Monopoly, is it a problem?(capitalism.org)
capitalism.org
Monopoly, is it a problem?
http://www.capitalism.org/faq/monopolies.htm
10 comments
Steve Keen (one of the less wacky economists to predict the GFC) claimed that monopolies often aren't so bad. Note, Steve claims to be part Keynesian, part math modeler, and part empiricist; and is extremely critical of free-market economists; but he'll flame any school of thought that he disagrees with.
http://www.debunkingeconomics.com/extracts.htm#4
>"The historical record gives many reasons to be critical of monopolies. Some of today’s most respectable names accumulated fortunes in the 19th century by grossly unethical means, and held on to their economic wealth by the abuse of the many forms of power that wealth can confer. This record of 19th century corporate lawlessness is the major explanation for America’s distinctive anti-trust laws, which enable the judiciary in this bastion of capitalism to dismantle corporations that have acquired the position of ultimate market power.
>Economists have reduced this plethora of reasons to be critical of monopolies to just one: the size of a monopolist relative to the size of the market. According to economists, monopolies are worse than the alternative of competitive markets simply because the absence of competitors allows a monopoly to set price above marginal cost. Perfectly competitive industries, on the other hand, set price equal to marginal cost. Economists argue that monopolies are therefore necessarily bad, and that small, competitive firms are necessarily good, because monopolies produce a lower output for a higher price, thus restricting the supply of their products and exploiting consumers by over-pricing. However, the ‘proof’ of this argument makes the fundamental mathematical mistake of equating a very small quantity to zero. When this mistake is corrected, the economic argument against monopolies collapses, as does the economic theory of competition..."
http://www.debunkingeconomics.com/extracts.htm#4
>"The historical record gives many reasons to be critical of monopolies. Some of today’s most respectable names accumulated fortunes in the 19th century by grossly unethical means, and held on to their economic wealth by the abuse of the many forms of power that wealth can confer. This record of 19th century corporate lawlessness is the major explanation for America’s distinctive anti-trust laws, which enable the judiciary in this bastion of capitalism to dismantle corporations that have acquired the position of ultimate market power.
>Economists have reduced this plethora of reasons to be critical of monopolies to just one: the size of a monopolist relative to the size of the market. According to economists, monopolies are worse than the alternative of competitive markets simply because the absence of competitors allows a monopoly to set price above marginal cost. Perfectly competitive industries, on the other hand, set price equal to marginal cost. Economists argue that monopolies are therefore necessarily bad, and that small, competitive firms are necessarily good, because monopolies produce a lower output for a higher price, thus restricting the supply of their products and exploiting consumers by over-pricing. However, the ‘proof’ of this argument makes the fundamental mathematical mistake of equating a very small quantity to zero. When this mistake is corrected, the economic argument against monopolies collapses, as does the economic theory of competition..."
I agree. Thanks for explaining :-).
> Monopoly power is market-distorting, and prevents the normal free-market mechanisms from working to allocate supply and demand efficiently--- even if the monopolist did nothing "wrong" in getting to be a monopoly. The main argument for anti-trust laws is that society is better off when the "invisible hand" can work its magic, and use of monopoly power, especially to influence other markets (e.g. Microsoft demanding that Dell not ship any non-Windows computers), prevents the market from operating efficiently.
Having large market share lets a company generally get its way in many things (favorable terms, high margins), but the company always has a tradeoff consideration to make: If quality gets too bad, or prices get too high, someone is going to come and try to eat their lunch.
Microsoft is a great example. They succeed in markets where they make products that are good enough to great, and fail when they do not. The XBox and Windows 7 sell quite well. But when they put out poor products or fail to keep innovating, they stagnate or lose - Hotmail, Windows Vista, Internet Explorer.
People get upset because a company with high market share can antagonize customers and suppliers in the short term and there's not immediate recourse. But there is recourse. Internet Explorer had a near monopoly position, they got arrogant and stayed in IE6 forever, this left a hole that Firefox and later others came through. Letting Windows stagnate and then putting out Vista with its bloat and driver issues let Apple grow in power to compete.
Microsoft has large market share, but if they abuse it and don't deliver appropriately, they get bitten. The alternative - trust busting - has produced some horrific corruption and lobbying. I present the following as one of the most corrupt rulings in American legal history:
http://en.wikipedia.org/wiki/United_States_v._Alcoa
"Alcoa said that if it was in fact deemed a monopoly, it acquired that position honestly, through out competing other companies through greater efficiencies. Hand applied a rule concerning practices that are illegal per se here, saying that it does not matter how Alcoa became a monopoly, since its offense was simply to become one."
