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News How Does a Free Market Prevent a Monopoly?

  1. Oct 9, 2009 #1
    I have seen the claim many times now that a free market would of itself prevent the formation of monopolies absent any laws or regulations of this aim.

    Those that hold this opinion, please explain.

    I know some of the arguments so I will come back and post some opinions of those arguments if I do not see them otherwise presented.

    Also I am having an ongoing discussion of this topic in another thread and wish to move it here where it will be on topic.
  2. jcsd
  3. Oct 9, 2009 #2
    Remember this post?
    You say that corporate trusts are a perfect example of regulations enabling a monopoly though we are talking about regulations aimed at preventing monopolies.
    And trusts already existed, it was the corporate 'trust of trusts' that was created as a work around to regulations against a monopoly.
    Trusts would exist in a free market. There would be nothing stopping anyone from making one of any sort they wanted for any reason they wished. There just wouldn't be much impetus to create a corporate trust of trusts since there would be nothing stopping them from creating their monopoly or cartel the old fashioned way.

    You'll note that I actually said the opposite multiple times. That Rockefeller had plenty of competition and took them all out. Apparently to you this means that there was a shortage of competition due to regulation because obviously he otherwise would not have been able to create a monopoly in a free market. That's called circular reasoning. And yes I would say that there were likely plenty of people who may have competed with Rockefeller but who probably decided not to though I would think it was likely more because Rockefeller was a ruthless competitor who had already claimed the market for himself rather than because of any regulations.

    In this case there are plenty of common hindrances to a free market. Among them we might count laws against fraud, theft, false advertising, libel, assault, battery, ect. I mean really all of these laws just keep potential competitors out of the market. I am quite certain that I could make more money than the electronics shop down the street if only I could steal merchandise rather than paying for it and then advertise it as brand new with a warranty that I have no intention of honouring.

    I am certain that we can agree there are certain practices that should be illegal, including certain types of business practices. These are what laws and regulations are supposed to be for. While there may be some laws and regulations today that were specifically designed to help corporations over their smaller competitors I do not believe that many such laws existed during Rockefeller's days. In fact I believe that Rockefeller and other industrialists creating their monopolies virtually unchecked and pissing off smaller business owners that could not compete were what originally spurred regulation, and mostly regulation aimed at preventing monopolies and the unethical business practices which they relied upon for their edge in the market.
  4. Oct 10, 2009 #3
    No, we weren't. At least I wasn't when I said that.
    The fact that a company could create a monopoly without a trust doesn't equal "nothing stopping them."
    Sounds like zero competition to me. "Plenty" minus "them all" equals zero. But of course that's not actually true. Rockefeller didn't actually take them all out. But the other companies did have a hard time actually trying to compete with Standard Oil.
    No, you implied there was a shortage of competitors since the U.S. ran out of them. I said that regulation helped reduce their competitiveness, helping Standard Oil take them out. How is it circular reasoning to suggest that regulations that helped "take down" the competition made it easier to create a monopoly?
    It was both.
    Those are not hindrances to a free market, and are not commonly called "regulation" since they are not targeted and apply to everyone equally. A free market requires laws against force and fraud by definition. "Free" means free from force and fraud, by government or otherwise. Is this the source of our disagreement? A free market, by definition, is free from force, fraud, and coercion.
    I agree. I never mentioned any law or regulation specifically designed to help corporations over their smaller competitors. But that's the effect of virtually all regulations.
    Unchecked? How about aided by government?

    Standard Oil's monopoly was the result of a combination of Standard Oil's actions and government's actions. Regardless of how we divide up which had the greater effect, the fact is that it was both. And between the two of them, the actions of only one were as agents of the people, and therefore politically relevant.

    And if you believe Standard Oil would have become a monopoly in a free market (free from force, fraud, and coercion), then either you are using a different definition of "free market" or a different definition of "monopoly." And I don't want to argue semantics anymore today.
    Last edited by a moderator: Oct 10, 2009
  5. Oct 10, 2009 #4
    Lets pare this down a bit.

    What regulations do you believe led to Standard Oil achieving a monopoly?

