> If you think about it in terms of balance equations there have to be exactly as many sellers as there are buyers at a given price and any want-to-be sellers who aren't competitive at that price are eventually forced out of the market through bankruptcy because they can't sell and run out of reserves to hold on.

That's not how it works in practice.

In a market with low fixed costs, you can have an arbitrarily large number of sellers. Some markets have millions of sellers, billions if you count the labor market.

In a market dominated by fixed costs, larger sellers have an advantage, but even that doesn't imply that there is a specific "appropriate" number. If all of the sellers are the same size then none of them has a scale advantage over the others regardless of how many there are.

So we have to distinguish between two different things.

The first is, how many sellers can the market support? In other words, suppose it costs a billion dollars to enter the market, the maximum value customers place on the product would allow for a gross margin of $100, and there are a billion customers. Then the maximum viable number of competitors is 100 because otherwise they can't each get enough customers to recover their costs and go out of business. Whereas if there are 100M customers then it's only 10, and if there are 5M customers then it's 0 and nobody produces that product.

But this being a low single digit positive integer is very rare, because to get there you have to thread the needle exactly and find something that can only support 2 rather than 20 or 5000 or a billion, but also not get so tight that it's 0.9, because anything less than 1 is really 0.

Which brings us to the second thing. You're in the market that can support e.g. 100 suppliers. To support 100 suppliers they each need a gross margin of $100, and customers value the product in that amount when it's not available for less. But now suppose some of the sellers are willing to accept $10 margins. At the lower price the market would only support 10 sellers; they each need 10 times as many customers. At a margin of $1 it would only support one seller. But this is every market where the fixed costs aren't fully zero. And, of course, the fewer sellers there are the less inclined they are to accept the thinnest of margins, or the more likely they are to be operating a large inefficient bureaucracy that eats up the economies of scale through red tape etc.

Notice also that the "maximum" number isn't necessarily the optimal number -- the market could support 100, but you might be better off with 15, because then the margins can be $15 instead of $100, which might be worth it on a $1000 product, whereas trying to save the remaining 1.4% by going all the way to a monopoly is not likely to go in your favor.

Which brings us to the thing that most commonly happens in practice. The market can support 100 sellers but one or two of them have more capital, so they lower their prices temporarily until the others go out of business, then raise them back up again as long as no one new enters the market. Which doesn't work when the barriers to entry are low because then people constantly enter the market anyway, but does work when the barriers to entry are high. Which is why we need to keep them low or, where that isn't possible, need antitrust.

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roenxi 20 hours ago | parent [-]

> ...but also not get so tight that it's 0.9, because anything less than 1 is really 0.

Fractional sellers are actually pretty easy for a market to do, there are businesses where the product is one thing and they do another thing on the side. Eg, an antiques business that also repairs old clocks if the market for clock repairs isn't big enough to support a dedicated repair person.

And then there are business models selling general capabilities without committing to a concrete product. Like a factory that can retool to whatever someone wants on a lower-volume basis.

> But this being a low single digit positive integer is very rare...

Which results in this scenario being quite common in practice. The software industry is flooded with examples where fixed costs >> marginal costs and there are only single digit numbers of suppliers in practice.

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AnthonyMouse 3 hours ago | parent [-]

> Fractional sellers are actually pretty easy for a market to do, there are businesses where the product is one thing and they do another thing on the side.

That's not the issue here.

Suppose there is some demand for supersonic passenger jets, but they're also expensive to operate and generate sonic booms that de facto require them to be used only for transoceanic flights, which limits the demand. So then you're stuck trying to recover the costs over a small number of planes, and small batch planes are expensive to produce.

The result is that there are currently zero providers of supersonic passenger jetliners. It's not that they can't be produced -- the Concorde existed, but proved economically unviable. Only 20 were ever built, none are still in operation and nothing replaced it. Because the cost of doing it is just a little bit more than the demand can sustain. It's the thing at 0.9 and there are correspondingly zero suppliers, and will continue to be unless the demand changes or somebody figures out how to do it at a lower cost.

> Which results in this scenario being quite common in practice.

The common thing isn't that the market couldn't support more companies, it's that it consolidates to fewer companies than it could support. The consolidation is more likely when fixed costs dominate because then when competitors are eliminated through mergers, attrition, dumping, etc. they're harder to replace because a replacement has to pay the high entry costs.

Software also tends to have a network effect, which incumbents frequently use anti-competitively. If a company makes sure the apps that run on their OS can't run on your competing OS and vice versa then developers focus on the platform with more existing market share, which suppresses competing platforms that would otherwise have been viable. If they tie all of their company's products together then it creates barriers for someone who wants to offer a substitute for only one of them.

Compare how many alternatives there often are for a given open source app. They're often not even forks of each other, but because they're not actively trying to suppress their competitors or create interoperability problems, the number of alternatives is higher -- even with lower funding.

	▲	roenxi 13 minutes ago \| parent [-]
		> Only 20 were ever built, none are still in operation and nothing replaced it. Because the cost of doing it is just a little bit more than the demand can sustain. You're not describing a situation where the market could support 0.9 sellers though. You're describing a market that can support 0 sellers because nobody would pay enough to have the product produced and consequently the market supplies 0. If the market could support 0.9 sellers then there'd be new supersonic jets produced every so often by companies dipping their toe into the market in response to seeing an opportunity to sell something. Probably some boutique manufacturing firm specialising in serving tricky markets. I suppose there are some semantics here on what you mean by "0.9 sellers" since the term isn't very meaningful without assumptions and I'm inserting a "per annum" on the end in my head, but even if you mean selling 0.9 of a product that is totally doable. If you want 0.9 of a chocolate bar and were within walking distance of my place we could make that happen. Fractions of a thing are possible. Anyway; it is routine for a small market to only support one, two or other digit of choice firms producing a good.