Alcoa was a great company that took a large market share by making a great product, doing it efficiently, and ran their company well. They didn't anything sleazy at all - but they were broken up under antitrust laws as a political power play.
Giving governments the power to break companies based on the subjective judgment that they're too powerful leads to bad places. The power tends to get wielded rather arbitrarily. There's a natural check on companies with large market share - if they overprice or produce low quality, it stimulates competition and they lose that market share. People point to bad companies abusing monopoly position, but there aren't many examples of companies that holding a monopoly position with a bad product for very long at all. The only way it happens is when it's the "official" provider as blessed by some kind of government agency.
Letting political figures and bureaucrats break up a successful company just by virtue of it being successful goes to bad places - in particular, a company with a positive history of acquisitions having to run things by the Department of Justice is a problem. Google should be allowed to acquire whatever the heck they want - if they stop innovating or start gouging suppliers or clients, then they'll enable competitors to rise up. But if they're providing good services and winning because they meet people's needs, then they should be allowed to win, not broken because a competitor started lobbying and donating money to a powerful Senator.
Having large market share lets a company generally get its way in many things (favorable terms, high margins), but the company always has a tradeoff consideration to make: If quality gets too bad, or prices get too high, someone is going to come and try to eat their lunch.
Microsoft is a great example. They succeed in markets where they make products that are good enough to great, and fail when they do not. The XBox and Windows 7 sell quite well. But when they put out poor products or fail to keep innovating, they stagnate or lose - Hotmail, Windows Vista, Internet Explorer.
People get upset because a company with high market share can antagonize customers and suppliers in the short term and there's not immediate recourse. But there is recourse. Internet Explorer had a near monopoly position, they got arrogant and stayed in IE6 forever, this left a hole that Firefox and later others came through. Letting Windows stagnate and then putting out Vista with its bloat and driver issues let Apple grow in power to compete.
Microsoft has large market share, but if they abuse it and don't deliver appropriately, they get bitten. The alternative - trust busting - has produced some horrific corruption and lobbying. I present the following as one of the most corrupt rulings in American legal history:
http://en.wikipedia.org/wiki/United_States_v._Alcoa
"Alcoa said that if it was in fact deemed a monopoly, it acquired that position honestly, through out competing other companies through greater efficiencies. Hand applied a rule concerning practices that are illegal per se here, saying that it does not matter how Alcoa became a monopoly, since its offense was simply to become one."
Alcoa was a great company that took a large market share by making a great product, doing it efficiently, and ran their company well. They didn't anything sleazy at all - but they were broken up under antitrust laws as a political power play.
Giving governments the power to break companies based on the subjective judgment that they're too powerful leads to bad places. The power tends to get wielded rather arbitrarily. There's a natural check on companies with large market share - if they overprice or produce low quality, it stimulates competition and they lose that market share. People point to bad companies abusing monopoly position, but there aren't many examples of companies that holding a monopoly position with a bad product for very long at all. The only way it happens is when it's the "official" provider as blessed by some kind of government agency.
Letting political figures and bureaucrats break up a successful company just by virtue of it being successful goes to bad places - in particular, a company with a positive history of acquisitions having to run things by the Department of Justice is a problem. Google should be allowed to acquire whatever the heck they want - if they stop innovating or start gouging suppliers or clients, then they'll enable competitors to rise up. But if they're providing good services and winning because they meet people's needs, then they should be allowed to win, not broken because a competitor started lobbying and donating money to a powerful Senator.
Good point. But, what if in the "imaginary case", Google starts to become the one and only internet service?
They will have the largest capital, the best human resources, and they could control the market. I mean factually nobody could compete with Google. Because of a reality that nobody could make money if they want to compete with Google.
Let's also imagine that they start venturing into non-internet service, and they were able to do that too because of the large amount of capital that they have amassed from a long time.
I understand that government should not break companies just because of their political power, but in this imaginary Googlism society. How do people who are upset with Google or at least not satisfied, start to find or build another provider?
(I know this is quite impossible, given the amount of competing internet services, but just imagine).
They will have the largest capital, the best human resources, and they could control the market. I mean factually nobody could compete with Google. Because of a reality that nobody could make money if they want to compete with Google.
Let's also imagine that they start venturing into non-internet service, and they were able to do that too because of the large amount of capital that they have amassed from a long time.
I understand that government should not break companies just because of their political power, but in this imaginary Googlism society. How do people who are upset with Google or at least not satisfied, start to find or build another provider?
(I know this is quite impossible, given the amount of competing internet services, but just imagine).
