How Does a Free Market Prevent a Monopoly?

[WhoWee]

Competition doesn't prevent the existence of monopolies...

There's an old saying, "he who has the Gold - makes the Rules", and it's true - Capital is the key to growth.

Normally income (after taxes) is the slow but steady route to growth, the ability to borrow large sums is a faster track, and funds obtained through an IPO (often based upon future growth projections) can lead to exponential growth.

Typically, a company will move through all 3 phases - unless they have a unique concept that is successful overnight.

Once a company is publicly owned, it may use it's stock as "acquisition capital" to gobble competitors. Sometimes this is the only way to sustain growth (and support market share price - to acquire more competitors).

The Government controls interest rates and bank lending policies through regulation (and now participation?). The banks decide winners and losers (as well as the Government in some cases through SBA and tax incentives) with loan selection. The Government also regulates international trade and imposes taxes - both very important to the way business is conducted. Investment banks pick winners and losers and the Market verifies suitability.

Normally, the ultimate goal is to win, to be the best. To oversimplify (as this post is already too long), in business the ultimate winner is labeled a "Monopoly" and "busted up" - by the Government that enabled it in the first place.

 

[Al68]

If a law does not effect persons who are not running businesses and effects all persons who are running businesses how in the world does this make the market no longer free?

I was referring to the "free" in "free enterprise", not "free market". The freedom to engage in business is what is limited by "legal distinctions" made as a result.

This is why I keep harping on the legal distinction.

What is the difference between making a "legal distinction" between people and "treating them differently"? The fact that others and current law makes such a distinction doesn't obligate me to make it.

So you believe a man who owns a farm with a cow on it should be held to the same standard as any business?...
Or do you think it should be ok for a large company to mass produce and distribute meat and give no more attention to the safety of it than a simple visual inspection of the animal before slaughter?

I think that they should not be treated differently by government (no arbitrary legal distinction) in statutes. And the distinction is arbitrary, since presumably there is an arbitrary number of cows owned above which one would be treated differently by the law (legal distinction, if you prefer). And whatever number is chosen, for example 10 cows, it's not like there is something inherently special about that number. The distinction is completely arbitrary and not based on the actual action performed, since it is identical in either case. Either way, someone sold bad meat.

Of course if a law requires only every tenth cow to be sampled, then both the small and big business may sell their first 9 unsampled, so there would be no "legal distinction", and no objection on my part. But if a law required every cow to be sampled, then no cow should be sold (as meat) that wasn't sampled, and the number of cows owned should be irrelevant.

A better example might be the laws that apply only to businesses with 50 or more employees. There is nothing inherently special about the number 50, it was arbitrarily chosen. Hiring that 50th employee has a regulatory cost to a business that is many times the employee's salary, to say the least. I'm sure you aware of the disproportionate number of businesses that have 48 or 49 employees.

This is a big reason many small businesses have a hard time competing with larger ones, government is artificially limiting the number of people they can hire.

Well when I have a dispute with my neighbour and those nosey buggers come in and haul me away for resolving our own private dispute with my gun I am obviously no longer a private citizen. The government is managing my life for me and treating me differently than those persons that call the police or go to court to resolve their disputes.

Comparing shooting someone with "managing the internal operations of their business"? The force used by government to imprison murderers is defensive force to protect the public, not management of someone's private business.

Yes, government is justified in treating a criminal differently from the person that called the police.

 

[Al68]

Where are you going with this? Granted force and fraud can play a role in monopoly creation, but are you saying that a primary path to monopoly - http://en.wikipedia.org/wiki/Predatory_pricing" - does not exist, or that somehow predatory pricing requires fraud?

Despite the fact that your link points out that there isn't a single example of this ever happening, such a situation sounds like Walmart to me. Walmart's prices have caused many competitors to go out of business, and they are the leading retailer by far. But the term "predatory pricing" doesn't refer to a company trying to sell at lower prices to increase profits, it refers to a company selling at low prices, even at a loss, to put competitors out of business in order to make huge profits then with high prices. This just won't work in a free market, because, like Walmart, they know that if they try to raise their prices enough to make up for previous losses and come out ahead, potential competitors will pounce like a lion on a wounded lamb.

So, yes, I would say that path does not exist in a free market.

 

[mheslep]

Despite the fact that your link points out that there isn't a single example of this ever happening,

Huh?
http://en.wikipedia.org/wiki/Predatory_pricing#Examples_of_alleged_predatory_pricing

such a situation sounds like Walmart to me. Walmart's prices have caused many competitors to go out of business, and they are the leading retailer by far. But the term "predatory pricing" doesn't refer to a company trying to sell at lower prices to increase profits,

Right

it refers to a company selling at low prices, even at a loss, to put competitors out of business in order to make huge profits then with high prices.

