The Free Market and Monopolies

[Tahuti]

This isn't true.

Monopolies happen because capitalists want to make money. End of story. The most money that can be made is a monopoly. Why do you believe that people who know that they could make more money by creating a monopoly would refrain from doing so? Why would they simply ignore this money that has dropped in their laps for no effort on their own part?

The main problem is that you fail to see that there are many things, outside of government trustbusting that may prevent monopolies from being more profitable or tear them apart: Diseconomics of scale is a very notable example of that. It may be advantageous to be big, but it can also mean inefficiencies and RELATIVELY higher operating costs. On occassion, it may be advantageous to a very very large corporations to sell less profitable subsidiaries to increase profit margins and increase investor confidence. This increases competition, but also increases profits in the long run.

Monopolies are very rare to begin with, and especially if it doesn't involve any government. Microsoft was a monopoly, but then you also had Software Patents. Banking is prone to monopolies, but the large banks are able to print national currency, which arguably is a privilege. Mercantile companies were monopolies by law, and the historic origin of the very word "monopoly".
Standard Oil might be the only monopoly that was made without decisive intervention from the government.

 

[Evie]

All of those potential pitfalls of growing larger are indeed issues...but at the end of the day, we don't have corporations merging left, right and center because capitalists are afraid of their corporations growing larger.

 

[Mise]

Milton Friedman had both an interesting and believable explanation: Free trade would destroy any monopolies otherwise free markets would produce. With all the competition from abroad now welcomed, there would be much more suppliers.

I don't understand how this is both interesting and believable. The only time this is believable is in trivial cases, where, say, a good product comes to market and gains a large market share, but over time rivals enter the market, improve on the original product, and the market share of the first mover diminishes. But this is a completely uninteresting case: no government would ever break up a monopoly that would otherwise be broken up by free trade. If what Friedman said was true, then there would simply be no need for the government ever to interfere and break up a monopoly, because the monopoly would be broken up by market forces anyway. The interesting cases are where the monopoly doesn't get broken by market forces: cases that do not depend on a superior product, but simply a naturally high barrier to entry for new entrants or natural advantage to the first mover beyond that associated with having a high market share. Economists know an awful lot about natural monopolies, and a lot of study has been done on them. These are the interesting cases, where a monopoly incurs a deadweight loss to the economy, and the market is not at all free. And in these interesting cases, it is demonstrably false that market forces break up the monopoly. That's the whole reason why these cases are interesting: market failure occurs because of some quirk in the specific industry, and monopolies endure despite there being no government intervention.

So Friedman's statement is either uninteresting, because it applies only to trivial situations that no government cares about, or it is unbelievable, because it is demonstrably false. Economic theory is pretty clear on this: abuse of a dominant market position by one or more agent is counter to free markets. The laws in the UK, EU and US pretty well enshrine these basic economic principles and ensure that markets operate as efficiently, freely and competitively as possible.

 

[Tahuti]

I do not deny it at all. Still, thinking of his theory, the EU agriculture policy comes to mind almost immediately.

 

[Mise]

Monopolies are very rare to begin with, and especially if it doesn't involve any government. Microsoft was a monopoly, but then you also had Software Patents. Banking is prone to monopolies, but the large banks are able to print national currency, which arguably is a privilege. Mercantile companies were monopolies by law, and the historic origin of the very word "monopoly".

This is nonsense; you're taking "government intervention" to an absurd extreme. I mean, if you can call software patents an example of government intervention then you might as well call all of our laws, such as those against murder, or those enforcing contracts, "government intervention". What exactly doesn't count as "government intervention" in your conception of it? Yeah, sure, if you include software patents and similar enforcement of contract as "government intervention", then yes, it is very rare for a monopoly to form without "government intervention". But then, it is also very rare for anything to form without "government intervention"! If "government intervention" is responsible for Microsoft becoming a monopoly due to its enforcement of patents, then it is also responsible for the entire software industry due to the same enforcement. Taking the concept of "government intervention" to such absurd extremes does not support the case for the government to stay out of the markets -- rather, it supports the case for governments to intervene in the market even more. For without "government intervention", where would the software industry be today? So lets all let the government intervene and regulate to its heart's content -- who knows what future industries it will nurture!