    Also, again, we can agree that there ought to be laws and regulations preventing certain unethical business practices yes?
    You say that you define as free market as being free of force fraud and coercion. What about force fraud and coercion from businesses? Do we not need laws and regulations to prevent these things?
  6. Oct 10, 2009 #5
    I think a lot of this argument has to do with the definition of a free market, IMO there is no such thing as a free(no regulation whatever) market. Just as there is no such thing as free speech, as that was originally meant to mean no governmental influence(censor boards), it has never meant that we could say whatever we want(self censorship). The whole argument for "free" just implies no governmental regulation not that there is no regulation. A free market is regulated by consumers, if the consumers wont support a monopoly, a monopoly could never exist unless a different enity supports that monopoly such as a governmental enity. If the government for example say that it is more efficient for one company to do whatever without having to worry about competition, then the consumer no longer has a choice, if consumers want electricity they have to support GE. If consumers wanted a phone, they had to do buisiness with AT&T. What the government loves to do is to prop up a buisiness(i think for the most part unwittingly) that has already grown to a huge size by supposedly making regulations to tame their practices, but all they do is add other obstacles in front of the next buisiness from reaching this level, and therefore they stiffle the competition, which in essence creates a monopoly. IMO it will be hard to show a case where the government directly created a monopoly(except for maybe RCA), but it is easy to see that they have bolstered a buisinesses market share by inserting obstacles in front of those that follow that the original never had to deal with. So imo it is pretty apparent that government supports monoplolies though it is through indirect means. We could also look at recent events, the market said banks were over valued, but the government said that was not the case and propped up the banks by taking money from the taxpayer that they normally were withholding from the banks and then they gave it to the banks for the consumers best interest(the economy would collapse they said, I would argue that the economy would collapse to its true value). We dont have a free market when the government overrides the markets opinion, and we dont have a free market when consumers allow buisinesses to take advantage of them because they really want something. It is the consumers job to keep profits in check, just as it is the ceo's job to make as much profit as possible, the trouble comes when the government thinks they know the market better than those directly involved and thinks it is in the consumers best interest to lose their voice in the process.
    Imo laws do not prevent anything, the sec was made to stop greed on wall street but here we are 90 years later and are arguing that the sec just needs more power to accomplish the goal they have been trying to succeed at for 90 yrs, why dont we get rid of the sec(which I feel is just a false sense of security) and allow people to realize they need to take responsbility for their own choices. We have had ethics laws in congress for a while now and we still have corrupted politicians, is it because laws dont work to prevent corruption or do we just need stronger ethics laws?
  7. Oct 10, 2009 #6
    Of course laws against fraud and force are staples of a free market. The word "regulation" isn't normally used to refer to such laws, since they apply to everyone. Businesses are only forbidden to do the things that are forbidden for every citizen.

    The claim that monopolies are impossible in a free market is equivalent to saying that monopolies are impossible without force, fraud, or coercion. Does that help anything?

    If you really want to discuss the regulatory environment for Standard Oil and its competitors in detail, I'd need time for a little research.

    As far as "unethical business practices", that's in the eye of the beholder, and it reminds me of a Democrat's speech (don't remember who) demanding that CEO's give a small percentage of profits to charity. That's obviously not only unethical, but outright theft, because the money simply doesn't belong to the CEO, it belongs to the shareholders. Asking a CEO to steal from shareholders is obviously unethical, and it's irrelevant how "good" the charity would be. Yet some would consider it just fine.

    If an "unethical" business practice constitutes force or fraud, then it would be illegal under the same laws that apply to every citizen. Otherwise, it's just necessarily a consequence of freedom that you don't get to tell others what to do.
  8. Oct 10, 2009 #7
    http://www.nathanielbranden.com/catalog/articles_essays/question_of_monopolies.html [Broken]

    A government cannot prevent a monopoly since it is itself by definition a monopoly (on the legitimate initiation of the use of force). Therefore, using a government to try and prevent monopolies is like trying to drink sulfuric acid to get rid of your heart burn.

    Monopolies by the definition of the word can't exist because they aren't charging whatever they like, they still have to compete with the market. Anyone is allowed to produce and sell a cheaper product if they can. But the bigger a company is, the more they can produce and sell, the less likely someone else could possibly compete. That's not a monopoly, that's good business sense. The public is not paying huge prices for a product that could be made by someone else cheaper, which is what we mean when we think of oppressive monopolies.

    Last edited by a moderator: May 4, 2017
  9. Oct 10, 2009 #8
    I snipped out the rest of your comment because it deals with the current conditions of the market that create monopolies and near monopolies. I am more than willing to concede that regulations, particularly of certain types, can enable a monopoly or support a large company over a smaller company. I am more interested in the supposed mechanisms of the 'free market' which are said to prevent monopolies.