> If quality gets too bad, or prices get too high, someone is going to come and try to eat their lunch.
The problem is that in monopoly, things have to be really, really bad and prices must be really outrageous before anything changes. Healthy markets are the opposite - even a minor decrease in value creates a niche that is filled by a competitor.
The problem is that in monopoly, things have to be really, really bad and prices must be really outrageous before anything changes. Healthy markets are the opposite - even a minor decrease in value creates a niche that is filled by a competitor.
That really depends on the market.
In a market with strong network effects (e.g., operating systems), you are correct. It costs money to switch from windows to linux, and this may preclude a switch for a small cost gain.
In a market for commodity goods, this is not true. It costs nothing to switch from Alcoa aluminum to little guy aluminum.
In a market with strong network effects (e.g., operating systems), you are correct. It costs money to switch from windows to linux, and this may preclude a switch for a small cost gain.
In a market for commodity goods, this is not true. It costs nothing to switch from Alcoa aluminum to little guy aluminum.
And that's precisely why monopolies rarely form (not impossible, but really difficult) in commodity markets.
Anyway, it's not as important as when the monopoly is established. Any competition would have to bootstrap itself. Until competition is reestablished, market distortions ensue. They can be as large as the barriers that prevent competitors from entering the market.
Anyway, it's not as important as when the monopoly is established. Any competition would have to bootstrap itself. Until competition is reestablished, market distortions ensue. They can be as large as the barriers that prevent competitors from entering the market.
> The problem is that in monopoly, things have to be really, really bad and prices must be really outrageous before anything changes.
That's the theory, but do you have any examples of a company abusing monopoly power without government backing for any extended period of time? I don't know any examples of a non-government-backed company abusing monopoly power for any considerable length of time without losing market share.
That's the theory, but do you have any examples of a company abusing monopoly power without government backing for any extended period of time? I don't know any examples of a non-government-backed company abusing monopoly power for any considerable length of time without losing market share.
Microsoft?
They abused monopoly power to force their OEMs to do their bidding, all the way from punishing IBM for shipping OS/2 computers to preventing Dell and HP from placing software such as AOL's (MSN competitor) and Netscape (we all know that).
They have achieved monopoly and near-monopoly in several categories (office applications, IDEs) and have used it to raise barriers to entry. Every IDE available for Windows is either targeted to a small niche or free and cross-platform.
They abused monopoly power to force their OEMs to do their bidding, all the way from punishing IBM for shipping OS/2 computers to preventing Dell and HP from placing software such as AOL's (MSN competitor) and Netscape (we all know that).
They have achieved monopoly and near-monopoly in several categories (office applications, IDEs) and have used it to raise barriers to entry. Every IDE available for Windows is either targeted to a small niche or free and cross-platform.
> As all political intervention (initiation of force) in the marketplace is outlawed under capitalism, a harmful monopoly under capitalism is impossible.
That's at least a bit naive.
If declaring something outlawed made it impossible we would live in completely different world right now. We could manufacture teleportation device powered by only clever lawmaking.
This kind of statements seem like sticking fingers in ones ears and repeating a mantra.
That's at least a bit naive.
If declaring something outlawed made it impossible we would live in completely different world right now. We could manufacture teleportation device powered by only clever lawmaking.
This kind of statements seem like sticking fingers in ones ears and repeating a mantra.
As long as there is no coercion involved, I'm okay with monopolies. All a monopoly is a cornering of the market for a particular thing and you could even see entertainers as having a monopoly on their own unique offerings.
Most of the things people consider monopolies actually have competition. Its just not quite exactly the same, as cheap or as good.
If you had a monopoly on the automobile, there would still be the bicycle, the train, the horse and buggy, and of course, walking. These all compete with people just moving closer to work. Or living near a navigable body of water or getting a helicopter.
And lets not forget that the government is handing monopolies in exchange for sharing ideas (also known as patents). When such a deal makes sense for society, the monopoly is a good deal. When it isn't, we shouldn't be granting them.
Most of the things people consider monopolies actually have competition. Its just not quite exactly the same, as cheap or as good.
If you had a monopoly on the automobile, there would still be the bicycle, the train, the horse and buggy, and of course, walking. These all compete with people just moving closer to work. Or living near a navigable body of water or getting a helicopter.
And lets not forget that the government is handing monopolies in exchange for sharing ideas (also known as patents). When such a deal makes sense for society, the monopoly is a good deal. When it isn't, we shouldn't be granting them.
"If any business attempts to charge prices higher than the market will bear, he will lose all his business to his competition, since he cannot force his competition out of business."
