Where is the Logical Fallacy?

[ravochol]

In a free market, monopoly, and even oligopoly are nearly impossible

Well, I 100% disagree, and I think to the contrary, that it can be logically demonstrated that in a purely free market - monopoly or oligopoly are nearly impossible to avoid in the long run.

The barriers to entry into markets DO NOT only come from government - they also come from capital costs and economies of scale.

Maybe, if there were no government prohibition, you could start a bank in your house. Still, it would be very small, unknown, and therefore very risky for depositors; you would probably have to get an insurance policy for your deposits from a large and trusted company. You, a tiny bank, would probably have to pay a high “retail” rate for your policy. A mega-bank, on the other hand, could buy the same policy at a lower, “whole-sale” rate. The same would be true of everything else you do - renting office space, buying ink for the printers etc. You would be paying a higher rate of overhead for almost everything you do, compared to the larger bank . Furthermore, you might be able to afford 1 or two ATMs, while your mega-bank competitor has dozens - you can advertise with flyers in laundromats, while they can buy catchy ads during the Superbowl. You might be able to compete with the megabank, if you are a genius and have a genius business plan - but, the odds are against you being able to pay a higher rate of interest to depositors while also being able to pay a higher rate of overhead for expenses.

In other words, size leads to efficiency and confers advantage in most industries in a capitalist economy.

It’s true that you can grow corn and sell it in your back yard - but it’s also irrelevant if the large farm next door can do it profitably for half of the price you can. You simply can’t sell corn for $2 if corn of the same quality can be purchased for $1 nearby - and, you probably won’t be able to produce corn profitably for $1 until you get nearly as big as your farming competitor.

This is a very real barrier to entry into markets which exists totally outside of government - it’s part of the logic and practice of free markets themselves.

The problem is, markets stop being efficient if they get too concentrated - both on the top and on the bottom. At the top, too few companies will not compete efficiently - in part because they can turn to rent-seeking (or even outright taxes) instead of competition. At the bottom, people with good ideas can’t try them out in the market, simply because the barriers to entry or risks are too high.

So, the main points are that economies of scale exist, that their existence encourages consolidation, and that continued consolidation ends in oligopoly: unless anyone can challenge these points, I don’t think we can avoid the conclusion that totally free markets, left to themselves, crash into the wall of wealth concentration/oligopoly.

The ‘intelligent steering’ a free-market requires is the creation barriers to economic players becoming either ‘too big’, at the top, or ‘too small,’ at the bottom.

A good example of the latter is allowing individuals to go bankrupt, without putting them in debtors prisons (as lenders would surely prefer). This (non-market) protection makes the economy more efficient, by putting a floor under it which allows people to ‘get back into the game,’ even if they lost a round- if everyone who ever went bankrupt were put in a debtors prisons, many great companies and products wouldn’t exist today - also, who would be brave enough to start a business?

Economic players must also be prevented from becoming too big at the top.

Obviously, this is an economic issue - monopolies are non-competitive and non-efficient. But even prior to that, it’s political - if any entities get too big or too powerful, they will start acting like governments (or take over existing governments), simply because so much wealth and clout in their hands gives them the ability to.

[bionic_mosquito]

You continue to comment as if big means efficient and lowest cost. This is false on its face. You write as if you have only read text books. Have you worked for a large company to see how inefficient most are? Have you ever competed against one? Have you seen how they are so slow to react to new competitors? Do you read actual events in the news? Of course, you have not, else you would stop with silly assertions.

Again, address Google in the face of Microsoft. Address Hyundai in the face of General Motors. You ignore these because they don’t fit your textbook.

[Autolykos]

Ravochol, please respond to this post of mine.

[JH2011]

ravochol, i would also appreciate it if you repsonded to this part of my post

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But if you are serious about your claims, then you need to be more specific than saying an economy needs “regular maintenance and intelligent steering.”

Let’s be specific to your claim about the winners and losers. How exactly do you plan to make it more “fair” for both sides by using maintenance and steering?

My guess is that your suggestions to make things more fair will not only be unfair themselves, but will be extremely unlikely to be implemented successfully in practice.

[EmperorNero]

@ravochol

So, the main points are that economies of scale exist, that their existence encourages consolidation, and that continued consolidation ends in oligopoly: unless anyone can challenge these points, I don’t think we can avoid the conclusion that totally free markets, left to themselves, crash into the wall of wealth concentration/oligopoly.

You are presenting this as if people can only spend as much on business ventures as they have in their wallets. If that were the case, then indeed companies could get big enough for nobody to be able to come up with the funding to compete with them, and wealth would concentrate. But one of the fundamental aspects of capitalism is that it offers access to funding. New businesses can be financed with credit. That defeats the economies of scale argument. Any business can have any scale from day one.

[KAZVorpal]

The barriers to entry into markets DO NOT only come from government - they also come from capital costs and economies of scale.

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Sorry, I’d intended to head off that logical fallacy, and must have forgotten.

The socialist educators who commit that fallacy are taking capital costs and economies of scale as if they are magically isolated from all of the factors that can nullify them.

For example, there is always demand for an alternative, simply for the sake of being an alternative. SOME people will always hate Microsoft. It wouldn’t matter what they did…they’re big, and appear monolithic. They’re not even a monopoly, yet they already manifest a backlash that only grows with market dominance.

Capital costs and economies of scale, too, only apply to an existing version of a good or service. Gatorade and Snapple were such completely unique products that economies of scale were irrelevant. No amount of savings on the part of Pepsi or Coke was going to stop those new companies.

Nor would buying them. of course, because in a free market the purchase of small companies creates an industry of making small companies to be purchased.

Maybe, if there were no government prohibition, you could start a bank in your house. Still, it would be very small, unknown, and therefore very risky for depositors; you would probably have to get an insurance policy for your deposits from a large and trusted company.

What do you mean “have to”? The whole point of an actual free market is that nobody has to. Nobody has to get an insurance policy, and nobody has to deposit in my bank. But if there is an oligopoly of big, unresponsive banks, SOME people will deposit in my bank, because they hate those big banks. Initially, it’ll be people who know me personally, but then my reputation will grow.

You might be able to compete with the megabank, if you are a genius and have a genius business plan - but, the odds are against you being able to pay a higher rate of interest to depositors while also being able to pay a higher rate of overhead for expenses.

There will always be people willing to pay a premium for what they prefer, like an anti-oligopoly alternative, knowing the bank owner personally, et cetera.

It’s true that you can grow corn and sell it in your back yard - but it’s also irrelevant if the large farm next door can do it profitably for half of the price you can. You simply can’t sell corn for $2 if corn of the same quality can be purchased for $1 nearby - and, you probably won’t be able to produce corn profitably for $1 until you get nearly as big as your farming competitor.

Actually, I can sell corn for $2 a head while the agribusiness sells it for $1 a head:

First, I’ll sell bi-colored corn. Or tri-colored. Or organically grown corn, or corn only fertilized by free-range rabbit poop.

There will always be a niche market for things that the big businesses don’t WANT to provide. And some of those will grow in popularity until the economy of scale is comparable.

You also forget that, without government, there is cross-industry competition.

For example, Microsoft was kept out of the banking/finance industry by the US government. Entry is so expensive that the most wealthy company in the world could not pull it off. In real life, there would ALWAYS be new competition, not only from new entries, but from other large businesses that see a demand for an alternative when one business dominates an industry too much.