Ludwig von Mises Institute

Monopoly

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A monopoly is an enterprise that is the only seller of a good or service.[1]

Definitions[edit]

Despite the fact that monopoly problems occupy an enormous quantity of economic writings, little or no clarity of definition exists. There is, in fact, enormous vagueness and confusion on the subject.

"A state of affairs in which the monopolist, whether an individual or a group of individuals, exclusively controls one of the vital conditions of human survival."

Such a monopolist has the power to starve to death all those who do not obey his orders. A world-embracing socialist state would exercise such an absolute and total monopoly; it would have the power to crush its opponents by starving them to death. According to Ludwig von Mises, this type of monopoly "has no reference whatever to a market economy."[2]

"Monopoly exists when a firm has control over its price."

Firms never have control over their prices, because every exchange is a voluntary transaction subject to market forces. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price.

All producers have absolute control over the quantity they produce and the price which they attempt to get; and absolute noncontrol over the price-and-quantity transaction that finally takes place.

"The only seller of any given good."

It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a "monopolist. John Jones, lawyer, is a "monopolist" over the legal services of John Jones; Tom Williams, doctor, is a "monopolist" over his own unique medical services, etc. The owner of the Empire State Building is a "monopolist" over the rental services in his building. This definition, therefore, labels all consumer distinctions between individual products as establishing "monopolies."

Mises notes, "Except for certain raw materials, foodstuffs, and other staple goods, monopoly is everywhere on the market." However, he also notes that this does not necessarily give rise to a monopoly price; although "[u]nder copyright law every rhymester enjoys a monopoly in the sale of his poetry . . . [i]t may happen that no price whatever can be realized for his stuff and that his books can only be sold at their waste paper value."[2]

Only consumers can determine what is an individual good. There is no way to determine this externally.

A monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group.

This definition of monopoly goes back to the common law and acquired great political importance in England during the sixteenth and seventeenth centuries, when an historic struggle took place between libertarians and the Crown over the issue of monopoly as opposed to freedom of production and enterprise. Under this definition of the term, it is not surprising that "monopoly" took on connotations of sinister interest and tyranny in the public mind. The enormous restrictions on production and trade, as well as the establishment by the State of a monopoly caste of favorites, were the objects of vehement attack for several centuries.

This type of monopoly can never arise on a free market, unhampered by State interference. In the free economy, then, according to this definition, there can be no "monopoly problem."[3]

Restriction of production[edit]

Producers restrict production whenever they discover an inelastic demand curve, meaning they can produce less and ask for a higher price. This means that it is possible that the producer simply misidentified the proper amount of production in his initial calculations, and now the restriction is merely a correction of his miscalculations. There is nothing inherently immoral or wrong about asking for a higher price and producing less. In fact, it is what all producers engage in. Consumers have no right to a certain amount of goods, and the producer is still subject to market forces. He cannot keep raising the price without making the demand curve elastic.

The whole concept of "restricting production," is a fallacy when applied to the free market. In the real world of scarce resources in relation to possible ends, all production involves choice and the allocation of factors to serve the most highly valued ends. In short, the production of any product is necessarily always "restricted." Such "restriction" follows simply from the universal scarcity of factors and the diminishing marginal utility of any one product. But then it is absurd to speak of "restriction" at all.[3]

There are other reasons to restrict production and "withhold" goods from the market. It may be for speculative purposes. If the owner of merchandise expects that the price of his commodity will be higher in the next period than in the present, he will hold off sales, in the hope of gaining greater profit, but this will imply fewer sales right now.

An entrepreneur with low time preference is likely to "bide his time", and not allow himself to be rushed into premature sales; his optimal pattern of sales will call for "withholding" goods from the market now, and selling more and more as time goes on. He, too, benefits financially from his "withholding" pattern of exchange, for his subsequent sales are worth relatively more to him than to the high time preference person, since he discounts the future less heavily.

Conservation is yet another reason for selling less of a natural resource than might otherwise be sold. The owner who is motivated to conserve his resource will refuse to sell it all in the present period. He will "hold back" some of it. The owner does not try to maximize his sales in the present period; rather, he tries to maximize his return over the whole period during which the good is sold. He will only sell it all right away if he calculates that this is the best method of maximizing his profit. It is impossible to distinguish the conservationist motivation for withholding the sale of resources from the "monopolistic" one (if there is such a thing).

A desire for leisure can bring about a similar result. Muhammad Ali may choose to fight only three times per year even though he would certainly be able to contract for 52 bouts in a year, or even more, were he so disposed. Now one reason for this behaviour might be a vicious attempt On part to "defy the orders of the consumers for his Own advantage", to "infringe (upon) the supremacy of the consumers and the democracy of the market", and to "defy the supremacy of the consumers and substitute the -private interests of the monopolist for those of the public". But another explanation, much more plausible, is that Ali won't fight 52 times a year because he would start to get very tired, and would probably begin to lose. Another possibility, a very strong one, indeed, is that Ali has a taste for leisure, and, earning so much money from his ringside exploits, he can afford to give in to this taste.

