I’ve read that government favoritism is what makes certain businesses assume control over a market, and although I believe that, it still bothers me that if a business were to progressively succeed against its competitors, and assume control over them. Can this happen? And if it does, should the government leave the monopoly alone, or would intervening in such matters go against the laissez-faire principles?
That’s a veritable can of worms. My brother (who’s a competition lawyer) and my father argue about this all the time (my brother is convinced there’s no such thing as a natural monopoly and my father otherwise).
As some food for thought, let’s imagine I have a natural wonder in my back yard called “Jimmy’s magic cave”. Now let’s imagine I start selling tickets to the magic cave and it really is a magical experience and I get roughly 20 million visitors a year to my cave from all over the world. As it’s my cave and it’s the only one that exists, we can hardly dispute that I have a monopoly over this particular business.
However, and my brother would argue, although I’ve got the only magic cave you have to admit that Chichén Itzá in Mexico is pretty fancy too… as is the great wall of China. So if my prices are too steep, people are likely to just skip my wonder and go visit someone elses.
Similarly, even if you have a monopoly over fixed line telephone cables in a particular area, another company could always start up a satellite or cellular phone company. Planes compete with trains, cars and boats etc. So in the long run, if government wasn’t creating monopolies left right and center, just how likely is it that any one company would end up owning all the trains, plains, buses, roads and canals (for example) or that a tour operator would be able to obtain every wonder in the world?
To be perfectly honest, I have no idea but it’s certainly an interesting question… it might turn out to be one of those “what is the meaning of life” type questions though, which are just a PITA.
The government? I thought we were talking about a free market.
But what precisely bothers you about a free-market monopoly? Unlike a government monopoly, it isn’t like once the monopoly is achieved, it is inviolate. The business still has to contend with the possibility of competitors entering the market if it raises prices and obtains high profits. If it doesn’t do that, what’s the danger?
On the other hand, Rothbard extends Mises’ socialism argument to show that a free-market monopoly cannot persist anyway. If a firm has no competitors, it becomes subject to the same calculation problems inherent in a socialist system, and will become uncompetitive and lose its position of dominane.
Producers vie for the consumer’s favour not just within industries but across industries. That money you could’ve spent on a holiday may just as well be used to by a plasma screen television. So besides competition in the market for corporate control and within an industry, firms also face it from outwith, and must also face the possibility that consumers will simply not put up with high prices and cease consumption.
I’m convinced of the benefits of Austrian economics (even though I’m still a newb). The thing that bothers me is that, once a company has complete control over a market, and starts diversifying (starts turning into a conglomerate), it would be like a government assuming complete control over several aspects. However, I hadn’t read before what you said about such a company becoming subject to the calculation problems of socialist states. That really caught me off guard, thanks!
IMHO, while theoretically possible it’s practically impossible. E.g., the owner of the only biodome on Mars has a monopoly on the planet’s oxygen, but it still doesn’t mean he can charge any amount for oxygen he wishes. Let’s say he charges a rate that impoverishes every single one of his customers. Now they don’t have any money left. Now they all die. Now, no customers to pay money to keep the oxygen machines running.
There was actually a hilarious illustration of this sort of thing on South Park, when Cartman managed to buy an entire amusement park. Sure enough, machines have to be maintained, he needs a revenue stream, and he quickly finds himself answerable to customers.
It would appear that even if a monopoly were possible, true monopoly pricing that is inelastic to supply and demand is impossible.
What do you consider a monopoly and for how long? All monopolies die in the long run as other businesses complete for the same customers. Keep in mind that in the absence of government protection temporary monopolies see competition from all over the world. The most powerful government protection is in the form of patents and copyrights. If you remove this protection then a ton of the market influence of the largets companies suddenly dissapears. Patents are followed closely by limited liability. If the people who made the Love Canal had to bear the full brunt of their destruction then the Love Canal would have never happened.
Even in our system with tons of protection from patents and copyrights, super wealthy and powerful corporations like Microsoft now, IBM and GM a generation ago, are constantly having market share ripped from them. Where did Google, Amazon and Ebay come from? Who will win between Microsoft-Yahoo or Google, or someone else? The ultimate examples of government as the agent ensuring monopoly are AT&T and Standard Oil. AT&T lived for years on government protection from wireless, FM, stallites, cable TV, the power company etc. (The Baby Bells still are protected from most of these competitors.) Standard Oil had a 98% market share in the US but got into a price war in Europe with BP and Shell. The result of which was an incremental raising of prices. As prices went up their market share went down. When Standard Oil was broken up the company had under a 70% market share. Contrast that with AT&T who kept their market share in local phone service for at most of the 1900s.
A monopoly, if defined as a limit on the supply of a good that can be produced, is impossible under the free market.
Your confusion stems from the fact that many monopolies have used the fact that some markets are supplied by a single firm, without limit, to legitimize their actual monopoly. This is a popular tactic of people enjoying political privileges. Most famously slave plantation owners in the house of commons tried to discredit the abolitionists by saying that working conditions in the Manchester factories were slave-like.
