“A monoply can and will exist when the barriers to enter a particular market is very high ( either through costs, or having the monoplistic entity punish any consumers of the new enterprise (remembering that most new entries to a market segment are likely to be small and will not be able to provide a large supply of goods”
How do you respond?
..so successful large firms punish small firms with low prices to consumers. Seems to me like a magnificent thing. If economies-of-scale didn’t exist then investment couldn’t yield a benefit, and we’d all be stuck living like hunters and gatherers.
Read more here: http://www.vforvoluntary.com/wiki/TheMythOfNaturalMonopoly .
That market power is an artificial failure created by state intervention, naturally, or that it doesn’t actually exist (that would be the cute Irenicus position). Of course, there is the fact that a fellow of times past named Adam Smith said that "The interest of the dealers, however, in any particular branch of trade or manufacture, is always in some respect different from, and even opposite to, that of the public. To widen the market and to narrow the competition is always in the interest of the dealers. To widen the market may frequently be agreeable enough to the interests of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens.” Interesting, considering that this occurred prior to our age of “corporatism.”
You need to first define a monopoly. I define a monopoly as a business that manages to price products high enough to make consistent profits without competitors obtaining market share. Using my definition, Microsoft, Walmart, Standard Oil, Whole Foods, etc are NOT monopolies as they have competitors constatly trying to take market share. AT&T was a monopoly, the postal service is a monopoly, the power company is a monopoly, the Federal Reserve is a monopoly, etc. These monopolies have one thing in common, that is they hold market share and prevent competition by force.
So monopolies ONLY exist at the purview of some agent using force normally a government. Neither cost nor market size have anything to do with an business being able to set monopoly prices.
If cost of entry is high then simply allow foreign companies to enter the market who have established businesses in other countries. Think of airlines, where foreign competitors can not enter the market for domestic service. How low would prices go with Luftansa, Virgin, etc running routes?
If the market is small then you will see smaller competitors or parts of larger competitors attempt to enter the market. You will also see buy outs of the profitable players as larger companies attempt to use the new business to satisfy customers in the larger business.
So Michal Jordan is monopolistic because his superiority in his field deprives a **like yourself from playing in the NBA. (Replace MJ with a more contemporary player if you like)
The only barriers to free competition are those set by the State by means of regulations and special privileges.
Actually it would be the former. Absent it, then yes, it is vague nonsense.
Because state intervention in the economy is new, and because intent to “monopolise” automatically implies success in doing so… btw, higher prices alone =/= tax.
Respond by hitting them with Dom Armentano’s work on monopoly theory/anti-trust.
No , for trying to educate myself. All I wanted to know is how do you respond to someone who makes this claim? Because someone argued it to me with things like electricity and sanitation.
Don’t mind DD5, he hates the dodgers.
keep it clean guys. i have to warn you not to insult each other, a) its a pain for me to censor. b) if it keeps up people have to leave.
He just has this image of me because I post questions here from a political forum that I argue on. He thinks that the question I pose from those message boards are mine so he’s just automatically hostile toward me.
But about the topic. Someone can easily argue you that electrical companies by their very nature don’t lend to much competition (power lines). Sanitation systems also (pipelines and sewer systems). This is due to a “barrier to entry.” How do you respond to this? Does this lend itself to the view that government has to take over because the market won’t provide enough competition?
that’s pure nonsense though.
competition isn’t measured by degrees. counting companies and calling that competition is silly. competition is either permitted or not permitted. if its permitted and you can’t find a competitor, consider becoming a competitor if you think there are profits to be had. if you don’t then what’s there to complain about?
I’ve had this conversation before and the interesting thing is this:
Problem: potential monopoly
Solution: monopoly (government)
Never has made much sense if you ask me…
The only difference is that the monopoly can charge however much it wants as long as it keeps competition out. Is this worse than the government solution? Is there proof either way?
Interesting point. Maybe we can explore it with a ridiculous example:
The Electric Company sends you a bill for $1 million. What do you do?
