Hi guys. One argument I hear against libertariniasm is that cartels for example make a lot of profit, so the competition is much below the market equilibrium. I was wondering if you have data about the average profit of a company in a given industry, or better yet, what percentage of companies in a given industry operate at a loss.
Thank you.
To clarify further, I’m not talking about government supported cartels. I am talking about whole industries which consist of companies that all of them make a lot of profits. For example if all companies that produce yogurts make huge profits it means the competition is far below the equilibrium. That’s why I am asking about data to see whether such industries exist.
How exactly would one even compile such data? Without it being prone to massive errors.
You should read up on Mises’s concept of a “Monopoly Rate” or “Monopoly Price”.
You are asking the wrong question. Austrian Economics follows micro-economics in the principal that absent government force, the upkeep of a cartel or other oligopoly or even a monopoly is impossible. So it is competition to get real economic profits that will envite new competitors into a marketplace. Eventually the competitors will charge slightly less than the cartel and get the profits. This assumes that competitors are similar. In cases where the competitors are different makes oligopoly even more difficult.
Either they will charge less, or they will join the cartel. Look its all a theory, I want an empirical evidence that clearly shows that cartels do not happen.
cartels can happen for a while. so what.
What exactly would that prove? Who’s making an argument that cartels could not happen? Explain how a member of a cartel does not have a profit motive for leaving the cartel. That is the fundamental flaw with cartels.
Provide a reference for a cartel that lasted on the market that
A) Was not a benefit to the consumer or
B) Was not artificially re-enforced due to state sponsorship.
I know all the arguments for both sides. What I lack is emperical evidence. I do know for instance that the banks in Israel do have huge profits for several years now, the same is true for celullar companies in Israel.
When I look here: http://money.cnn.com/magazines/fortune/ … ndustries/
I can see quite a few industries in which all companies made very big profits. Such industries don’t seem very competetive to me.
How are you defining “competitive”?
No offense, but are you sure?
Explain to me why cartels are allegedly bad.
So we are to suspect rampant cartelization anytime industries are shown to profit? How much should an industry profit for us to come to this conclusion?
Israel cellular companies and banks are a great example of a government sponsored cartel. You and me can not open a bank nor a cellular company in Israel. Only the connected to the government bureaucrats of Israel who get a permit can. This is why the ROE[Return On Equity] in Israel is irritating high. In a free market, high ROE in a industry would cause a lot of entrepreneurs to allocate capital to the industry. This is the reason that cartels will be abolished even though they could succeed in the short term.
Just a quick general point on monopoly theory - Breaking the monopoly removes the incentive to create monopoly. But, as the claim goes, many industries are naturally monopolies. So under an anti-monopolist regime, natural-monopoly-industries would never be created in the first place. The expected profits of the new industry are artificially lowered because the investors won’t have a monopoly.
Consider if anti trust actually had been used against microsoft. Consider even that entire new industries and product lines might go uncreated, because to create a new industry means to have a (temporary) monopoly, and monopolies are illegal.
In short, monopoly prices and high profits are not only an incentive for the rest of the market to come in and try to break the monopoly, they are an incentive to create monopolies by opening radically different product lines and services.
Sux
The only time a naturally-forming monopoly is really bad is when its sector is something people absolutely need (i.e. food, water, shelter, etc.) and the prices can by risen to the point where many people can’t afford the product. But it just so happens that the government tries to help many of those sectors and eventually makes them worse. Food subsidies raise the prices for everyone. The housing bubble created in part by the Fed left many homeless (not to say that many of the people should have known they couldn’t afford the homes in the first place). As for Microsoft, it can’t really be said that people absolutely need computers/software, but they’re becoming much, much more necessary in everyday life, especially in terms of educating the masses.
There’s nothing to stop people from entering the market and breaking up a monopoly the real way. And, if someone is successful in creating a competitive business but decides to be bought-out by the monopoly to stop competing, who cares? They got money and will spend it somewhere else. Plus, people will see that the monopoly can be hurt. It’s like in 300 when Xerxes lip bleeds and people finally see that he isn’t untouchable.
Plus, this sounds like a good thing. There don’t always have to be ‘loser companies’.
Maybe the phenomenon you’re describing is not a monopoly. Maybe the word monopoly is being wrongly applied, or that there is no meaningful conception of a free market monopoly, since a monopoly is a privilege, not a position of being the sole provider of a particular good or service.
The reason I say this, is that every good and service is unique. Each can of coke is a unique unit. There are no two the same.
I also think this sort of reasoning dovetails nicely with Kinsella’s work on IP.
Yeah I understand that cartels and monopolies eventually get broken, but who said it is more efficient to let them stay in the short run than let the government break them? It is correct that in Israel it is difficult to open a new bank or a new cellular company, but the government does try to bring new players into the industry, and despite this attempt it still doesn’t really happen. This is at least 10 years already that the banks and the cellular companies all make huge profits.
And I don’t think companies should be encouraged to attempt to reach a monopolistic position, I don’t think it is that in general it is healthy for the economy.
A good example of a cartel are the Israeli cellular operators. They make huge profits, they have the same market share for almost 10 years, they publically say that they do not want to engate in prices competition and it is easier for them to just raise the price when the other company does so. The government constantly tries to bring new players into the field but they initial investment is very large so no one comes.
The prices for businesses are A LOT smaller because a business, especially a large one has a lot more bargaining power. However the prices for the customers are really high (twice as the prices in America), and it continues for 10 years already.
It seems to me that government regulations in the form of at least anti price fixing operations can help in this case.
You will not find accurate empirical evidence in economics. Economics is a social science, not a natural science. Thus, economists cannot run experiments holding all other variables constant. In the name of empirical evidence, you can’t raise taxes in the US to 90% while holding everything else constant, there are moral issues. If you don’t hold all other variables constant, there will always be confounding variables that will prevent you from drawing accurate conclusions.
A example of one confounding variable: government taxes raise the barrier to entry to every industry causing more monopolies than under a totally free market.
Thus, in economics we use arguments, not empirical evidence. Read ch1 and ch2 for further explanation: http://mises.org/books/lessons_for_the_young_economist_murphy.pdf
You have yet to prove that naturally forming monopolies are bad in the first place. So in effect your just arguing against them for the sake of arguing. You want state intervention for the sake of intervening. But why? Why are they bad? You should consider the gravity of what LS stated above.
Please explain to us, assuming no state coercion, why or how cartels and monopolies are bad.
Michael Porter, an economist at Harvard, wrote extensively on what he believes are the factors of an industry that will determine if it will be profitable. If you google Porter’s five factors you should find some of his articles. A few years ago in Harvard Business Review he published a study of the most profitable industries over time. Not surprising, they were mostly industries that lended themselves to high returns on invested capital. Industries like the airlines are always going to be near the bottom due to the high amount of capital investment necessary and the commodity-like product.
Jeremy Siegel, a finance professor at Wharton, collected stock price data going back to the original S&P 500 stocks in 1926 and looked for basically the same thing. He found similar information.
Neither of these guys are Austrians, and their work may be questionable in some respects, but they did compile some very interesting and useful data that might interest you.