Question on So-Called Monopoly Problems

Economics Economics Questions
1

I am well aware of the many flaws in the doctrine that monopolies are inherently bad, and that capitalism produces monopolies through predatory pricing.

I understand that competitors could buy up supply from producers engaging in predatory pricing, such as Herbert Dow did to the German cartel. Also there is the great risk of selling below cost not working out for the firm. Or even if this practices succeeds, what is to prevent a new competitor from entering the market?

So here is the point of my post. I have long believed there is another flaw in the argument that predatory pricing is effective, and only recently have i seen another poster even mention it.

Here it is: Even if we ignored all the previous arguments I mentioned above, or we assumed that predatory pricing could conceivably be effective in some case, this case must be limited to only certain kinds of goods. That is, the ability to raise prices to whatever level a firm desired, thus fleecing the consumer, would only truly be effective in regard to a good or service that people absolutely must have, such as water or food. The poster I mentioned earlier goes on “This even ignores that there are many kinds of food all of which have substitutable goods. For instance: great! You have a monopoly in bananas! Well, I’ll just eat apples. Oh, you have a monopoly in all fruit? Ok, I’ll eat more vegetables. Do you have a monopoly on these things in just the U.S. or the world over? Who’s to say your foreign competitors won’t come to supply the “helpless” consumer?..Even if you have a worldwide monopoly on, say, diamonds, you could only arguably say what I really have is a monopoly on engagement rings that don’t use any other precious stones, or on diamond cutters. But these are things that people do not need. So, unlike water, should the supply become artificially low enough, or the price raised to monopolized levels, there is still a point at which people simply will not buy; this is not because they cannot afford to, but because the utility of the diamond simply looses out to the money they would have to pay for it. The laws of supply and demand still pertain.” This statement embodies well what I have been thinking for years. The kind of predatory pricing that everyone fears, if this kind of monopoly were possible in the first place, could only result in fleecing on things such as water. There is no substitute for water. We must have water, so if there is only one supplier, and that supplier is able to maintain his position as sole producer of water (unlikely) then, yes, he could charge almost whatever he wanted. So long as people have a dime in their pockets, he could take all of it. Again, I don’t find this scenario possible in the first place, but it illustrates the point that even if your ignore all other arguments, predatory pricing can only really work in an industry that is both needed and without substitute. As shown, not even needs such as food and shelter would qualify because people would simply forgo this kind of food or shelter for that kind.

Has any notable austrian ever posited this argument? I hope I am being clear. I appreciate your comments, as usual.

2

I’ve seen your agrument (“I’ll just use something else.”) made many times before, and it’s a good one.

As for the water scenario, how do you imagine one entity could possibly own ALL the water on this planet (rivers, oceans, clouds, etc.)? Even if, however unlikely that may be, a single agent acquired sole ownership of asset X which was essential for everyone else’s survival then social (property) norms would simply change/adapt, spitting/stoning him would pass as “ok” in every private court, and/or ostracism would simply force said agent into relinquishing control of asset X.

3

That was kind of my point. It was purely hypothetical. The only way predatory pricing could truly be worth the effort was if, somehow, one could attain the entire supply of water, or simply be the sole producer of purifying water. This has been historically, and is logically, impossible, therefore, predatory pricing is a total myth. My point was to illustrate that predatory pricing is only effective in industries that are both needed and without substitutes. I cannot think of any industry besides water that fills both of these categories. True, different producers of purified water might be called substitutes, such as aquafina vs smart water, but these are mere competitors more than substitute goods. Water itself has no substitute and all humans need water.

4

I’m not sure of any Austrian, but it’s really just a basic elasticity/substitute goods argument. You’d get instruction on it in any intro to microecon course.

However…your example of water is an interesting one. It lends credence to the point about monopolies (of the type that people fear) only being able to survive due to State backing. The case of Bolivia is a great example.

It of course was used to bash “capitalism” in the film The Corporation, but you get details on the story:

(I haven’t seen them yet, but I’m sure this case is also covered in Blue Gold and Thirst)

5

I guess another thing I am asking for clarification on is: in technical economic vocabulary, is the elasticity of a specific good (say diamonds) changed only by the good’s given price and supply or does the existence of a substitute good (say sapphires) also effect this. I understand that the existence of substitute goods will have the tendency to lower the price of the original good (the diamond), but in technical lingo, is the elasticity of the specific good (diamonds) any different.