Right

This just won't work in a free market, because, like Walmart, they know that if they try to raise their prices enough to make up for previous losses and come out ahead, potential competitors will pounce like a lion on a wounded lamb.

So, yes, I would say that path does not exist in a free market.

I would say you are ignoring some barriers to entry, perfectly efficient markets, etc.

Now it happens that I generally agree that predatory pricing claims are way overblown. There's a respected academic study that looked at all of the pred. pricing claims about Standard Oil and found them essentially non-existent. Furthermore, I agree that governments enable monopolistic pricing as you have outlined above.

That said, monopolies are acknowledged to exist in free market systems all by themselves. Waving them away misses the larger point: What can or should be done about them? I like Milton Friedman's point on the subject. The only alternatives to monopoly are either 1) public monopolies such as the post office, or 2) high restrictive regulation. Friedman's point is that both of those alternatives have very high carrying costs, and that if we compare those government imposed costs to the higher prices imposed by monopolies, we find that we're better off with monopolies, esp. given the monopolies tend to eventually fall apart because of the reasons you outlined above, and the public monopolies live forever.

 

[Al68]

That said, monopolies are acknowledged to exist in free market systems all by themselves.

There are no such examples, simply because there are no completely free markets. Monopolies have existed in relatively free mixed economies like the U.S., but only with the aid of government.

The only alternatives to monopoly are either 1) public monopolies such as the post office, or 2) high restrictive regulation.

I think we mostly agree, but notice that those "alternatives" to monopolies are just worse monopolies, especially #2.

If government is greatly controlling an industry by regulation, that's equivalent to a government monopoly, since the word "ownership" means the right to control. Whether such control results in government revenue, or who "owns" a business on paper, is not very relevant to consumers. They would have no choice but to buy that product from a government controlled enterprise.

And calling different businesses "competitors" only makes sense if they are each under at least mostly independent control.

 

[mheslep]

There are no such examples, simply because there are no completely free markets. Monopolies have existed in relatively free mixed economies like the U.S., but only with the aid of government.

That's spurious. You're asserting it as a fact which demands some backup. Where is it? Just stating that government is involved in the marketplace (yes of course, though in some markets very slightly) doesn't necessarily mean the government facilitated every monopoly in large part, or even at all. If that's your implication, then it is a http://en.wikipedia.org/wiki/Fallacy_of_the_single_cause" .

I think we mostly agree, but notice that those "alternatives" to monopolies are just worse monopolies, especially #2.

If government is greatly controlling an industry by regulation, that's equivalent to a government monopoly, since the word "ownership" means the right to control. Whether such control results in government revenue, or who "owns" a business on paper, is not very relevant to consumers. They would have no choice but to buy that product from a government controlled enterprise.

No, the USPS is not the equivalent of anti-trust regulation and, say, the break up of ATT. Though ATT is subject to some government controls, as is all business, in no way is it the same thing as the USPS. The major thing they have in common (relevant to this discussion) is that both cases (anti trust regulation and the USPS) are examples of increased costs to taxpayers.

 

[Al68]

That's spurious. You're asserting it as a fact which demands some backup. Where is it?

I was pointing out that there is no evidence that a monopoly could arise without government help, not that there is empirical proof it couldn't. It's impossible to "prove a negative", so all we have empirically is a total lack of any examples of monopolies arising without government help. With the Standard Oil example, government gave them such help, so their becoming a monopoly isn't evidence that they would or wouldn't have also become a monopoly in the absence of such help.

No, the USPS is not the equivalent of anti-trust regulation and, say, the break up of ATT. Though ATT is subject to some government controls, as is all business, in no way is it the same thing as the USPS.

I didn't say any of that.

 

[mheslep]

Im referring to this statement, which is not a negative.:

Monopolies have existed in relatively free mixed economies like the U.S., but only with the aid of government.

I don't think its supportable.

 

[russ_watters]

Nor do I.

Al68, you need to substantiate your claim that the government gave Standard Oil substantial aid to facilitate the growth and formation of the monopoly. Ie, after a quick read through the wiki on Standard Oil I see no mention of government aid at all, much less aid of a scale that could have helped facilitate the creation of the monopoly. On the contrary, I see a company that quickly developed and successfully implimented anti-competitive tactics and was fought amost every step along the way by local, state and federal governments until the Sherman Act finally stopped it.