The Government sends you a bill for $1 million. What do you do?
Hey, .. I wasn’t referring to you!
per your request, I gave you a response intended for who ever you were debating. I thought that was obvious. Look at the quote it refers to.
The “douchebag” wasn’t intended towards you. I can’t believe it got moderated.
Well then I apologize for misreading your post. I hope you accept.
There are two aspects of this.
A) The costs to enter are too high. This can be reflected by the extremely low price of goods provided by the alleged monopolist. But this would not be a bad thing for consumers at ally. Low prices and abundance are good, it’s what makes a wealthy economy.
B) It is foolish to often assume what a barrier to entry is. Many believed that nothing could tackle the telephone networks several decades ago. Now we have cellular phones and internet based phones. This is a classical argument but the argument assumes that a market is stagnant in the existence of monopolies, and that in the presence of consumer demand innovation would not also transpire. What usually happens under extreme demand is new efficient technology is built by risk taking entrepreneurs to satisfy that demand. The problem is we cannot forsee what technologies the future will bring us so we assume what we have now is what will always be. So as a solution we make the Government manage these monopolistic firms. In doing this we strip consumer sovereignty and create a way for coercively provided monopolies. These state sponsored monopolies, disconnected from the consumers, can set any rate they like without fear of loosing business. Historically it is almost always the case that they operate entirely with corrupt officials by some form of profit sharing venture, where the statists provide market protection. In addition to new arbitrary prices we are less likely to see new innovation in an area where it is needed. A coercively provided good has no incentive to improve it’s process, and has no incentive to compete, dollar for dollar, with other goods.
There are numerous monopolies who believed they had a technological privilage, and because of this beleived that they held a strong barrier to entry due to the high costs of capital investment. But these firms have always been torn apart by some new innovation which did their same process at a fraction of the cost.
If there is consumer demand technology will follow.
To summarize, a market monopoly cannot do the following.
Lower prices too low, without risking the loss of revenue.
Raise the price too high, without risking the loss of consumers, or the attraction of new competitors to the market. If the goods are selling at a very high rate, new entrepreneurs may decide that the price structure justifies the expensive capital investment.
It is entirely impossible for a market monopoly to punish the consumer without risking the loss of it’s monopoly. The only way monopolies can remain in power is by pleasing consumer demand, unless of coarse we are talking about genuine monopolies. That is, monopolies granted by state sponsorship.
We want the the firm who can provide the highest volume of goods, at the lowest cost, and at the highest quality to succeed. If they end up being a market monopoly because competitors do a poor job at pleasing consumers than thats perfect. We want to weed out in-effecient firms so as not to waste scarce natural resources. A market monopolist holds it’s ground simply by making the mass majority happy. If they mis-manage their position they will loose market share.
Electricity and sanitation are state monopolies. They are genuine monopolies. In other words they do not need to please consumers. They exist coercively, regardless of whether they are doing a good job or bad. If we are against monopolies we would certainly be against coercive monopolies. Consumers have no bearing on the structure of prices from a coercively provided monopoly.
If electricity providers or sanitation providers offer a poor service at higher costs several things would result.
A) Competitors would take over
B) New technology would enter the arena to provide alternative energy
C) Combination of A and B (Most likely)
Matthew has made a critical point here. A market monopoly is a monopoly who comes into power and remains in power by meeting a certain level of consumer demand. If they mis-manage the monopoly price they will loose their position. It’s an extremely difficult position to carry out in reality. Likely a next to impossible one too discover, absent of state help.
Again let me re-emphesize the risks a market monopolist holds. If it raises it’s rates too high or too low it will loose revenue and most likely it’s monopolist position. It cannot price it’s good at whatever price it wishes. Let’s pretend for a moment that Microsoft is the soul provider of all the software developed in the world. If they were to sell their operating system, Windows 7, at $3000 per license people would stop buying it. Understanding the Marginal Theory of Value people choose things in an orderly fassion. If a good is priced too high they will choose another good, possibly entirely different, that they deem of more importance on their value scale.