    I failed to come back and reference the arguments I am aware of but you remind me of one here in your post.
    Many people seem to think that consumers will not allow a monopoly, that if a corporation grabs too much power in the market people will boycott and protest and that this will dissolve the powerhold or at least assist in doing so.
    I don't see this as necessarily the case. It would seem to me that if people are happy with the products that they are receiving they are more likely to support the monopoly (voting with their money) than not. A strong element in this is that in a consumer society people often identify themselves partly by the brands which they choose to purchase. We still see it today though I think it was much stronger around the turn of the previous century and corporations tend to be rather deft at exploiting this.
    Going back to Standard Oil, most consumers benefited by the monopoly from having a higher quality product for lower prices. Those that protested and boycotted were the small businesses which were being hurt by SO's unethical business practices and driven from the market especially when SO bought out a rail company and attempted to control the means of product distribution.

    Essentially any law or regulation that limits or controls the actions of a company or corporation applies to anyone since anyone can create a company or corporation so long as they have the funds, even though not everyone has the funds. Similarly the laws and regulations that govern the use of a motor vehicle apply equally to everyone since anyone who can afford to purchase and operate one is effected, regardless of the fact that not every one can afford a vehicle.

    As for unethical business practices there are many. While I am sure that there are many who will argue all manner of silly things as being unethical business practices I will stick to things that are the hallmarks of a corporation seeking a monopoly. In other words, anything that serves to limit competition by unduly infringing upon the ability of competitors to compete in the market. The most effective are generally controlling the resources needed for production and controlling the means of distribution.
    Would you agree that controlling the means of distributing product and giving your own corporation price breaks or even selling the service at cost or a loss to be made up for in profits by the producing corporation is an unethical business practice?
  10. Oct 10, 2009 #9
    That is an argument requiring discussion. For now let us discuss the supposed mechanisms of a free market that prevent monopoly.

    Even monopolies that are not complete (100% control of the market) can work toward that goal and can raise the relative price of their goods or services by being the only one in the market that can afford to sell at a cheaper price. If other companies were capable of becoming as large and dominating as the monopoly (or near monopoly) they could sell at lower prices and become competitive with the monopolizing corporation forcing them to lower their prices further. With no true competition on their level of playing field the corporation more or less has the capacity to set prices as the choose with in limits.
    Last edited by a moderator: May 4, 2017
  11. Oct 10, 2009 #10
    I was talking about laws that apply to everyone, whether they create a company or not. It's illegal for me to defraud people, use non-defensive force against people, steal from people, whether I own a business or not. That's why those laws are not normally considered "gov't regulation".
    No, of course not, not by itself. If such a thing is done for the purpose of fraud or theft, then the fraud and theft should be illegal, just like they are illegal for everyone else, regardless of the specific means used to commit the act.

    If I commit fraud by selling a painting that I painted myself while claiming it's a lost Da Vinci painting, it's the fraud that's illegal, not the act of painting a picture, by itself. Fraud should be illegal. The act of painting a picture, by itself, should not be.

    If the example you give is for the purpose of defrauding stockholders, then defrauding stockholders should be illegal, but not just because of the specific means used.
  12. Oct 10, 2009 #11
    You are still equivocating the very thing the article i linked to refuted. There is a huge economic incentive to undercut any monopoly that tries to artificially raise prices, both for new entrepreneurs and for parts of the corporation itself either with the exact same product or with similar products. You can always set whatever price you want, but customers won't by your products.

    The only way you can reach such a dominant coercive monopoly is by having a government intervene with force into a free market by supporting special corporations or making private options illegal.
  13. Oct 10, 2009 #12
    Laws regarding fraud only apply to you if you commit an act that may be construed as fraud. Laws restricting your use of force would not even enter your mind unless you actually had some means of force to utilize.
    Laws are all situational and if you never are in a situation or of a mind to commit the acts regulated by these laws then they hardly apply to you until such a situation arises. The same goes for business regulations, they obviously do not apply unless you are in a situation where they have relevance.
    You might say that anyone could potentially arrive in a situation where they have the opportunity to use force. But I would obviously counter that anyone could potentially arrive in a situation where they own a business.
    Technically, at least in most countries with a modern system of law, no law or regulation may be made that applies specifically to a certain class of people unless the distinction is naturally inescapable. For example a law against abortion, barring any argument of constitutional freedom, would not be illegal even though only women can get abortions. Similarly a law against same sex marriage, barring arguments of constitutional freedom, would not be illegal even though only homosexuals desire to marry someone of the same sex.
    So no law or regulation pertaining to businesses would be legal save for the fact that any person may start a business and so it applies to everyone equally.