Ie, the concept of a "trust" was developed by Rockerfeller for the purpose of circumventing legislation to limit the size of companies.

http://en.wikipedia.org/wiki/Standard_Oil

And how about the example of Microsoft? How was it government created?

In my opinion, this is an obvious argument against reality.

 

[TheStatutoryApe]

I was referring to the "free" in "free enterprise", not "free market". The freedom to engage in business is what is limited by "legal distinctions" made as a result.

My argument is still the same. What difference does it make if all people engaging in business are treated the same way? Laws that apply to all individuals whether or not they are engaged in business are just as restricting of freedom of enterprise as ones that only apply to people who are engaged in business.

What is the difference between making a "legal distinction" between people and "treating them differently"? The fact that others and current law makes such a distinction doesn't obligate me to make it.

I was referring to the distinction between treating people differently and treating situations differently. That "legal distinction" is that it is illegal to treat people differently, the law may only treat situations and circumstances differently. Owning a business is an element of circumstance, it is not fundamental to the person.

I think that they should not be treated differently by government (no arbitrary legal distinction) in statutes. And the distinction is arbitrary, since presumably there is an arbitrary number of cows owned above which one would be treated differently by the law (legal distinction, if you prefer). And whatever number is chosen, for example 10 cows, it's not like there is something inherently special about that number. The distinction is completely arbitrary and not based on the actual action performed, since it is identical in either case. Either way, someone sold bad meat.

Of course if a law requires only every tenth cow to be sampled, then both the small and big business may sell their first 9 unsampled, so there would be no "legal distinction", and no objection on my part. But if a law required every cow to be sampled, then no cow should be sold (as meat) that wasn't sampled, and the number of cows owned should be irrelevant.

So a company that raises, slaughters, and distributes meat from several cows a year should have no more expectation placed upon them to make sure the meat is safe than a man who owns a single cow and eventually slaughters it for meat once it is no longer giving milk? Even though by circumstance the company is far more likely to wind up with tainted meat? Or would you require the man who by circumstance is significantly less likely to wind up with tainted meat to go through the expense of having it tested?

Comparing shooting someone with "managing the internal operations of their business"? The force used by government to imprison murderers is defensive force to protect the public, not management of someone's private business.

Yes, government is justified in treating a criminal differently from the person that called the police.

My dispute between myself and my neighbour is private. Theoretically my actions, whether it be shooting punching or yelling at them, may have an impact on society and so it is deemed in the interest of society to have such 'private' interactions regulated by law. A business is by its very nature an amalgam of private contracts and interactions between several members of the public greatly increasing the power of the business to have broad effects on the community as a whole.
If I were to get pissed off and kill one neighbour per year every year I will still likely be connected to fewer deaths per year than most large food distributing corporations are connected to per year merely as incidental to doing said business. And that's with stringent government regulation.

 

[Al68]

Im referring to this statement, which is not a negative.:

Monopolies have existed in relatively free mixed economies like the U.S., but only with the aid of government.

I don't think its supportable.

Sure it's a negative, since it asserts that there are no examples of a monopoly existing without government aid, which can't be proven. What if I reword it to say "There are no monopolies that were not aided by government"? The support lies only in the lack of evidence of any such examples existing.

It's similar to claiming that there are no cows that can fly. I can't prove it, but there are no examples otherwise.

 

[Al68]

Al68, you need to substantiate your claim that the government gave Standard Oil substantial aid to facilitate the growth and formation of the monopoly...
Ie, the concept of a "trust" was developed by Rockerfeller for the purpose of circumventing legislation to limit the size of companies.

Well, you just gave an example of legislation that "aided" Standard Oil significantly, even if it's not obvious to everyone that it was beneficial to Standard Oil. Their competitors were effectively limited by the legislation while Standard Oil circumvented it.

In other words, you gave an example of legislation that kept Standard Oil's competition from being competitive.

I'll try to find some links to info about the government loans, land, and other examples related to Standard Oil.

 

[Al68]

My argument is still the same. What difference does it make if all people engaging in business are treated the same way? Laws that apply to all individuals whether or not they are engaged in business are just as restricting of freedom of enterprise as ones that only apply to people who are engaged in business.

Yes, either way, everyone's freedom is restricted. But there is a distinct advantage to equality under the law.

Owning a business is an element of circumstance, it is not fundamental to the person.

I've already pointed out that it's not in the same category as racial discrimination, etc. I never meant the phrase "treated differently" as any reference to that sort of different treatment. Obviously people are not born owning a business or not, they have a choice. It's not like it's impossible to be "treated differently" for reasons that are not fundamental to the person.

