Just a question about the free-market solution to monopolies. Keep in mind I am being a devil’s advocate here. The free-market position on monopolies is that even corporations with no competitors still have to provide high quality goods and low prices to keep competitors out. However, its not like any John Doe can start his own corporation; it would cost money. So, wouldn’t a corporation with no competitors be able to give marginally higher prices and marginally lower quality goods with having competitors?
You have admitted something in your own scenario: That corporations, through their economy of scale, can provide goods at lower costs.
A company will charge the highest price that it can without being undersold. If a company has a de facto monoply we know that it is able to sell goods at lower price than any start up company. This is good! If the monoply was destroyed in favor of many smaller companies, prices would not drop, they would go up. None of those smaller companies would have the cost saving of the former monoply. The market would then steer back towards monoply as the “best” companies ate the “worst” companies, and as it did so prices would fall.
The fact that a monoply could possibly charge less is not relevant. There is no solution that would provide a better outcome to anyone(except competitors who want to hurt a business rival)
Shazam
From a libertarian perspective, the definition of monopoly is one where there is a restriction on entry to a market, not a market where there is only one producer.
I think that Rothbard uses the example of there being only one chemist in a town. No one would suggest that this chemist had monopoly power because one could drive to a chemist in another town. Likewise Alcoa was accused of being a monopoly but there were no barriers to entry. Alcoa was kept in check because a rise in prices would cause customers to move to other materials: steel, ceramics, plastics, alloys etc. So, with regards to your question, as soon the equivalant of the chemist or Alcoa starts putting its prices up, or selling shoddy goods, customers will move elsewhere or new ones will move in.
In fact, a monopoly cannot exist without government support, whether they be government agencies themselves or because of the protection government has given to specific sectors via tarriffs, regulation, licence, patent, copywrite etc.
It is worth remembering the the original monopolies were monopolies granted by governments to specific companies - East India Company, Hudson Bay Company etc. This demonstrates the skill of government propagandists who have turned what was a government bad into a private sector bad, and they have even had the gall to suggest and get away with the argument that government should be the one agency (i.e. monopoly) to oversee such private sector bads!
With kind regards
Remnant
There’s all that, and there’s also another factor to consider - firms compete with one another in all areas, and even on the market for corporate control (although changes in government regulation have dampened the latter.) A firm that is not mindful of this will end up attracting possible competitors with its high prices. Granting the assumption that the firm could indeed grow huge, if it became the sole provider of the good, it’d eventually run into the calculation problem, thus allowing new competitors to break in and take over the market (Rothbard discusses this in MES.)
There is an implicit assumption in that question that producers must always produce the highest quality for the lowest price. But that isn’t so. What all producers do, whether single source producers or not, is produce the lowest quality for the highest price they can get away with.
In terms of barriers to entry in the form of large capital investments, this problem is easily overcome when you realise that firms in other industries and sectors may wish to diversify into this monopoly’s sector, and by virtue of them having large amounts of money, they are able to invest a lot into capital goods in order to match the incumbent firm’s economies of scale. The other solution to raising large amounts of money is an IPO, and these happen all the time. Also, as someone has already mentioned, when firms grow too big, they have the calculation problem, or this could be called diseconomies of scale (correct me if the two are not the same).
Like all things in economics, this is better analysed through supply and demand. The purpose of an economy is not to have competition, but to produce the greatest possible supply of goods. Because of problems of efficiency, division of knowledge, and so on, it is usually the case that the total supply for a market is divided between many producers. However, some industries benefit from returns to greater scale, meaning that it costs less per good if a greater supply is produced using a single system of production. This means that one firm can produce so many goods and remain profitable at such low prices that no other firm can profitably increase the supply henceforth. This would be, from the point of view of economy, the optimal situation, although it may not appear “competitive”. So, for example, if I provide telephone services over cable in an area, it would be totally unprofitable for another company to lay down a second cable. All this shows is that my service is already economically optimal; there are no profits to realize from increasing the supply.
What would be the consequences of a monopoly then? A monopoly is a legal privilege to be the exclusive supplier of a good to the market. This means having the power to deny that others increase the supply of a good, which, from the point of view of the economy, is obviously sub-optimal. For example, the medical licensing bodies can deny that physicians who do not meet their standards work as physicians. This means that there are fewer total physicians on the market than the market demands, and so prices are higher. The same is true for all good regulated by various government agencies.
Pascal Salin applies the same reasoning to the cartel. A cartel, under a free market, is a net positive for consumers, since it allows multiple companies to cooperate with each other as if they were one big single company, while remaining independent and capable of individualized economic calculation. The airlines, for example, will route a passenger through multiple companies for irregular travel routes. This is obviously a net benefit to the consumer. Another example is the franchise company, like McDonald’s, which allows private ownership of restaurants within its corporate structure.
Like any organization, companies, too, face organizational problems, i.e. bureaucracy. A large company with a lot of middle managers or other inefficient hierarchy will face higher costs that new entrants to the industry can avoid.
Sure, it costs money to start a company, but if you’ve got a good business plan, and can show potential high profits, you can attract investors who are willing to give you the money to start the company.
Not only that, but other existing companies (with plenty of capital) could enter another market if they noticed an opportunity.
It’s way too risky to treat customers poorly.
I think it is often forgotten that all goods and services compete with all other goods and services. What I mean by this is that I can spend my 10 dollars on any number of goods within that price range. Candy, soda, car oil, cd, tootpaste, a few gallons of gasoline. Even if noone else creates and sells candy bars within a given area for example, the candy bar company still competes for your dollar againt other possible choices. Of course this is where someone will bust in about inelastic demand or some such…
I like candy 
My solution is a preventative one: deny the would-be monopolists the ability to obtain and maintain market power through coercive means. Namely, abolish patents and other forms of government-endowed monopolistic privilege. Additionally, do away with government regulations that restrict entry into the market and make small-scale competition untenable. This renders the question of null competition moot.
Agreed. The only possible problem monopolies can cause on a free market is when the supply requires a big investment ahead.
Say I have a motorway. I charge high prices for using it. I recover the costs of building it quickly and then just pocket the money.
Someone realizes there is an opportunity here and starts to build another motorway. I wait until he built it and then cut my prices. I have already recovered my building costs, he did not - he will be ruined. When he is broke I can just raise my prices again…
Well I was writing an excellent reply with metaphors and then my firefox decided to crash, bloody hell. I’ll be quick about it then.
You’re missing two things here:
- People often hold grudges against monopolies because of their history of price gouging. For example, I hate Microsoft and if they were today to start offering a cheaper and better quality operating system than Apple, I still wouldn’t buy it. That might just be me though.
- It’s unrealistic to think that after an extended time of price-gouging and “fattening”, the monopoly would be able to run quickly again (compete efficiently). It will have likely built up a bureaucracy of some sort, dis-economies of scale, etc, and so its costs will likely be higher than the new competitor.
Can’t think of anything else right now.