I’m in an “Economic Analysis of Law” class this semester, so I’m expecting “learning” about antitrust legislation. In fact, I am excited for this portion of class, excited because I can’t wait to inform my professor and class that yes, I believe that natural & free market monopolies are beneficial. Think about it: the owners of a natural monopoly would have every incentive to keep their operations as efficient as possible in order to make as much profits as possible. Those profits would then be reinvested into making their operations even more efficient and profitable, thereby further serving the consumer in a way that no regulated monopoly or government owned monopoly could possibly do.
I would love to be a fly on the wall during your class. It would be cool if you could record it. 
I imagine the professor will only argue that such monopolies can result in over-charging customers.
And also stifle competition by temporarily cutting prices to put them out of business, then raise prices back up later.
Krazy Kaju, since you are learning law, was the original antitrust legislation in the 1890s actually meant for stopping large powerful companies like Microsoft and Intel or was it meant for stopping one particular practice only that does not resemble what today’s corporations do?
There is no such thing as a natural or free market monopoly. I dislike these terms. A monopoly is a privilege reinforced by violence, not a winner takes all market advantage.
It’s not a monopoly. We must use this word correctly. Arguing with incoherent and fallacious terms is futile.
I predict lots of migraines as you beat your head against the wall.
Lots of the works on austrian economics/anarchy use the terms natural monopoly. Until the experts start using other terms exclusively there really isn’t much else to use. Unless we want to begin every discussion with a paragraph long explanation it might be easier to stick with what’s in the literature even if it sounds similar to another term.
That’s my point. My point is to work entirely within the confines of neoclassical economics, which my professor and class is is familiar with, and to show how monopolies are beneficial. If a natural monopoly were to charge monopoly prices and thus earn monopoly profits… what will it do with that money besides reinvest in its own operations? Of course some would go to the owners/investors, but not that much. If there were a perfect, omniscient, omnipotent government capable of economic calculation, it could regulate away the economic profit of the monopoly… But is that what we really want? With no economic profit, there would be no greater incentive to invest in the monopoly than in any other business. The result would be that, in the long run, prices would be higher in the regulated monopoly than in the unregulated monopoly!
And of course, a government takeover of a monopoly is out of the question, since it would lead to all of the problems associated with government monopolies… waste, fraud, corruption, inefficiency, and much more.
No serious economist actually argues that. Slashing prices and then raising them would bankrupt a company as long as there was open entry into the market. That’s why, in economics, the discussion revolves around natural monopolies.
I’m actually going to school for economics. I was originally planning on double-majoring in econ and philosophy, but I decided to drop the latter in order to be able to take almost every economics class that our econ department offers.
Anyway, I have not learned anything about the origins of antitrust legislation in school. But from other sources (yay Mises.org!) I’ve learned that antitrust legislation was basically a protectionist racket for certain uncompetitive businesses.
At the risk of derailing the thread, why does this (non) argument still have so much currency outside of serious economists?
That’s weird: I have a monopoly on my own services. Is this a privilege reinforced by violence? In one sense it is, but I always thought we were in favor of this privilege, called self ownership?
In any case; the concept ‘monopoly’ as defined as ‘the single seller of a good’ is a coherent meaning and the market is full of it. So I’m not sure if that term is fallacious per se.
That is, however, obviously not a problem.
This could really be called a ‘natural monopoly’, even. And it’s not a problem. Competition in a market is not between homogenous goods, but between goods - full stop. Homo- or heterogenous (depending on consumer valuation).
Also: both a government monopoly and a natural monopoly are both in competition. Imagine the post office being a government enterprise, making it illegal to compete on first order mail. It doesn’t follow that this enterprise is absent competition entirely, because it still competes with email and stuff like that. Absent a complete planned economy - as long as there is a capital market - there is always some competition left, as far as I can see.
Huh? I expected to read something different when clicking on this thread. Natural monopolies have incentives to be efficient? No they don’t. Why would anyone bother to be efficient or reinvest when they have no competition? You wouldn’t really be driven to efficiency without a competitor breathing down your neck, luring to steal your market share.
Natural monopolies are not beneficent because they have incentives to be efficient, but because they had to be efficient to become a natural monopoly. The only way you can do that (in a free market) is by offering better or cheaper products than your competitors. If you are a natural monopoly it means you out-competed everyone else, which means you are the most efficient producer. Natural monopolies are not efficient, efficient companies become natural monopolies.
There are two kinds of incentives: positive incentives and negative incentives. A negative incentive is one that encourages you to take a course of action simply to prevent your position from getting worse, e.g. improving the efficiency of your company in order to not lose market share to competitors. A positive incentive is one that encourages you to take a course of action in order to better your current position, e.g. reinvesting your profits in order to make even more profits in the future.
The fact of the matter is that a natural monopolist lacks the negative incentive, but has an even greater positive incentive to become efficient. If the natural monopolist does not strive for maximal efficiency, he is simply shortchanging himself of additional profits. In fact, there would be no point of being a monopoly if you were to remain inefficient, as you would lose your economic profit if you were to be inefficient.
Furthermore, natural monopolies create incentives for others to break the natural monopoly through technological advances. For example, an oil monopoly creates incentives for others to think of new ways of providing energy, i.e. corn ethanol, shale oil, algae oil, solar power, compressed natural gas, etc.
Your entire argument ignores what a natural monopoly actually is. If Peak Oil were to actually happen, and I owned the last few operating oil wells in the world, I would have a natural monopoly, not by virtue of me being competitive, but by virtue of the fact that I was the only one capable of providing this good in the entire world.
