Hello. I just recently began reading about Austrian free market economics, and I was discussing this with a friend of mine. He said that free markets cannot work and that a middle ground between free markets and government regulated markets must be met. I couldn’t really defend my point because of the example he used. He used the example of the railroads back in the late 1800s. The railroad companies were not regulated and charged farmers ridiculously high prices for high profits. They had a monopoly and charged whatever they wanted. Basically, what is a Austrian free market defense against monopolies? Thanks!
Hey hey [:D].
Welcome good sir!
The Railroading of the American People - Murray N. Rothbard
- “railroad companies were not regulated” <— hahah.. [:)] → [;)]
Monopolies are defined, in the proper (Austrian) and true (oldschool) economic meaning (before Keyesianism took over) as “a barrier of free entry”, and that is always government.
Cartels may form on the free-market but they never last. Monopolies are only possible due to government intervention, licensing, laws and regulation.
Government and Cartels - MNR
Monopoly and Competition - MES (text), lecture.
No worries. Check out itunes and type in Mises. Get those audiobooks etc, and keep learning 
This is also important, to establish if things are good or bad because of X or despite of X:
Theory and History (by Hans-Hermann Hoppe)
http://www.youtube.com/watch?v=0n4IYhSk9oQ
I disagree. While you are probably correct in most cases, I believe economies of scale can play a role in the development of a monopoly. Once a firm is able to move down the experience curve, it will be tough for new competitors to enter the market because of the significant up-front costs associated with trying to match that firm’s productive capabilities. Additionally, even if a competitor could enter the market, they have the problem of trying to capture enough of the monopoly firm’s market share to sustain the production levels required for scale economies.
Additionally, one form of government law that most respect, property rights, can be responsible for the creation of a monopoly. Let’s say all the world’s oil resources get used up except for those under a patch of land owned by one firm. That firm then has the ability to charge practically whatever prices it wants because their are no alternative sources for its product. Theoretically, new technologies could be developed and implemented that could operate without the use of oil, but the switching costs are likely to be exorbitant.
Looks like someone has thoroughly explained our position on monopolies. Allow me briefly to explain why the statist approach won’t work.
The statist-claim basically amounts to resorting to attacking someone. Usually innocent people. If I owned a railroad and wanted to charge insane prices, I have every right to because it is my property and no one else has any claim to it. So this this the justice aspect.
The utilitarian aspect goes like this; that even if it could be theoretically beneficial at times to attack innocent people, institutionalizing aggression leads to a giant moral hazard. If we say “group A can attack group B”, where depending on our political philosophy group A could be the majority, a king, whatever, it basically means that there are no restraints on group A beyond their own self restraint.
Self restraint is not a good system of checks and balances.
This gap is rapidly closed. Human beings learn by example very quickly.
If they can offer a better price, they can capture market share. If they can’t offer a better price, its not really a problem is it? Consumers are being served at the lowest cost. I mean, is google a monopoly? Maybe, but its not too bad for consumers…
The countervailing force is that entrepreneurs can forcast this shortage of oil and figure out the most cost effective way of dealing with it. You have to let people reap the rewards of their investments (property with oil on it) otherwise entrepreneurs won’t bid up the price of oil by trying to purchase more assets. Without prices, you won’t have rational resource allocation, and there will be massive shortages of whatever commodity.
So the market is bad because it charges high prices for scarce things? Duh, thats a good thing. It prevents waste.
So the firm is just too damn good for anybody to compete with. so far we’re good with free markets.
Again, because the big firm is just to damn good to compete with. Still no problem.
The only way for all the oil to get used up is for the land to have been owned by government and not private property. Under private property, the oil would never run out since the capital value of the oil fields are directly proportional to the future expectation of the firms’ money making potential. This means that the firm would always adjust the price so that it would never deplete its resource.
This means that there is no energy problem or natural resource depletion problem, etc… These are all problems of socialism. Not capitalism! Yes, we take the blame every time, but a few of us will always be around to spread the truth to all those who are thirsty for it.
I’m not talking about knowledge alone. I’m talking about industries that require significant investments in capital equipment to achieve economies of scale.
The problem is, the monopoly firm can easily lower their artificially high prices once the competitor tries to make an entry. Since the monopoly firm is already an established provider of good X, coming into the market without being able to offer a lower price than the monopoly firm will make it nearly impossible for the new firm to gain any reasonable market share. Nobody knows anything about the quality of the competing firm’s product, so with the price being equal, the monopoly firm will probably win most sales.
Also, the problem isn’t just capturing market share, it’s capturing enough market share to sell the large quantities of good X produced through scale economies. What if 70% market share is required to run a sustainable operation? Only one firm can survive in this situation, and it will likely be the existing monopoly firm. Once the new firm goes bankrupt, the monopoly firm can resume charging artificially high prices.
