Personally, from a Utilitarian POV, I believe some form of antitrust laws are necessary in order to protect consumer sovereignty.
What are the main arguments that you guys have against antitrust legislation?
I could list the arguments, but why not let Armentano himself tell you?
Based on the above, I don’t really see anti-trust as having much of a foundation in utilitarian theory.
For this discussion lets say that GM is the only car company in the world. Would you buy a car from GM if they only made one model and it cost $1 million? Maybe you would, but many people wouldn’t, for GM to maximize their profits, they will likely determine that they should drop the price to the point that they sell as many cars as possible for as much money as possible. The very fact that consumers will only pay a certain amount of money for a product keeps the producer in check, even if the producer has a monopoly. Now from an Austro-Libertarian point of view, a monopoly is not likely to last long unless the government somehow keeps new firms from competing with the monopolistic firm. Competition will natually appear because of the high profits that monopolistic firms command. If GM ends up producing their one model car for $10,000, and they determine that the max. profit will be made by selling at $40,000, it is likely that someone will come in to produce a very similar if not identical item and compete with the monopolist for those great profits.
I think it has been shown fairly conclusively that anti-trust legislation doesn’t improve anything. I would like to hear your reasons for why you see a need for it.
From looking at some of your other posts I see that you are new to the economic way of thinking. One of my favorite things to do is find oposing views on an issue and determine which makes the most persuasive argument. This is how I have come to agree with the austrian school, The hard part is that you have to do quite a bit of reading and thinking to form your opinions about something, but if you really want to be a person who thinks for him/herself, keep at it. We need as many people who think for themselves as we can get. Always remember to keep your mind open to alternative opinions, because when you think you know something you close your mind to other ideas. There are many people who sadly have made up their minds and will likely follow an incorrect path for the rest of their lives.
I can understand how you might have inferred, having read my other posts, that I am not an Austrian, but I have read all of Human Action and Man, Economy, and the State, and have agreed with nearly everything. However, Misesian and Rothbardian analyses of monopolies have seemed a little weak for me.
Also, one of the strengths of the Austrian epistemology is that the aprioristic nature of praxeology lends itself to short, concise, explanations. In Human Action, for example, Mises disproves the existence of God, drug laws, and other things in a couple of paragraphs.
What I actually wanted to do was to play devil’s advocate and test Austrian arguments against antitrust laws. My teacher is the former chief economist for the FTC and has brought up some very good points in favor of antitrust, and I would like to test them.
Why are the following things false?
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Businesses can collude to raise prices above competitive levels; game theory has shown that a tit-for-tat approach, i.e., collusion, is an equilibrium. This would infringe upon consumer sovereignty.
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Businesses, even after gaining a monopoly through free market means, can raise prices above competitive levels once competition is eliminated: this hurts consumers.
In response to your post, I understand that on a free market, a good competes with every other good on the market. Prices on a free market are kept low by the elasticity of demand; but, in addition to that, competition drives prices down below what would be predicted by basic supply-demand equilibria.
If GM were to have a monopoly, it would certainly have to keep prices well short of 1,000,000; the demand for cars is not nearly that inelastic. However, they could raise prices above competitive levels for greater profit.
Economics declares that prices are set by the equilibrium of supply and demand.
It is irrelevant how many businesses there are producing the supply so long as no artificial limit on supply is imposed.
Sounds like a profit opportunity to me. Epistemologically, by the way, how would you know the “competitive price” in order to say that the monopoly price is higher? In any case, absent the use of force, why isn’t this an opportunity to enter the field?
Again, if there’s no use of force, this is a profit opportunity. Also, what do you mean this “hurts consumers?” How am I hurt by being offered a product only at a higher price than it would otherwise be offered? Do I have some kind of right to pay some specific price for a product someone else made?
Now, assume that your 2 statements were unobjectionable. That we should have anti-trust legislation still doesn’t follow, unless you first explain how you’re going to keep the rich and powerful people at the top of the industry from gaining control of the board which monitors these things.
OK, let’s take oil for example. The demand for oil is so inelastic that a monopolized oil industry could easily raise prices significantly and see little reduction in consumption. However, with competition, a business can not raise the price of oil otherwise consumers will defer to cheaper competitors.
I’m arguing that competition makes the price elasticity of demand for a good from that business far more elastic; this lowers prices.