What I mean is, if put in a situation where there was very little water, then water appears to be a very inelastic good in that we would pay nearly any price for it. However, diamonds do not enjoy the same situation, or at least not to the same degree. Yes, a lower supply of diamonds (artificial or otherwise) will raise the price of diamonds, however even if the supply is cut by 90%, you would not have the same situation of eager buys, as you would in the same situation just with water. Without going into the diamond-water fallacy (which I understand completely), I am asking is water actually inelastic regardless of the fact that there are many private bottlers, because based on MES, it seems like Rothbard would define aquafina as a totally different good than vitamin water, or even smartwater.

For instance, people say that Gas is a very inelastic good. Even if the price of gas is $50 a gallon, people will still buy it. But to me, this confuses the issue. it seems like only something needed and non substitutable is TOTALLY inelastic. Of course goods are not either elastic or inelastic, but varying degrees of elasticity. But now I feel like my questions are just confusing me. I know people will cut back on gas is it went to $50 a gallon, or in the case of water, take fewer showers, buy less bottled, or drink less water. Perhaps I am confusing inelastic goods to goods that might be more susceptible to predatory rates, although I admit even water is not really (I just mean given what has been discussed so far).

I am just thinking this through, but it seems like the major difference i am pointing to is, at bare subsistence, any one will pay any amount they have to get the minimum water needed to live. Diamonds will not enjoy this. When the price rises for either good, the quantity of water or diamonds demanded may go down, but there will be just as many consumers of water as there was before, but not as many for diamonds. For example, lets say you have a hundred people in a group. 10 are willing to buy one diamond at $100 each and another 10 are willing to buy two diamonds at that price, and all 100 are willing to buy 20 gallons of water a day at $3 a gallon (this is the amount needed for 2 showers a day, plenty for cleaning and cooking, waching car, etc). Then you have a price rise of 300% on both goods. Diamonds are now $400 a piece and water is now $12 a gallon. What would probably happen is you would see both the number of people demanding diamonds and the amount of diamonds each demanded lower, whereas with water, all 100 people in the group would still demand and purchase some amount of water. The amount of water demanded would lower, but the number of demanders would not, and the amount of water demanded would eventually bottom out. For instance, at the new prices, only 5 people would be willing to buy a diamond at $400 a piece, and no one would be willing to buy two. However, each of the 100 people in the group are willing to buy water at $12 a gallon, but will only buy 5 gallons a day. In this example, lets say that 5 gallons is the absolute minimum to sustain life (I don’t know what the real amount is). So, if the price of water rose 50% from $12 a gallon to $18 a gallon people would still be willing to pay the $90 a day to buy their needed 5 gallons. Obviously, I haven’t checked the math to see if these numbers would make sense for the seller but, for the sake of argument, lets just assume that the seller would see an increase in profit from these price increases relative to quantity demanded. While I recognize that the amount of a good demanded at a given price, regardless of how many are individuals are demanding, is all that really matters for the seller, at least theoretically (ignoring things like the personal values of the seller), what I am asking is, if in the absurd case that someone were arguing with me and said "No, it is absolutely possible for one person to control all of needed good X (purified water), is there any way to rebuttal the notion that given this, the producer could charge whatever he wanted so long as the money was there in some form of another (i.e. at this bottom out price, the producer could indirectly give no other alternative to the buyer than to sell off everything he owns to afford his needed 5 gallons a day). This of course can go into all sorts of ethical and philosophical discussions (like those of when the slave chooses to remain in enslavement because he believes it is in his interest when compared with the risks of escaping; likewise, some socialists might posit that the monopoly producer and his predatory rates make the option of selling off everything more attractive than than dying of thirst). I would like to steer clear of these discussions, because most of us know the difference.

I know I am putting this to absurdity, but I am willing to bet I will run into someone who wont believe the other critiques given about predatory pricing, so if it comes to this statement, I want to be ready if there is anything better than saying to him “You are being absurd and unrealistic.” I know I don’t take that for an answer when someone says this to me regarding my belief that the state isn’t necessary.

Wooh, long one. Sorry for the stream-of-conciousness vomiting I’ve just displayed. I was kind of typing out loud.