I agree that people should reap the rewards of their investments, I was just presenting the fact that property rights, which is something I would think everyone here finds important, are a possible route to forming a monopoly.
A better example would be if one firm purchased all of the world’s existing oil reserves tomorrow. I guarantee prices would go up, and its not because the supply of oil went down. The only thing that changed is the supply of oil was shifted from multiple owners to one owner. As a result, you wouldn’t have rational resource allocation based on the forces of supply and demand. The single owner could always hold out for higher prices, and the switching costs of developing new technology that doesn’t depend on oil on a global scale would make it tough for the free market to punish the owner’s behavior.
See my updated example above. Tomorrow, a single owner buys all the existing oil reserves. I can practically guarantee that prices would increase, not because of resource scarcity, but because of a scarcity of sellers. Without any change in supply, prices could go through the roof.
I’m confused by this part. You claimed that only government policies can cause monopolies, I claimed otherwise. So do you now agree that the free market can also lead to monopolies?
Again, see my improved example. A single firm buys all existing oil reserves tomorrow. Since no reasonable alternative energy sources are available, and the switching costs of abandoning oil as an energy source are so high, what’s to stop that single owner from raising prices through the roof?
When has this ever happened? Ever. What industry requires greater than 70% market share to be viable? Even if a company does become a single source supplier due to whatever reason, they are still subject to supply and demand. Raising prices arbitrarily above market clearing levels does not necessarily generate more revenue and when a firm does this it open’s the doors for competitors.
You’re forgetting that oil suppliers are also in competition with all other energy suppliers. If the price of oil were to skyrocket for whatever reason, it will only increase the demand and procurement for alternative sources of energy. Read the article on the front page of mises.org today.
Hold on a minute. I had a similar exchange just the other day about monopoly with an engineer. This is what I said to him. Maybe the point will be clearer afterwards.
“Monopoly” is too broad of a term so we must be careful before we debate it. In reality, we are all monopolists, for none of us can offer the exact same product or set of skills. An engineer working on a particular project or task is a monopolist. He has acquired certain knowledge and experience pertaining to the project that only he possesses. He is not replaceable in the technical sense. No replacement can be found without bearing the cost of having to retrain and reacquire the knowledge necessary to continue from the exact same point. Surely, this cannot be the type of monopoly that you are concerned about. For “monopoly” to be used in a negative connotation as you did, only a coercive monopoly can consistently meet your criteria, such as the case of a supplier that according to you, can set whatever prices he wants, implying that the consumer is forced or coerced into some relationship that does not necessarily serve his own interests according to his own judgement. So for you to have a real case for concern , you should claim that a free market tends towards this type of monopoly,i.e., a coercive monopoly.
Free entry to any field of work and industry is the only correct definition for a completive market that is in line with the real world. No government restrictions or barriers to entry. Number of competitors is irrelevant.
Does it all make more sense now?
I don’t know of one right off hand, but it doesn’t change the theory. The idea is, a company achieves scale economies (lowest cost per unit) by producing X units, and Y units need to be sold to make producing X units profitable. If I can achieve scale economies by producing 700 units/yr of something cheaply when there’s only demand for 10 of those units/yr, I am wasting tons of resources by ‘taking advantage’ of scale economies.
Using that same example, let’s say demand at market clearing prices is closer to 700 units/yr. If a competitor comes in and mimics my firm’s scale economies, we will produce 1400 units/yr. Due to the increased supply, prices fall and demand rises to 1000 units/yr. There’s not enough demand for two firms, so one must eventually fail. The two firms are overproducing by 40%, and if one decides to produce less, their unit costs go up.
You’re correct, it doesn’t necessarily generate more revenue. It depends on elasticity of demand. If demand is inelastic, higher prices = higher revenues.
As far as competitors are concerned, there are significantly high entry costs in my example. I’ve already explained how the monopoly firm can easily conquer any new competitors.
I’ve already explained this as well. You’re ignoring switching costs. Oil is practically a network good in the sense that the large number of users increases its value, and in the sense that there are high switching costs associated with moving to a new energy source. If the single firm buys all oil reserves tomorrow, cars will still be running on gasoline. I seriously doubt that all American car owners would be able to easily find a new mode of transportation if they were getting gouged on gas prices.
How is he going to buy all the oil supply?
What about the price hike in gasoline increasing the incentive to increase oil exploration?
Clearly this scenario didnt make you believe in the dangers of monopolies, your beliefs on monopolies caused you to make the scenario. So, why the fear of monopolies forming?
