Co-Opetition - Adam M. Brandenburger [59]
Commenting on the government’s antitrust case, the business weekly Barron’s wrote:
The legion of trustbusting lawyers would be far more productively occupied playing Super Mario Brothers 3 than bringing cases of this kind.… In their pursuit of … crooks, we wish the trustbusters well. But [they] are in equally hot pursuit of Nintendo and other real business success stories, real achievements, real technological progress and real rewards.10
A year later, the government dropped its investigation of Nintendo.11
Monopoly Money
Always leave them asking for more.
—Old vaudeville saying
What does it mean to have a monopoly? Without you, there’s no game. So your added value is equal to the whole pie—an enviable position to be in. But how well you do depends not only on your added value but also on the added values of everyone else making claims on the pie. That’s where shortages come into play.
In the Card Game, both Adam and Barry had a monopoly. Each had all the black cards, but Barry did a lot better than Adam. By losing three cards, Barry effectively created a shortage. The result was that Barry’s students had a lot less added value than did Adam’s. So while Adam split the pie evenly with his students, Barry captured the lion’s share. That’s why Nintendo did so well: while monopoly by itself is nice, monopoly and shortage is twice as nice.
The Nintendo story demonstrates the potent effects of under-supplying customers. This strategy has a counterpart toward suppliers, as must be the case, given the symmetry of the Value Net. The counterpart strategy is underdemanding a resource—a strategy that is potentially as powerful as undersupply.
The National Football League employs both strategies. In the Game Theory chapter, we saw how the National Football League limits the supply of teams. The league also limits its demand for players. By holding down the number of teams and limiting the roster size of each one, the NFL ensures that there are many more players who would like to play professional football than will ever get the chance. That reduces the added value of every football player, even someone who makes the cut. Were the NFL to expand, the quality of the play might go down, but the players’ pay would go up.
The Ace of Diamonds Let’s go back to where we began this chapter: Adam Smith’s water-diamond paradox. Two hundred years ago, diamonds were to be found only in riverbeds of India and the jungles of Brazil.12 Thus, supply and demand explained the relative prices of water and diamonds. Water was plentiful and therefore cheap. Diamonds were scarce and therefore dear. Paradox lost? Not quite.
The real puzzle is why diamonds have remained so expensive. The high prices led people to search for new sources—and they found them. In the 1870s major diamond mines were discovered in the Transvaal of South Africa. Still more diamond reserves have been found in Angola, Australia, Botswana, Namibia, and Zaire. In the 1960s Russia found a way to unearth its massive reserves from under the Siberian permafrost. It’s now the world’s largest producer of high-quality gemstones. Between 1950 and 1985 the world’s output of diamonds grew from 15 million to 40 million carats a year. Then, between 1985 and 1996, it more than doubled again to over 100 million carats. Today diamonds are hardly scarce.
That’s one side of the equation. As for demand, it’s much more stable. Demand is mostly driven by demographics—the number of people getting engaged, in particular. With