“why isn’t this an opportunity to enter the field?”
I will concede that point. However, what is to prevent these cartels from undercutting their new competition?
“Also, what do you mean this “hurts consumers?” How am I hurt by being offered a product only at a higher price than it would otherwise be offered? Do I have some kind of right to pay some specific price for a product someone else made?”
I mean that when the price is no longer reflective strictly of costs and of consumer demand, then resources are not allocated as efficiently as they would have been with competition.
Your original complaint was that prices would be too high. Now you’re worried about a business making prices too low? If the cartel undercuts the new competition, there will be a price war until one or the other group hits the point of normal profit, and will go no further. If there was any meaning to your original talk about “competitive price” than this would either be that price, or lower.
Well, that’s something different from what you said originally. In relation to this claim, how do you know? You don’t know how the monopolist is investing his profits. What makes you think that the economy as a whole is less efficient?
Oh really? You mean to tell me that, without government regulators breathing down their necks, there’s no incentive for companies to develop alternative energy sources while the monopolist who controls oil keeps raising the price?
I think this is one big myth that has been propagated for quite some time. A monopoly that has to continually undercut new competitors would 1.), lose the trust of its consumers and 2.) negate the purpose of making larger profits since lower prices would force them to increase production thus increasing costs. This back and forth process would never be worth it.
Further, I think you’re missing the main point. In almost every case imaginable the reason a cartel exists is because of anti-trust or governmental regulation. It’s difficult for cartels to exist without government protection unless they’re like a Wal-Mart and truly providing customers with highly-valued products at low prices.
Prices are never at their “competitive” levels as no one can even know what those prices are.
It’s important to always consider the options your proposing.
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Allow the monopoly to exist despite the fact that the prices it’s charging are above “perfectly competitive” prices.
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Have government delegate who get’s to produce and who doesn’t. This is essentially what anti-trust is. The goverment determines market share.
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Have government assume the role of the monopoly completely.
I thinks it’s rather obvious what’s preferable. Once you allow the state to assume even the power of delegating who produces and who doesn’t you’re opening yourself up to a process which is no longer bound by the profit motive. It’s governed by bribes, etc. Further, once you give the state even a little bit of power, there’s no turning back!
The consequeces of the third option are absolutely horrific, as anyone knows. Government run companies are notoriously inefficient and sluggish. They have no profit-motive!
Further, you’re giving no credit to the ability of the free market to punish monopolies. If there really were an evil monopoly charging exorbitant prices on inelastic products and there wasn’t anti-trust, there would undoubtedly be a myriad of company rating organizations. Their ratings (the evil monopoly’s) would plummet. Further, any company associated with that company would want dissassociate it self from that company as consumers would be aware of such connections. In a society where government takes care of such things there’s little incentive for consumers to be vigilant and picky. But without anti-trust, such is not the case.
Funny that oil was mentioned as an example. Standard Oil had a 98% market share based on under cutting competition. Consumers saw lower prices as Standard Oil had to fight off competitors. This held into the 1890s when Standard Oil got into a price war in Europe. Then the market share began to deteriorate as Standard Oil could not afford to lower prices in both Europe and the US. When our Anti-Trust gods broke up Standard Oil the market share was under 70%.
what is to prevent these cartels from undercutting their new competition?
Whom exactly are you proposing to use the law to protect? Are you trying to protect consumers? If so cartels undercutting the new competition would benefit them by offering lower prices. “But,” you might say, “the cartels will undercut the competition to put them out of business and then raise prices”. Well this sounds plausible, however if it could happen I expect it should have happened at least once in history, but the truth of the matter is that in the one case that I have read about where a chemical firm in Europe which had a monopoly on the production there of something like boron, or phosphorous, attempted to put their American competitor out of business by undercutting prices (actually selling below the cost of production). Sounds like a great plan right? Well the American producer quit selling his stock of the chemical and immediately sent buyers to buy as much as they could at the artificially low price. He then held his stock of chemicals until the European firm was forced to raise prices because they obviously could not operate at a loss forever. Once they raised prices he came back into the market and was able to make extra profit the chemicals that he had bought “on sale”.
Also, I don’t know if anyone addressed your very first phrase “from a utilitarian point of view”, I would say that most Austrians are not utilitarians after Mises. I guess this depends on which utilitarians you are talking about however (certainly not Benthamite).