So a company that raises, slaughters, and distributes meat from several cows a year should have no more expectation placed upon them to make sure the meat is safe than a man who owns a single cow and eventually slaughters it for meat once it is no longer giving milk? Even though by circumstance the company is far more likely to wind up with tainted meat? Or would you require the man who by circumstance is significantly less likely to wind up with tainted meat to go through the expense of having it tested?

I already addressed this. A law that required every tenth cow to be tested would allow both to sell the first 9 untested. But if it's that important that every single cow be tested, then yes, the single cow owner's cow should be tested if it's sold. Either it's important that every cow is tested or it's not.

My dispute between myself and my neighbour is private. Theoretically my actions, whether it be shooting punching or yelling at them, may have an impact on society and so it is deemed in the interest of society to have such 'private' interactions regulated by law.

That's not a private interaction. The dispute may be a private one where government should not be involved, but the shooting of someone is not. Similarly, a companies internal operations may be private while their external actions may not be.

 

[russ_watters]

Well, you just gave an example of legislation that "aided" Standard Oil significantly, even if it's not obvious to everyone that it was beneficial to Standard Oil. Their competitors were effectively limited by the legislation while Standard Oil circumvented it.

In other words, you gave an example of legislation that kept Standard Oil's competition from being competitive.

I'll try to find some links to info about the government loans, land, and other examples related to Standard Oil.

That isn't good enough, Al68. Previously, you asserted (or seemed to assert) a direct link between government regulation and the rise of monopolies (that the government helped create the monopolies via the creation of a regulatory framework that aided their existence) - now you are only asserting the government failed to successfully prevent it, which is a very different assertion. Failure to hinder is not the same as actively helping. You need to substantiate or retract that previous assertion of the government actively working to help create monopolies as it is central to your thesis in this thread. What you are now saying about Standard Oil is in direct contradiction with your asssertion that monopolies cannot arise in a free market. The government did exactly the opposite of what you are asserting it did: the monopoly arose in spite of efforts to prevent it. This is prima facia evidence that monopolies can form in a free market: they can even form in a market that it set up with restrictions against them.

An example of the former would be (formerly) AT&T and the power companies, which are government sanctioned/sponsored monopolies: the government purposely helped create these monopolies because it recognized that large public utlities must have centralized/standardized infrastructure to function.

 

[Al68]

Well, you just gave an example of legislation that "aided" Standard Oil significantly, even if it's not obvious to everyone that it was beneficial to Standard Oil. Their competitors were effectively limited by the legislation while Standard Oil circumvented it.

In other words, you gave an example of legislation that kept Standard Oil's competition from being competitive.

I'll try to find some links to info about the government loans, land, and other examples related to Standard Oil.

That isn't good enough, Al68. Previously, you asserted (or seemed to assert) a direct link between government regulation and the rise of monopolies (that the government helped create the monopolies via the creation of a regulatory framework that aided their existence) - now you are only asserting the government failed to successfully prevent it, which is a very different assertion.

You must have misunderstood, I never said that government only failed to prevent it. You gave an example of legislation that actively helped Standard Oil, not just fail to stop them. And in the case of your example, the help was indirect, not direct. Standard Oil successfully circumvented it completely, while its competitors didn't. The actual net result was (indirectly) beneficial to Standard Oil by its (direct) negative effect on their competition.

Any government action that in any way negatively effected Standard Oil's competition indirectly helped Standard Oil. Is that not obvious?

Failure to hinder is not the same as actively helping.

I agree

What you are now saying about Standard Oil is in direct contradiction with your asssertion that monopolies cannot arise in a free market. The government did exactly the opposite of what you are asserting it did: the monopoly arose in spite of efforts to prevent it. This is prima facia evidence that monopolies can form in a free market: they can even form in a market that it set up with restrictions against them.

I never said a monopoly couldn't form in a market when government (unintentionally) helps one by its "efforts to prevent it." "Efforts to prevent it" is not the opposite of "unintentionally helping it".

A monopoly forming while government is trying to prevent them is obviously not evidence that a monopoly could form in a free market. And the "intent" of the regulation is completely irrelevant. Obviously actual effect is often very different from intended effect.

 

[russ_watters]

You have been given ample opportunity and failed to support your assertion. TheStatutoryApe, you have your answers: Monopolies are not prevented by free market economics and specifically, Standard Oil was not enabled by legislation, it arose naturally and was only failed to be prevented by legislation.

Thread locked.