6

…That question doesn’t really make sense. The whole point of “elasticity” in this context is to give a name for the responsiveness of the quantity demanded to a change in its price, aka “price elasticity of demand”. You’re asking if elasticity is changed depending on price…but when people generally talk about “elasticity”, their entire point is to illustrate how much people are still willing to maintain their same quantity demand despite a price change.

If quantity-demanded changed with a price change, there really wouldn’t be any inelasticity to speak of. The entire reason you bring up water is because it is highly inelastic…that is to say the quantity demanded is highly resistent to change due to price change.

I don’t understand. I thought when you were talking about “water” you literally meant “H2O”…I didn’t realize you were simply saying “water provided by one supplier”. I mean, vitamin water, smartwater, Gaterade, Coca-Cola, milk…all these products require H2O. A monopoly on water would affect the ability to make any of these goods. (Not to mention, you’re not going to wash your clothes in colored vitamin water or Gaterade).

I do not think that gasoline is as inelastic as people make it out to be. Just look at the effect on the typical “summer drive spike” a few years ago when the price of oil first got over $100/barrel and gasoline was breaking (nominal) records. People didn’t drive as much. The quantity demanded shifted pretty significantly…and that was just a change of a couple dollars.

By the same token…you’re telling me you wouldn’t see an increase in the quantity of gasoline demanded if the price fell to $1/gal over the next year? Balogna.

Exactly. Think of a diabetic’s demand for insulin. That’s inelastic. They need a certain amount, or they face serious consequences. So if the price goes up, their quantity demanded is exactly the same. Same story if the price goes down. Just because it’s cheaper doesn’t mean they’re going to buy more of it. They only need a certain amount of it to survive, and they really have no use for it otherwise. (And I believe it has a shelf-life, so they can’t really try to “stock up” on it if the price is low.)

That’s what inelasticity looks like.

You’re basically describing price elasticity.

See here.

Just try to use more paragraphs.

7

(1) Ok, cool. So what you are saying is that, in a sense, I have it backwards. The price elasticity of demand is what it is in that it shows the level of demand for a good or service at different points over a range of prices. I am backwards in that a good’s elasticity of demand is not changed depending on price; rather, the price is changed depending on a good’s elasticity demand right?

So, this leads me to my next question…

(2) Even though we say that water is a highly inelastic good, this is not always the case is it? Given the developed world’s relatively excessive use of water on a daily basis, it seems to me that if it were such an inelastic good, then that means we would use the same amount regardless of the price (which I’ll get to in the next paragraph). I currently charge up about a $14 water bill at each of my residences every month. I have nearly zero regard for my usage because the bill is such a negligent amount of money that I would prefer to be liberal with it (enjoy long, hot showers) and pay an extra buck, than to be conservative by watching it to save the extra buck. Hell, a lot of Nashville apartments offer it free (although I guess the cost is included in your rent and thus socialized among the tenants). Perhaps there are state and city subsidies given to the water firm that was granted the job of producing the water so as to make it more affordable for the lower income levels which would have the effect of both hiding and raising the real-cost of the water to me, but it is what it is.

But, like gas, if everyone in the city maintained the same levels of water consumption, yet everyone’s water bill suddenly rose by $300 a month, I would bet most would cut back, and if they are like me, they would then cut back a lot. This is not the characteristic of an inelastic good. Now, please tell me if my next statement is flawed, incorrect, or fallacious in any way: it appears to me that water, as a good, is a unique good when compared to any other good or service that I can think of - As the price of water rises, its price elasticity of demand grows exponentially more and more inelastic. Eventually, as discussed before, the price bottoms out. Consumers will cut down on usage, but only to a minimum needed to live. They can cut bathing, cleaning dishes, even flushing their toilets by going outside in a hole and burying their waste, but they must have water for cooking and, at the very least, drinking. Insulin, as JJ pointed out, is truly a totally inelastic good. No matter where the prices are, the consumption is always the same. Water, however, is the very last thing to go, which makes this such an interesting topic.

Other questions I have:

(3) Can a competitor’s good be considered a substitute good? For instance, if the price of peas gets too high I might buy carrots as a substitute. Now lets say I prefer green giant’s brand of peas but their price rises and so I buy Kroger’s generic brand of peas instead. Could this also be called a substitute good? I have always understood substitutes to be different goods that take the place of the original good (like using baking soda instead of toothpaste when you brush your teeth). But in MES, Rothbard seems to make the claim that, from the perspective of the market, the kroger brand peas are a completely different good than green giant’s. Meaning the Kroger brand is not just a competitor’s good, but also a substitute. For consistency’s sake, another example might be buying different brands of insulin vs finding dietary plans that work as an alternative or “substitute”.