This seems dated in our modern world.
Of course you can force your competition out of business if you're big enough. It's even easier if you're willing to use some dirty tricks. It's also sometimes impossible to compete in some modern industries like software. I can't simply sell a cheaper version of Windows -- only Microsoft can sell Windows. It's not as simple as going to the shoppe to pick from different brands of top hat. They're basically the same thing so they can compete against each other directly. Capitalism is great for soft drinks and tennis shoes but I'm not convinced it's the best choice for everything.
This seems dated in our modern world.
Of course you can force your competition out of business if you're big enough. It's even easier if you're willing to use some dirty tricks. It's also sometimes impossible to compete in some modern industries like software. I can't simply sell a cheaper version of Windows -- only Microsoft can sell Windows. It's not as simple as going to the shoppe to pick from different brands of top hat. They're basically the same thing so they can compete against each other directly. Capitalism is great for soft drinks and tennis shoes but I'm not convinced it's the best choice for everything.
I think the author completely fails to understand the problem caused by monopolies and why the underlying capitalist philosophy implies the problem - namely that they can jack up prices without competition and its always in their best interest to do so.
Really the problem with monopolies is how we implement capitalism with so few checks and balances - in an "idealised" setting you want monopolies to get the most efficient use of resources globally - its capitalism that messes it up by driving the monopoly to do "evil" things like jack up prices. The incentive to be greedy and selfish needs to be removed - this is a LOT easier said than done, but it is something that governments are most certainly capable of.
Really the problem with monopolies is how we implement capitalism with so few checks and balances - in an "idealised" setting you want monopolies to get the most efficient use of resources globally - its capitalism that messes it up by driving the monopoly to do "evil" things like jack up prices. The incentive to be greedy and selfish needs to be removed - this is a LOT easier said than done, but it is something that governments are most certainly capable of.
Market draws it's power from being multiagent and dynamic. All monopolies are evil not because they exploit workers and consumers (which they may o may not actually do) but because they harm things that power market. They reduce number of actors, narrow choices and lower the speed at which market adapts to situation.
Bleh, this started off sounding like an interesting piece - but it devolves into stating that the only "evil" monopolies are governments.
Which might not be a completely incorrect conclusion, it just reads like a political piece more than anything.
Which might not be a completely incorrect conclusion, it just reads like a political piece more than anything.
What?! The problem with monopolies is nicely illustrated in this little diagram that everyone who ever had econ 101 has seen far too many times: http://upload.wikimedia.org/wikipedia/commons/thumb/e/ef/Mon...
Of course monopolies are not intrinsically evil. I can’t really see what that has to do with the question as to whether states should prevent companies from becoming monopolists, though.
Of course monopolies are not intrinsically evil. I can’t really see what that has to do with the question as to whether states should prevent companies from becoming monopolists, though.
"the question as to whether states should prevent companies from becoming monopolists"
I believe the general agreement about this question is a resounding "No." The anti-monopoly regulations prevent companies from abusing their monopoly power and most of the anti-monopoly law discussion revolves around the extent of this.
I believe the general agreement about this question is a resounding "No." The anti-monopoly regulations prevent companies from abusing their monopoly power and most of the anti-monopoly law discussion revolves around the extent of this.
1) If the monopoly is used specifically to upkeep the monopoly, it's evil.
2) Any successful monopoly will grow to be a large corporation.
3) Corporations will try to upkeep any monopoly they've attained.
2) Any successful monopoly will grow to be a large corporation.
3) Corporations will try to upkeep any monopoly they've attained.
Seems like a fairly theoretical look at monopolies, right out of Econ 101. The argument does, however, seem to ignore the barriers of entry that are very real in the real world.
But most antitrust theory isn't based on any sort of historical-deservingness argument; rather, it's based on the fact that a monopolist does not operate in a market, but is the market. Monopoly power is market-distorting, and prevents the normal free-market mechanisms from working to allocate supply and demand efficiently--- even if the monopolist did nothing "wrong" in getting to be a monopoly. The main argument for anti-trust laws is that society is better off when the "invisible hand" can work its magic, and use of monopoly power, especially to influence other markets (e.g. Microsoft demanding that Dell not ship any non-Windows computers), prevents the market from operating efficiently.
Some more modern, mathematically-heavy theory phrases this as more or less an issue of feedback behavior: in a properly functioning market, the market is determined by something outside the market mechanisms themselves (idealized as "real" supply and demand), but in a malfunctioning market, the market mechanisms themselves feed back into the market, so it's mostly determined, self-referentially, by itself.