So if the monopolist raises his rates too high people will simply stop purchasing the good. Alternatively if people continue to purchase the good it would be reflection of high demand. As the monopolist raises his rates he will naturally attract competitors for the margin of profit will appear greater. Even great enough to risk the capital investment.
It’s important to realize that on a market all goods compete with all other goods. Eggs compete for milk, bread with movie rentals, and Bicycles compete with clothing. Dollar for dollar all consumer goods compete with other consumer goods. A monopolist is competing for the dollar of the consumer. That dollar is contestable amongst all market goods. A shrimp provider is not just competing against other shrimp providers, but he is competing with all other goods in the entire market. If a shrimp provider rates his shrimp at $600 per pound people will alternatively decide to buy fish instead.
When you understand these key concepts you realize that market monopolies are not monopolies at all. They cannot control any price, and they are still entirely dependant on pleasing the consumer.
So to replace the Market Monopolist, who is practically harmless we insert a coercively provided monopolist, sponsored by the State. Coercively provided monopoles are not dependent on consumers at all. Consumers are forced to use/pay their services whether they like it or not. Some of these services are even paid through taxation, or are required as renters/home owners/city liver enforced by way of fines, fee’s, and all other clever forms of extortion. In some cities if you do not subscribe to the garbage service you are considered being a hazard to the environment will have to pay a fee. Coercively provided monopolies do not need to please consumers at all, they can offer any price they want at any quality they want with any volume they want and suffer no loss of business. They exist simply by way of force. People are compelled to use their services. This is TRUE MONOPOLY. This is exactly what we get when we make a government sponsored monopoly, like most city electricity utility companies, or sanitation.
On another point, I often argue that coercively provided services do not have adequate economic calculation. Their pricing structure is top down, and is done arbitrarily. Where as normally the pricing structure of goods is done bottom up, from the consumers onward.
Nielso recommended you read this article on his wiki. I highly recommend it as well.
http://www.vforvoluntary.com/wiki/TheMythOfNaturalMonopoly
A while ago I wrote a small essay(Un-edited, entirely ameteur, Don’t be too criticla [:)]) draft about market monopolies to help me study. I never got into the Monopoly Price, which is something you will hear about, but I don’t think it’s necessary for the sake of exploding the Market Monopoly fallacy. Still I welcome you to look it over and give it a skim through. It’s not too long and it compares market monopolies from state sponsored monopolies.
Feel free to read it Monopoly_Edited_Once.pdf (563 KB).
Nielso also has an important video on his Youtube page. See below
http://www.youtube.com/watch?v=7Ur6fysK_Lk
I would also look up all of Di Lorenzo’s monopoly material. I have links in my paper.
Enjoy!
FYI sorry about the weird formatting. Something went haywire halfway down the post. [:(]
There’s a Mises quote from Socialism that goes something like, “No other area of economics is more misunderstood than monopoly.”
A response is difficult to formulate since there was no specific question regarding monopoly. Also, the statement presumes that monopoly is a function of market barriers. Anyway, I’ll give it a go.
The existance of monopoly, or more clearly the singular control of some definate article of production by an individual or cooperating group of individuals, is irrelevant. The only point that matters is are they charging a monopoly price (as compared to the competitive price)? Barriers of entry, market power, etc. are neo-classical elements of monopoly. They in fact are irrelevant because the number of competitors in a market does not set the level of competition (2 people can compete just as hard as 2000), it is more a function of supply (or the distribution of the supply among competitors). So long as supply is not grossly disproportional, one firm cannot gain more profit by charging a monopoly price.
In summary, barriers of entry are irrelevant - the only question that matters is can the monopoly firm (ie the single controller) charge a monopoly price (a price higher than the competitive price which yields greater profit)? In practically all circumstances, the answer to this is “no” without intervention or some other form of coercion.
Classic Mises.