    Perhaps you missed my point. Are you saying that it should be legal for a corporation to own the means of distribution for its market and use that control as leverage against its competitors through discriminatory pricing and the like?
  14. Oct 10, 2009 #13
    I already treated this. You, and your article, are saying that a monopoly is not a monopoly unless it has complete control of the market and can set prices as it chooses. I am saying that a 'near monopoly' (owning say >50% of the market) can have virtually the same effect as a strict (100%) monopoly. That is to say that if by sheer size a company is capable of providing a similar quality product/service for a lower price and still making greater returns than the competition it can undercut and hedge out its competition continually growing and grabbing at larger shares of the market. Lacking regulation against monopolies and near monopolies these vast resources can also be used to fund other means of reducing competition such as buying out and controlling resources for production, means of distribution, and even controlling the market place itself.

    edit: while in a free market there may always be someone to be a competitor it does not mean that there will ever be a true competition once market dominance is claimed by the monopoly (or near monopoly).
  15. Oct 10, 2009 #14
    That me be a popular standard, but it's not the libertarian standard, obviously, or mine. "Everyone" includes both those that start a business and those that do not. What if a law applied only to people with shaved heads? Would such a law "apply equally to everyone" because anyone can shave their head.
    If I decide to make and sell a painting, it is legal for me to own both the means of production (canvas and paint) and distribution (my car) and set the price, yes, that should be legal.

    Unless you are asking me if that should be illegal for a corporation, although legal for me? Then we're back to laws applying to everyone equally.

    That's what I meant by laws applying equally. A law that allowed me to do "something" but prohibited a corporation from doing the same "something" isn't applying to everyone equally just because I could form a corporation.
    Last edited by a moderator: Oct 10, 2009
  16. Oct 10, 2009 #15
    Well, that example of a monopoly makes it sound like a good thing.
  17. Oct 10, 2009 #16
    Its a logical standard. It makes no sense to prevent the creation of laws or regulations that are aimed at people abusing a position of power, arguing that they are applied unevenly, simply because not everyone are currently in similar positions of power.

    Again you seem to misunderstand. Imagine instead that you are in control of all or most of the means of production and distribution and are actively preempting others from being able to produce or distribute. Does that not hinder a free market?
  18. Oct 10, 2009 #17
    The problem here is that they may eventually become complete (100%) monopolies and as they reach larger and larger sizes they become capable of greater influence of politics and regulation to further their dominance, as we have seen. Have you read much cyberpunk?

    The problem with the free market argument is that it says monopolies never existed and came about due to government interference. The fact* is that the monopolies did exist and due to their influence were capable of manipulating politics and government regulation to their benefit which secured them their future.

    *OK, this is my perception, not necessarily fact. I do not know for sure how it all went down.
  19. Oct 10, 2009 #18
  20. Oct 10, 2009 #19
    :eek:Where should I start?:rofl:

    How about this - would you agree it is very difficult for a highly regulated US corporation to compete against a state sponsored entity in a country such as China?
  21. Oct 11, 2009 #20
    My argument is that (lacking laws and regulation) large corporations can control the resources, distribution, market place, and to some degree even the consumer.

    Early federal regulation of commerce was directed at the purpose of protecting and expanding american enterprise, not limiting it, primarily through regulation of imports, infrastructure, and shipping lanes.

    This is my very point though I would contend that there are intraindustry practices outside the common knowledge and view of the average consumer that can be used to control the industry and market. The help of consumer support only makes these things more possible.

    The cost of doing business is the cost of doing business. I pointed out in the other thread that laws against theft, fraud, and threats curtail the capacity of others to compete in the market as well but we certainly consider these good laws to have. We have these laws to preserve the liberty of individuals from infringement by others. I see no reason to think that there should be no laws governing the sort of infringements of liberty unique to the position of companies and corporations. If a company or corporation can not get started without infringing upon the freedoms of others then it should not be.
    I am arguing versus complete deregulation so please do not cite overregulation in modern markets on which score I would likely mostly agree with you.

    I was referring to options available to large corporations and near monopolies in a completely unregulated market to control and impede a free market. The fact that the government can do this as well is no argument against this. In short, can you defend the idea that a free market naturally makes a monopoly impossible? or do you simply think that a free market is the better alternative? At the moment I am only interested in the former.

