Couple nights ago I got into a discussion with a friend (who has a business degree and is left of center) about monopolies and competition.
The topic was whether one can start a power company to compete with the current power company in a given area. His reasons against why it’s not plausible (for just anyone) is the cost of infrastructure is far too great for anyone. He agreed that competition (if there was a competing company) would keep prices low, but if one company goes out of business what’s to keep the other company from rising their prices again? I said that another business owner could invest in that industry or business and compete, and he told me that not just anyone can do it, only other people who have the wealth. I find this obvious since you would need some modes of production and capital to start a business on that large of a scale. He seemed to lay his argument that there would be some form of intervention since competition isn’t likely to keep them from raising prices since competition would be scarce. (I was having a hard time discussing this since we were both at a club drinking).
We got on the topic of a monopoly (which ventured into the realm of Wal-Mart) and though I insisted on the actual definition of monopoly, we used the layman’s term for the sake of argument. Regardless of whether or not there are State privelages, what would keep a company of a large scale from dominating the market? He seemed to have me in a slump since the example was pretty defined on a power company that would cost an extreme amount to just start and compete.
How about, I have a generator, and I charge way less than the power company per KWH. You don’t have to assume a viable competitor must produce on the same scale.
If this became a serious problem then my guess is that public organizations would perform this task and then either private firms would be scared into lowering their rates to prevent everyone from switching. Remember, free market doesn’t necessarily mean that the organizations can’t be communal or non-profit in nature.
Supply doesn’t appear magically out of thin air. In order to produce so much supply that you run your competition out of business, you need to invest in enormous capital goods, and you can’t uninvest in them once the competition has shut down, so you pretty much keep producing at low prices.
You can’t raise prices without reducing the supply sold, which means you also have to reduce production. If you’ve already committed yourself to a large production, then the marginal cost of producing more is zero, so by increasing prices you are just losing money.
Yes, however monopoly prices would still be far higher. I forget what it’s called, its like the monopoly price or somthing which is like market equilibrium except its the point where the profit reaches its maximum possible in between where too few people are buying and the price is too low.
Historically, this has never happened. The great monopolies [formed because they were better than anyone else, not by bribing and getting a law passed for their benefit] like Standard Oil were selling way cheaper than anyone ever did before or since.
And when the railroads finally got a legal cartel that kept everyone from competing, they raised prices to milk every penny they could.
Result: when was the last time you took a train? Exactly. They have not recovered to this day.
Historically, this has never happened. The great monopolies [formed because they were better than anyone else, not by bribing and getting a law passed for their benefit] like Standard Oil were selling way cheaper than anyone ever did before or since.
And when the railroads finally got a legal cartel that kept everyone from competing, they raised prices to milk every penny they could.
Result: when was the last time you took a train? Exactly. They have not recovered to this day.
I was thinking about this, and isn’t there a threshold in which a producer could raise prices, and loses productivity of capital, to his overall profit?
Say I produced power. My power plant could produce 500MW a day max. My minimum rate to break even was 10 cents per KWh. If I raised rates to 11 per KWh, and my production reduced to 499 MW per day, I would still be making more money than if I reduced rates to break even, and produced 100% of my max capacity. Of course you get into diminishing returns eventually, but wouldn’t there be a gray area?
Well, as far as the question of expense goes, many business ventures are funded by investors who believe they can turn a profit by either lending or buying shares in the business prematurely. As far as what keeps the “top dog” from raising prices, assuming all competition is thrown to the curb, is the fact that people have to work to earn money. The higher the price of power goes, the more people pay, but also the more people will find that they cannot afford to pay. You can charge a million dollars for power, but you’re not going to have any customers. The producer has to determine what the highest price is that he can charge and still maintain a clientele that is large enough to profit from. Put it more simply, imagine you ten people pay five dollars a week for a total of fifty dollars, but at six dollars two customers cannot afford the service. Now there are eight people at six dollars a week, for a total of 48 dollars. It is in the producer’s interest to therefore charge the lower rate of five dollars a week. This is an extreme and highly unlikely case, however, since even in a situation such as that of Wal-mart, where you have a giant of a company doing very good business, there are still smaller companies that fill the gaps that Wal-mart inevitably will leave. There are lots of Wal-marts, but they are by no means around every corner. Smaller local markets exist and persist across the country, despite the presence of a more efficient, wider-known brand. Perhaps it costs too much in gas to warrant saving that extra five cents on an apple pie. What will you do? Patronize the pastry shop down the street. And there are always those that have close, personal attachments to such local touches. “This place has the best danged apple pies in the whole state! I always get them from here.” Ad infinitum.
In regards to raising prices, this is the only power plant in your region, what’s to keep them from raising prices on everyone? Productivity is the same, the cost are the same, the profit is the same, but let’s assume the owners of this power plant decided to charge and extra $50-75 on every bill (without going into any reason).
The questions that I was imposed with were:
What’s to keep them from over charging?
Who’s to compete with such a large scale business?
The example itself seems to be a strawman argument (most uncommon example to debunk a theory and support State intervention in a market). I’d propose that anyone (with the capital) can start a power plant and compete, or at least spread their business to pieces of the region the current power plant has their business in. Besides one company having spread all over various cities you could have small plants maybe even buy out portions of the other, or the people of those areas all rid themselves of any contracts of the current power plant, and all decide to run off a small scale power plant nearby.
DING! Although the necessity of reducing supply to increase prices assumes some form of competition. Depending on the type of monopoly you do have price-fixing ability that allows you to do this. However, assuming an efficiency monopoly and not a government granted one, raising the prices makes the market look more appealing to new entrants so it’s a balancing act between maximizing profit and keeping customers happy because one way or the other you gotta maintain a large enough consumer base in order to fund production at your given scale and turn a profit.
Furthermore, on the topic of competition on differing scales: Geothermal anyone? Not quite here yet, but I have a feeling it will be sooner than later.