Still another alternative explanation for "monopolistic withholding" is that producers are also consumers, and may derive pleasure from less production. An owner of forests may refuse to cut them down, not out of a desire to balk the "use of a scarce resource to the fullest extent compatible with the pattern of other consumer's tastes for wood in the market'" but because he enjoys the vista of a virgin forest.[4]

Natural monopoly[edit]

A "natural monopoly" or "public utility" occurs where "competition is not feasible." This concept has the following issues:[3]

  • There is no way to determine how many firms should be in a given industry. It could be true that only one is possible.
  • It is also not possible to determine whether the firm is charging a monopoly price.
  • There are no rational grounds to separate "public utilities" from other spheres on the market.

The history of the so-called public utility concept is that the late-nineteenth- and early-twentieth-century "utilities" competed vigorously and, like all other industries, they did not like competition. They first secured government-sanctioned monopolies, and then, with the help of a few influential economists, constructed an ex post rationalization for their monopoly power.

The economics profession came to embrace the theory of natural monopoly after the 1920s, when it adopted a more or less engineering theory of competition that categorized industries in terms of constant, decreasing, and increasing returns to scale (declining average total costs). According to this way of thinking, engineering relationships determined market structure and, consequently, competitiveness. However, the existence of economies of scale in no way necessitates either monopoly or monopoly pricing.[5]

Practical examples[edit]

According to natural monopoly theory, competition cannot persist in the electric utility industry. The theory of natural monopoly fails on every count: competition exists and persists for decades in dozens of U.S. cities, price wars are not "serious," and there is better consumer service and lower prices with competition. Consumers themselves prefer competition to regulated monopoly and have gained substantial benefits from the competition, compared to cities where there are electric utility monopolies. Contrary to natural monopoly theory, costs are actually lower where there are two firms operating.

Telephone service was said to be a "classic" example of market failure and that government regulation in the "public interest" was necessary. But there was nothing "natural" about the telephone monopoly enjoyed by AT&T for so many decades; it was purely a creation of government intervention.

Once AT&T's initial patents expired in 1893, dozens of competitors sprung up. By the end of 1894 over 80 new independent competitors had already grabbed 5 percent of total market share. By 1907, AT&T's competitors had captured 51 percent of the telephone market and prices were being driven sharply down by the competition. Moreover, there was no evidence of economies of scale, and entry barriers were almost nonexistent.

Politicians began denouncing competition as "duplicative," "destructive," and "wasteful," and various economists were paid to attend congressional hearings in which they somberly declared telephony a natural monopoly. "There is nothing to be gained by competition in the local telephone business," one congressional hearing concluded. The crusade to create a monopolistic telephone industry by government fiat finally succeeded when the federal government used World War I as an excuse to nationalize the industry in 1918. AT&T still operated its phone system, but it was controlled by a government commission headed by the Postmaster General. Like so many other instances of government regulation, AT&T quickly captured the regulators and used the regulatory apparatus to eliminate its competitors. "By 1925 not only had virtually every state established strict rate regulation guidelines, but local telephone competition was either discouraged or explicitly prohibited within many of those jurisdictions.

The complete demise of competition in the industry was brought about by the following forces: exclusionary licensing policies; protected monopolies for "dominant carriers"; guaranteed revenues or regulated phone companies; the mandated government policy of "universal telephone entitlement" which called for a single provider to more easily carry out regulatory commands; and rate regulation designed to achieve the socialistic objective of "universal service."[5][6]

References[edit]

  1. ↑ George J. Stigler. "Monopoly", The Concise Encyclopedia of Economics, referenced 2010-07-16.
  2. ↑ 2.0 2.1 Mises, Ludwig von. "Competition". Human Action. http://mises.org/humanaction/chap15sec5.asp. 
  3. ↑ 3.0 3.1 3.2 Murray N.Rothbard. Man, Economy and State (pdf), Chapter 10 Monopoly and Competition, p.629-754. Referenced 2010-07-16.
  4. ↑ Walter Block. "Austrian Monopoly Theory - A Critique" (pdf), Journal of Libertarian Studies, Vol. I. No.4, pp. 271-279. Referenced 2010-07-20.
  5. ↑ 5.0 5.1 Thomas J. DiLorenzo. "The Myth of Natural Monopoly" (pdf), The Review of Austrian Economics, Vol. 9,No. 2 (1996). Referenced 2010-07-16.
  6. ↑ Adam D. Thierer. Unnatural Monopoly: Critical Moments in the development of the Bell System Monopoly, Cato Journal, Volume 14 Number 2, Fall 1994. Referenced 2010-07-19.

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