    Read above. I did not make this thread to argue a regulated 'semi-free' market versus a fascist corporatist market.

    Sorry to be blunt.
  22. Oct 11, 2009 #21
    How about this analogy: You can't argue that drunk driving laws treat drunk people and sober people equally, just because everyone is free to drink. There is no reason for those of us that support those laws to claim that drunk people and sober people are treated equally by it, because clearly they're not. But we can argue that treating drunk people and sober people differently is justified.

    It seems like your real position is not that people who operate a business shouldn't be treated differently than those that don't, but that treating them differently is similarly justified. Do I have that right?
    No, my imagining that I'm in that position doesn't hinder a free market. :biggrin:

    Seriously, it depends on whether "actively preempting others" involves fraud or force. The "free" in free market means free from fraud and force, not free from other people owning "means of production and distribution."

    If owning or controlling property (means of production) is being restricted by force, then it's not a free market. Whether the force is applied by government or a private entity is irrelevant.
    Last edited by a moderator: Oct 11, 2009
  23. Oct 11, 2009 #22
    What sort of infringements of liberty are unique to the position of companies and corporations? I can't think of any.

    Regardless, I don't think anyone has argued against such laws.
  24. Oct 11, 2009 #23


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    An Ayn Rand style laissez faire capitalistic free market technically cannot prevent a monopoly. It automatically prevents the holder of a monopoly from driving the price of the product above the level at which competitors may make a profit (except for a short period of time it takes for potential competitors to react to this condition). This either means that the monopoly holder is making a fair profit or taking a loss.

    Of course there is the situation where an individual or group can drive out competitors by taking a loss and pushing down the price in the hopes that once they've eliminated competition they can recoup the loss with raised prices. To do this of course they must have an oversupply of the product in question and sufficient running capital to wait out their competition.

    This is where the "evil" speculators plays their role in the free market. They see what's going on and purchase the under priced product to sell later. Speculators give inertia to market prices making it harder for them to be manipulated by an individual or small group. Note that a speculator can only sell to a buyer or buy from a seller who may himself be a speculator but ultimately there must be suppliers and consumers. Thus in a market bad speculators will loose their capital and drop out. By bad speculators I mean those who jump on price swings without researching their cause in terms of fundamental supply and demand.

    This same inertia which makes manipulation difficult can cause over-swing of prices. The good speculator will recognize this and bet counter to the swing when it passes its new equilibrium point. In the absence of fundamental support for the price the bad speculators cannot drive maintain an elevated price indefinitely. The bubble must burst and the more off equilibrium it bursts the louder the pop. The group of good speculators are also the more successful speculators and so over time have more money and hence more influence on market prices. The money flows to reward the speculators who most efficiently moderate price fluctuations.

    Finally I would point out that the gap between the large concern and potential competitors is the bridged by the small business. When a corporation begins behaving "unfairly" many small businesses though less efficient are able to join the market. This basically defines "unfairly" in a free market. That small startups can compete even with less experience and lack of scale efficiency means the large concern is over pricing goods or underpaying workers.

    The free market ideal works best when small business is most able to compete.
    However if you add to the unavoidable overhead of small businesses all the social engineering regulations requiring minimum wages, matching social security payments, hyper-progressive taxes of business income as personal income, and the administrative overhead that comes with all these taxes, fees and regulations then you give the large concerns that much more room to overcharge, underpay, and produce inferior quality merchandise or services.

    It takes a larger portion of venture capital and more time and risk to get a competitor up and running. The scale of their business must be large enough to afford legal and accounting staff to deal with this added overhead. If it fails the entrepreneurs lose far more capital in a single chunk and so they wait until the offending company is much more egregiously "unfair" in its practices. Even then they must hope that the company can't drop prices long enough to bankrupt the enterprise. Fortunately large companies also tend to acquire their on inefficiencies over time and when given regulatory advantage especially with regard to reacting to change. Still each added regulatory burden to small business has a highly amplified negative impact on the consumer.
  25. Oct 11, 2009 #24
    A regulated private company can not compete evenly with a Government sponsored monopoly - I too apologize for being blunt.
  26. Oct 11, 2009 #25


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    Sure, but then the free market concept seems completely philosophical: It's not reasonable to suppose that a captain of industry would not undercut another competitor who might potentially reduce his/her company's profits.
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