EDIT: I really don't understand how anyone, save the farmers, could support the CAP. Farm Boy will chime in about now I'm sure, but I'll just ask him what I've asked him before: where's the beef?

 

[Mise]

I suppose, to take what I was saying above to its logical conclusion, you would have to argue that yes, everything is government intervention, but there is good gov't intervention and bad gov't intervention. Gov't intervention that fixes market failures is good; gov't intervention that causes market failures is bad. At which point, you pretty much end up back where we started, with gov't intervention only if it increases market efficiency (i.e. what our current anti-trust laws say, essentially).

 

[Cutlass]

The main problem is that you fail to see that there are many things, outside of government trustbusting that may prevent monopolies from being more profitable or tear them apart: Diseconomics of scale is a very notable example of that. It may be advantageous to be big, but it can also mean inefficiencies and RELATIVELY higher operating costs. On occassion, it may be advantageous to a very very large corporations to sell less profitable subsidiaries to increase profit margins and increase investor confidence. This increases competition, but also increases profits in the long run.

Monopolies are very rare to begin with, and especially if it doesn't involve any government. Microsoft was a monopoly, but then you also had Software Patents. Banking is prone to monopolies, but the large banks are able to print national currency, which arguably is a privilege. Mercantile companies were monopolies by law, and the historic origin of the very word "monopoly".
Standard Oil might be the only monopoly that was made without decisive intervention from the government.

No, you still are not understanding. Monopolies are, in and of themselves, inherently, in fact by definition, the most profitable market organization possible. It is not possible that a free market actor can increase his rate of profit by introducing competition. It can not happen.

Diseconomies of scale are irrelevant at this level. Because, you should know, costs do not matter at this level. All costs are going to be passed on to the consumer. So it does not matter if the costs are higher than the costs of a competitive market. In fact, in most industries, it is almost a certainty that costs will be higher.

But that does not matter. And the reason it does not matter is that the rate of profit will be higher still. So in a competitive market they may struggle for a 5% rate of profit. But in a monopoly they can get 20% no matter how worthless and lazy they are.

And because the profits are so much higher, and the risk is so much lower, and the power is so much greater, monopolies will happen whenever the government does not prevent it. It is a very rare exception, rather than the rule, that the markets will not support a monopoly in the long run over competition.

 

[peter grimes]

Can anyone show an example of "pure" market forces preventing, disrupting, or breaking a monopoly?

And, as a counter, can anyone show an example of a monopoly that provides excellent efficiency to the clients?

Maybe these questions are economically naive? I know nothing about economics.

 

[Crezth]

Maybe these questions are economically naive? I know nothing about economics.

Don't be so modest, chum.

 

[Tahuti]

This is nonsense; you're taking "government intervention" to an absurd extreme.

Strictly speaking, a "pure" free market only has property rights protections with nothing coming in between. And yes, property rights protections would include laws against battery and rape and all that, being violations of property rights. However, this is - so far - theoretically impossible, so I won't be advocating that. And the mistake you made was that you implied that I did, or so it seemed at least.

That said, I still do think there is too much government in many areas, not too little, notwithstanding there are benefits in having governments, unlike libertarians.

No, you still are not understanding. Monopolies are, in and of themselves, inherently, in fact by definition, the most profitable market organization possible.

Monopolies are also inherently fragile, if they are not backed by law. It would need but one competitor, even a potential one, to break it. It's basically a soap bubble: Everyone awes at its very existence but it takes one fart to blow it apart.

Of course, monopolists could buy out any potential competitors, but that would only cost money. You fail to realize that it is profit and not market-share that companies seek.