8

Those two things do not seem to really be opposites. Just check out “price elasticity of demand” and see where you’re at from there.

Your story makes it seem like you didn’t read my entire post. I never said water was inelastic. I said “highly inelastic”…which means, “a relatively low level of elasticity”. My example of an inelastic demand was a diabetic’s demand for insulin.

You basically said yourself that you largely didn’t care what your water bill is, but if it rose by $300 in one month…then you would care. This illustrates my case of water having a relatively low level of elasticity.

That makes absolutely no sense. The only thing I can think of is that you still do not have an understanding of what “price elasticity of demand” means.

Suppose we lived in a world of mutants, like the Marvel Universe. Different people have different levels of pain tolerance, regenerative capability, and invulnerability. There were something called “temperature responsiveness of skin.” What this is is a measure of how affected a person’s skin is by outside temperatures. The higher the temperature responsiveness, the more affected a person’s skin is by temperature change. So someone like the Hulk has a very very low temperature responsiveness. The temperature can change drastically…really hot, really cold…it doesn’t matter…his skin is relatively unaffected. The temperature would have to change drastically…to extremely freezing, sub-sub-zero temperatures, or to extremely hot, beyond fire-burning temperatures before his skin would start to show any response.

On the other hand, suppose there were someone called “The Thermometer”, who had an extremely high temperature responsiveness of skin. The temperature changed a half a degree and his skin changed color. It would take very very little change to show a response.

The Hulk is comparable to a highly inelastic demand…whereas The Thermometer, a highly elastic demand.

Not really. It’s the same good…just a different supplier. “Substitute good” is generally used to refer to something used as an alternative. Technically you could argue that one competitor’s peas are used as an alternative to someone else’s peas, but unless they come from a different process than growing plants in the ground, they’re the same good.

Perhaps something like cubic zirconia could be considered a substitute for diamonds. Technically it has slightly different characteristics (e.g. it’s not as hard as diamond), but even if it was physically and chemically identical to diamonds, I would think in a way, it may could still be considered a substitute, given that it is produced in a different way. However, if it requires the same resources to create, one might argue it pulls from the same pool, and therefore is not a substitute…which I would say is the case for peas. Unless there is something characteristically different about the Kroger brand peas, I don’t think you can call them a substitute.

Do you have a page or chapter for this? It’s possible he was speaking within a context and wouldn’t really go as far as you’re taking it. But I wouldn’t put it past him to say what you’re alleging.

9

Haha, and this is why I choose to say anonymous, for questions like these where I am totally out of my element.

pg 23-24 of MES "What if one pound of butter was considered by the actor as of better quality than another pound of butter? In that case, the two “butters” are really different goods from the point of view of the actor and will be evaluated differently. The two pounds of butter are now two different goods and are no longer two units of a supply of one good. Similarly, the actor must have valued each horse or each cow identically. If he preferred one horse to each of the others, or one cow to the other, then they are no longer units of the supply of the same good. No longer are his horses interchangeable for one another. If he grades horse A ab.ove the others and regards horses B and C indifferently, then he has supplies of two different goods (omitting the cows): say, “Grade A horses—one unit”; and “Grade B horses—two units.” If a specific unit is differently evaluated from all other units, then the supply of that good is only one unit. Here again, it is very important to recognize that what is significant for human action is not the physical property of a good, but the evaluation of the good by the actor. Thus, physi- cally there may be no discernible difference between one pound of butter and another, or one cow and another. But if the actor chooses to evaluate them differently, they are no longer part of the supply of the same good.

The interchangeability of units in the supply of a good does not mean that the concrete units are actually valued equally. They may and will be valued differently whenever their position in the supply is different."

Its kind of looking like I may have remembered this portion differently than how it was meant though

10

There are multiple ways to create water, however. Many chemical reactions produce water as a by-product. So a person trying to monopolize water would actually have to monopolize all material that could conceivably be used to produce water through chemical reactions. That’s a much taller order, if you ask me.