I understand what you’re trying to say, but I disagree that an engineer is a monopolist. One of the main characteristics of a monopoly is high barriers to entry, whether caused by government regulations or other factors. While training a new engineer may cost more than keeping the one that you have on staff already, it’s not prohibitively so.
However, if it was prohibitively costly to replace the engineer, he could just halt the project at will and demand more money to continue. Wouldn’t you? He would then fit the definition of a coercive monopoly by holding the firm that employed him hostage. In the real world, he would get sued for a costly work stoppage if he was under contract.
Anyway, I’m not disputing that free markets are better than government regulation… that I agree with. I was just making the point that monopolies can be formed without government regulation, and further that such monopolies aren’t any better for consumers than those created by government. Perfectly competitive markets are the most equitable of all markets, and monopolies don’t fit that description.
No idea. It’s just an example of a monopoly that could theoretically be created according to free-market principles.
What if they explore, and find that there’s next to nothing available outside of the monopolist’s reserves? You’re assuming that exploration will lead to discovery. Additionally, you’re assuming that the monopolist is not also actively seeking any other oil reserves to keep a solid grip on his monopoly.
I’m not paranoid about monopolies forming, I’m just providing theoretical examples of monopolies that could be formed without government regulation. I don’t actually believe someone will buy all the oil reserves tomorrow.
The market is the solution to monopoly. Only through the market is there any escape from monopoly. To say that the market is subject to the same pitfills as monopolies is completely misunderstand the issue.
If a non-coercive “monopoly” were to form, it would be because it is better than the alternatives. Either, one producer is superior to all others, in the case, “monopoly” is a sign that all resources are being used to their best potential(none are being wasted by less skilled producers) Or, the nature of the industry is best suited to high capitalization, which leads to mergers in order to improve efficency.
Like power plants? Whos upfront cost is millions but has very low operating costs? Why is this problematic?
Lets say one guy builds a power plant, and starts charging way high rates. So an entrepreneur decides to build another power plant to compete with him. You might say “well then the old power plant would just lower its price so that its competitors would go out of business and then jack rates back up”. This is true only if human beings can’t organize. What the creator of the new power plant could do is contract with a large group of people to supply power at a lower price for a long period of time. Just because the new power plant can’t offer the lowest IMMEDIATE price doesn’t mean he can’t offer a lower OVERALL price. He can charge the lower overall price if he allows people to buy a power-plan from him.
Note that there were hundreds of telecom companies, power plants, etc before the state cartelized them. The myth of naturally monopoly has no precedent. Except maybe Stephen King has a monopoly on books written by Stephen King.
Then new firms have an incentive to figure out a way to provide the same service without requiring as much market share. You have to believe in human creativity. If using computers requires that they all be running on the same operating system so they can communicate, the owner of this OS might indeed have 90+% of market share. But if someone can come along and make another OS which can communicate with the old one, then we’re in the gold.
If you wanna get really technical there’s always an oligopoly because there are only so many oil fields / gold mines in the world. The issue is that entrepreneurs have an incentive to not let a single monopoly form. In anticipation of oil running out, people wouldn’t just let exxon mobil buy ALL the oil and gas. There’s competition for scarce resources so the price gets bid up to its MRP.
Explain why this isn’t already happening. Opponents of free markets typically think there are all these easy ways to make money. So why isn’t this the hot topic on wal street? The only easy way to make money is to have government rig the market for you.
No engineer or any worker can offer the exact same service. That makes him a monopolist by the very definition of the term.
What is a high barrier and what is a low barrier? Do you have scientific magnitudes in mind that distinguish costs that constitute a low barrier from a high barrier?
So when does it become “prohibitively so” according to you? Different costs of expenditures determine whether to embark on a project or not. This does not prove your case at all.
If the current engineer was incompetent, then the cost would be relatively low. If he was very competent, then the cost would be higher. Are you ready to define only competent successful engineers as monopolists, and the incompetent as competitive? Are you ready to penalize the former and reward the latter? Because that’s where your logic will take you.
Again with the term “prohibitively costly”. It is nonsensical if you cannot objectively define it or measure it. All engineers quiting their jobs in the middle of a task/project can fit that criterion. This hardly makes him a coercive monopolist unless he is applying some kind of force in order to extort his fees. He is only obligated to fulfill his contract.
Sure, he can try to “extort” (legally) his employer, but he wouldn’t make it very far in his profession. Would you hire a contractor to build your house with a reputation for always stopping just short of completion just so he can extort his clients for more money? The free market doesn’t tolerate this kind of work ethics. It’s just the result of the voluntary nature of the market. Contract disputes can be settled in courts of law. You’re not making the case for the possibility of systematic coercion in a free market. Such coercion can only be provided by the government.
There is no such thing as “perfectly competitive markets”.
You really should see view this. The man is a legend in this topic.