competition for most controversial and potentially divisive among readers, of all our categories.
In the absence of powerful intrinsic structural pressures such as those outlined above, what type of structure do industries tend to migrate towards?
Conceptually, there are three structures that matter most in the real world.