Innovative firms, dominate other forms, which transpires into a monopoly. Ultra-innovative firms can theoretically sustain a perpetual non-coercive monopoly by utilizing its profits from prior innovations to invest in more innovation. Although these monopolies temporary, trade secrets can sustain the monopoly.
Geographical monopolies can theoretically exist. The most common variants of geographical monopolies include the infamous state, geographical barriers (like the Native Americans vs. Europeans), and transportation barriers (you have to spend resources displacing to different retail stores, which increases the prices by a microscopic amount, like a tariff). These can be sometimes considered as a natural monopoly
In fact, trade secrets is a form of geographical monopoly. You can geographically exclude others from seeing your innovations. Borders, walls and prohibition of free movement in private property restrains the dispersion of knowledge.
The only types of monopolies are geographical monopolies.
Hey, I was wondering how economic coercion would be prevented in a free market. For example the monopolizing of supplies of water in a desert, food in an area where the only good soil is owned by one person, or shelter somewhere extremely cold (Or for an extreme example, oxygen on Mars).
This is how Wikipedia defines economic coercion:
Economic coercion is when a controller of a vital resource uses his advantage to compel a person to do something he would not do if this resource were not monopolized. If someone is the owner of the only water supply, then the owner can compel the thirsty person to pay an exhorbitant price for that water or have him perform enormous labor. This is also referred to as a form of exploitation. It has been argued that as the global economy has expanded greatly in scope, economic coercion has replaced other forms of coercion such as coercion involving physical or military force.
The market wouldn’t prevent economic “coercion”. And neither would attacks from super-advanced space aliens be prevented. Market failure!
It wouldn’t be prevented. Individual market participants would have to make plans for water (or oxygen) before moving to Mars or the desert.
One can’t expect to go live in the desert without water, and then the person with access to water, has to provide it regardless of cost or scarcity. I mean, what if they only have enough for one person to survive? Should you be entitled to the water they use for their own survival? And how can you determine what their needs are?
What is viewed as coercion, can very easily become exploitation by the consumer, if we remove all negative consequences from their acts. In fact, that is how current market socialism works. Regardless of means or merit, people receive goods and services at someone else’s costs. Eventually, this becomes a disincentive to work and provide for one’s self. And it becomes a discentive for the person providing, because they receive less than they make, and they see the recipient receiving for free…
And of course, as we saw in Soviet Russia, when the producers start to become free riders, it’s time to send them to the gulags! NO FREE RIDERS!
Thanks for the response, I understand what you mean, but what if someone was born in a place with dwindling resources? They wouldn’t be able to make plans for water (or oxygen). And that would be coercion, right? Someone could be forced to perform enormous labor or else they would die.
Again, thanks for the responses.
Markets provide information with regard to increasing scarcity via the price mechanism… prices rise if a resource becomes rarer. Which is also an incentive for profit-seeking entrepreneurs to alleviate the scarcity by providing the resource. So it is definitely possible to plan ahead. Very few people fail to realize rising prices tend to reflect rising scarcity.
it only seems to happen, when the firm is extremely good at what it does. Standard Oil attained a monopoly, albiet some intervention, but Standard Oil was revolutionary in its practices, and remarkably resourceful and priority oriented-that it was able to lower its prices so much
No, that still wouldn’t be coercion. Whose fault is it that resources are short? You could say that parents should plan better, that conceiving and giving birth to a child in a situation with limited resources isn’t such hot idea.
I understand what you are getting at, but it is hard to find good examples of it.
This is the same thing as work or starve. If my parents don’t work, my family will most likely starve. I don’t think you can call it coercion. The fact that water resource is dwindling is the result of nature, not the result of humans unless the humans…were of course..unwise in their water usage. I don’t think you can argue that nature is coercing humans to horde resources… It is a fact of reality.
Coercion would have to involve some sort of actions. For example, telling people to pay their taxes or you will throw them into jail. Where as a water horder said pay me and I won’t do anything to save you. The water guy won’t do anything, good or bad. He will just let you die on your own. The government will do something to you if you don’t pay up, maybe even kill you.
That wouldn’t be coercion, that would be bad luck. Under no other arrangement than the free market would this unlucky bastard be able to obtain more of these scarce resources.
I think it’s remotely possible for a free market monopoly to exist, but it would not be able to charge so-called “monopoly prices” only because if they did, then venture capitalists and entrepreneurs would see an opportunity to make a profit by competing against the said monopoly.
I totally agree, the whole discussion about monopolies is futile, as any monopoly, other than a coercive one, can never exist for long. Most of the examples used in the threat - Water, oxygene etc- incline that there is an inherent value in the good and that only the monopoly can provide it. But if you are not willing to pay the price you have a lot of options in a free market to avoid that. Not crossing the desert with a shortag of water might be one, another to take enough water with you upfront. A very scarce good in very high demand will always lead to entrepreneurs trying to enter the market, often enough through new inventions that lead to the production of goods that deliver the same result, that is cater to the same desire of the costumer, as the monopolized good.