Even monopolies that exist by the force of law are not really free from competition either. Consider the Swedish government-owned beverage stores and the fact alcohol is illegally sold or produced or bought in Germany.

 

[Cutlass]

Can anyone show an example of "pure" market forces preventing, disrupting, or breaking a monopoly?

And, as a counter, can anyone show an example of a monopoly that provides excellent efficiency to the clients?

Maybe these questions are economically naive? I know nothing about economics.

Well, in theory, you would have to have a market sector where essentially anyone can enter for next to no money, and it's just not worth the effort of the monopolist to shut them down.

In short, it is not a manufacturing industry. It's a purely local service 1 guy operation. Like a hot dog vendor or a lawn mower.

For a monopoly that provides good service, the regulated ones. Utilities, AT&T back in the day. But that isn't a true "free market" example.

In the real world, true monopolies don't tend to happen in developed nations, because the governments either formally or informally don't permit them. And where they happen in LDCs, it's often with the connivance of, or the deliberate neglect of the situation by the government.

You look at what Standard Oil did, even they were not entirely a monopoly, but they had so much control that they dictated price to everyone else. Now they did that efficiently. But at a high price.

 

[Cutlass]

Monopolies are also inherently fragile, if they are not backed by law. It would need but one competitor, even a potential one, to break it. It's basically a soap bubble: Everyone awes at its very existence but it takes one fart to blow it apart.

Of course, monopolists could buy out any potential competitors, but that would only cost money. You fail to realize that it is profit and not market-share that companies seek.

Even monopolies that exist by the force of law are not really free from competition either. Consider the Swedish government-owned beverage stores and the fact alcohol is illegally sold or produced or bought in Germany.

No, they are not fragile. Why would you think that? Where would that idea even come from? It's ridiculous on the face of it. Private sector actors do not break a monopoly from the outside. The monopolist could squash them like a bug with the tiniest of effort.

 

[Tahuti]

The monopolist could squash them like a bug with the tiniest of effort.

How exactly?

 

[peter grimes]

Standard Oil, you say?

http://www.newtowncreekalliance.org/community-health/exxonmobil-oil-spill/

A really complete overview:
http://www.epa.gov/region2/superfund/npl/newtowncreek/newtowncreek_review.pdf

 

[Leoreth]

And yes, property rights protections would include laws against battery and rape and all that, being violations of property rights.

What.

 

[Tahuti]

What.

Bodies are property too. I apologize to you if it makes me sound like a preachy libertarian!

 

[Cutlass]

How exactly?

The monopolist has access to cheaper capital. He can threaten to keep his prices below the costs of the competitor until the competitor goes out of business or sells out. In the long run the monopolist will earn so much more money that doing so is a cheap solution. No one will invest money in a challenger to a monopolist, because doing so is throwing away their investment.

 

[Leoreth]

Bodies are property too. I apologize to you if it makes me sound like a preachy libertarian!

You think we should be able to buy and sell other people's bodies?

 

[Tahuti]

You think we should be able to buy and sell other people's bodies?

eh... NO

The monopolist has access to cheaper capital. He can threaten to keep his prices below the costs of the competitor until the competitor goes out of business or sells out. In the long run the monopolist will earn so much more money that doing so is a cheap solution. No one will invest money in a challenger to a monopolist, because doing so is throwing away their investment.

If I were running a company that was in such a position, I wouldn't do this, if profits were my main motivation - which is already unlikely, given profits won't give me any reasonable increase in living standard. On top of that, I would lose investors for valuing being a dick to my competitors more than making a profit. And finally, no matter how many competitors I would be able to squish out, it simply would be unsustainable to continue this indefinitely. If it were a publicly traded company, the investors would perhaps even pull the plug en masse and my company would be gone. Ancient companies have been wiped out in a matter days this way.

 

[Leoreth]

Why does it make sense to classify our personal bodies as property then?

Usually it is okay to buy and sell property.