Is that actually true?
Let’s take an example. Imagine an island with 2000 inhabitants. Now imagine a company that builds a bridge to that island that costs 1 billion dollars to build. You could argue that the company that built the bridge now has a monopoly and therefore we absolutely must have a second company in the market that builds yet another bridge at a further cost of 1 billion dollars. You now have two bridges, neither of which was really a very effective usitilization of resources, all in the name of some strange kind of coerced competition (competition that would never have existed in the free market becuase it simply wasn’t rational to spend so many resources building these bridges).
Now let’s imagine that the first bridge only cost 500 million dollars. That would be 250,000 per inhabitant and you could amortize that cost over, say, 20 years meaning each person is still paying about 12,500 a year for the bridge. It’s a heck of a lot of money but imagine these islanders really really need the bridge. At a pinch, imagine these people are absolutely totally dependent on the bridge and so if they scritch and scratch and save they can pay that price but definitely no more (above and beyond 12,500 a year the inhabitants start moving back to the mainland). As such, you have a market for exactly one bridge but no rational way of explaining why you’d want to build two bridges. Two bridges could only be built at a loss, which must be paid for by someone (even if it’s not the inhabitants of the island).
In either of the scenarios above, forcing competition on the system and forcing the construction of a second bridge does not result in more efficient or a preferable allocation of resources. In both cases, building a second bridge would simply be a waste of time and money (in fact building any bridges at all only really makes sense if you can do it for less than 500 million).
The heart of the matter is that when we’re choosing what we spend our money on, we’re not choosing between bridges and bridges. There are other products in the economy. If the islanders see the bridges cost too much then they’ll decide to spend their money instead on new homes back on the mainland (thus rendering the bridges obsolete). To require competition in each and every tiny submarket for every possible product is in and of itself a waste of resources. You may end up with a lower nominal value on certain goods as a result of this but you’re going to end up with a higher overall cost as a result of all the useless bridges you built to achieve this (and the legislators you had to pay to write the legislation forcing the construction of the second bridge).
“The heart of the matter is that when we’re choosing what we spend our money on, we’re not choosing between bridges and bridges.”
This is exactly right. Why a bridge? If it costs $12,500 per head of the population, then why not an hourly ferry that might cost $5000 per head? Alas, 2000 people aren’t a lot; why not a few row boats and perhaps a ferry that stops by once a day whilst on the way from another island. All that could cost just $1000 per head. Surely the “best” solution would be the one that the inhabitants, living under perfect liberty, would choose via the price system. No need for forced competition at all.
“the cartels will undercut the competition to put them out of business and then raise prices”Again as Rob explained, no biggie for a libertarian. When the “cartel” eventually raises its prices after “forcing” its competitor out of business, then this will have a big increase in its marginal profit, let’s say, jumping to 40%. This, in perfect liberty, will only affect the consumer for a limited period as investors (a hedge fund manager, for example) would look at that industry and say “holy crap lets get my money out of those stocks paying 5.45% and into those paying 40%. (In reality, these hedge funds would buy up underperforming companies and turn them around.) The only way for the cartel to maintain its monopoly is for tyrants to decree that no more actors are permitted to enter the market place – i.e. tariffs, legislation, trade unions, minimum wages, red tape etc.
The heart of the confusion over the nature of monopoly is assuming that a company like GM can set prices. It can do no such thing. Only the market, the equilibrium of supply and demand, can set prices. GM’s prices follow those of the market.
If it happens that GM supplies so many cars that the price falls to a level where it is unprofitable for other companies to supply more cars, then GM, despite being the only company in business, is not a monopoly. In fact, it is the case for many industries that merging creates economies of scale that make greater supplies possible. Pure mergers may not be even necessary. Forming cartels can achieve these economies of scale just as well. (Airline companies, for example, connect to each other to make it more convenient to travel through multiple airlines.)
This is exactly what is happening in the bridge example above. The market sets the price of one bridge to an economic level, but two bridges would not be economic.
The classical definition of monopoly, then, is what there is a legal barrier that makes it impossible to add to supply even when it would be economic to do so. If regulation says that all new bridges need to be built out of marble, that is a form of monopoly. Similarly if only one company is allowed to supply cars, that company will supply as it can, but it may not have the efficiency required to supply what a truly free market would.