A more realistic example of a natural monopoly pertains to railroads, roads, etc. Obviously, if I build a railroad from one place to another, nobody can recreate my accomplishment. Others can build roads and railroads or create new airways in order to take people from Point A to Point B as well, but I still own the natural monopoly over the most efficient railroad route there. I could easily earn “economic profit” in such a situation, but only if I kept my business venture efficient. If I didn’t I could still make money, but not as much. Hence, the incentive to be efficient.
What you’re talking about isn’t so much a natural monopoly as much as a free market monopoly, where barriers to entry are pretty low, but the monopolist has achieved such an economy of scale and keeps prices low enough to discourage others from entering the market.
Non of this discussion, which is supposed to be put in terms of neo-classical economics, mentions the standard neo-classical argument for the problem with natural monopoly, which is not that high prices divert money from the consumer to the producer but that high prices result in some customers who value the product at more than its cost of production not getting it–an inefficiency in the standard neo-classical sense. Nor does it mention Tullock’s further point, that the existence of monopoly profits results in firms spending resources to make sure that they instead of other firms become the monopoly and get those profits. See his “The Welfare Costs of Tariffs, Monopoly, and Theft,” which is, so far as I know, the original rent seeking article, although the term was coined in a later piece by another author.
In order to criticize a theory, it is necessary to first understand it.
If we actually apply the term “monopoly” as is widely understood and used (even by many economists), then we must realize that the term is misused, for we are all monopolists. No goods or services are identical. Market competition always occurs between “monopolists”. So the term by itself is useless for economic analysis unless you want to just point out this widely misconception about the term “monopoly”.
Now, “coercive monopoly” is a different beast. But there cannot be any coercive monopolies in a free market by the very definition of what a free market is. I’m sorry but a “natural monopoly” is not a coercive monopoly. Every land owner has a natural monopoly over his land.
It should be pointed out to your professor that we should be concerned with coercive monopolies, not monopolies. This begs the question: What goals can antitrust possibly achieve?
You are correct that both of these arguments have not been dealt with. Let me try and take a stab at it - even though it will probably not be sufficient or exhaustive.
The first argument seems reasonable - within the neo-classical framework. ‘People want to pay for it, there is a profit possibility and yet, there is no production!’ There are, however, multiple nuances possible. First of all: resources are, in fact, scarce. Not that radical from an idea, but relevant in this perspective. If certain resources go into the production of stuff by the ‘natural monopoly’, it would mean that they will not be used somewhere else. So it’s wrong to say that it’s inefficient per se - because you don’t know how much wealth is created somewhere else in the economy and, because of this, how much wealth creation is lost because of the shifting of resources to the natural monopoly. Even though they can produce at a low cost, it doesn’t follow that they produce at zero cost: some resources still have to be used there.
Another jab an Austrian could take at that theory is that it fails to see why there is something ‘inefficient’ at the fact that someone doesn’t want to produce something, even though people are willing to pay for it. I’m not working somewhere right now, even though there are probably people willing to pay for my services. Should this be considered ‘inefficient’ by the same standard? If not: why not? If so, isn’t that a weird use of efficiency?
I’m not sure if these two points are convincing, but those are the two I would make at this point in time.
The second point, however, isn’t really a problem with (natural) monopolies per se, but the fact that enterprises can turn to lobby. I’m not sure why this is a specific point for a natural monopoly and not a point in general with (big) firms?
I’m not quite sure I understand the distinction between positive and negative incentive. The difference seems to be how the situation you are striving for compares to your current situation, whether you are improving your condition or preventing it from deteriorating. But you always do both. You save to have more money, but also to not have less. And having a greater market share is the same as not having a lower market share.
Don’t all businesses shortchange themselves by remaining inefficient? What extra incentive is there for a monopolist? Let’s compare the owner of a road which is the only route between two destinations with one who owns a road that has to compete with alternative routes. Now both have to fix potholes in their road. Does the former, the monopolist, have more incentive to get a cheaper road repair service, to be more efficient, than the latter? He doesn’t, right? They are both spending their own money. The monopolist doesn’t have any additional incentive.
I agree. But not just through technological advances, they would try to break the monopoly through any kind of capital investment, using new or existing technology. For example, at some point a road monopolist who charges excessively will provoke a second road to be built.
But here we are acknowledging that natural monopolies don’t completely lack negative incentive after all. They have to compete with potential competitors even if they currently are the only seller.
What I stated above still works though. If peak oil were to happen, and you owned the last oil wells, you would be the most competitive producer of oil. Nobody could compete with you because they couldn’t produce at all. “Not being able to produce” is a form of “not being able to compete”. You are a natural monopoly because you are the most efficient producer.
We have to consider though how, in a real world scenario, you would come to owning the last oil wells in the world. In the absence of government protection, the only way to do that would have to be that you invented a new kind of oil well or something. You have that natural monopoly by virtue of being competitive after all.
The distinction between a natural monopoly and a free market monopoly seems to be what the barrier to entry is. If that barrier is a physical limitation (e.g. competitors can’t build another road) then we call it a natural monopoly. But if that barrier is merely economic, meaning the monopolist can keep prices low enough to discourage competition, it’s a free market monopoly. But economically they are the same. A physical barrier is just an economic barrier, because there are greater costs to compete. Almost any physical barrier will be overcome if profits are high enough.
Just want to say I appreciate the high level of discussion. Am learning something.
But that’s the root of Kaju’s excitement. The opportunity to smash false premises.
The earth has always been flat.
If you want to wait for permission and innovation from so-called experts you will be waiting a long time.
You don’t need to define your terms. They need to define theirs. The notion of a “natural monopoly” is contradictory, because a monopoly is not natural.
Doesn’t that depend on how one defines “monopoly”?