Corporations Abusing the Market and the Difference between Moderates and Radicals

4

June 29, 2012 by galudwig

On my post from yesterday, Atticus Finch commented the following:

When a corporation has the power to “play unfairly” via, wages, predatory pricing, or monopoly then in effect the corporation itself is hindering the power of the market. Although it is true that the Market would eventually adjust for this – it could take a decade or more. So with minimal government regulation a monopoly could be prevented or broken apart quickly.

And also:

it is not mutually beneficial when a powerful corp abuses the market…or when a transaction is not voluntary, but mandatory (like food) and prices have been artificially inflated. Although both government and corporations are guilty of that act.

This is without a doubt one of the most convincing arguments for government regulation in the economy, and the one which is most often used against bringing the libertarian argument to its full conclusion, even by the majority of self-professed libertarians themselves.

But what does it mean for a corporation to abuse the market or play unfairly? Allow me to quickly address the charges point by point:

Predatory Pricing

Many people preach against the danger of ‘predatory pricing’ but I see no evidence for it whatsoever. How is it ‘predatory’ when prices are reduced and consumers get to buy products at very low prices, even though it forces certain producers out of business?

Of course, it’s not the predatory pricing itself that is a danger according to those who warn against it. Rather, it’s the alleged ‘jacking up’ of the prices after companies get competed out of the market. Yet, when pressed to give examples of this actually occurring in real life, it turns out that the matter is not as clear-cut as it seems.

Laws against ‘predatory pricing’ exist because corporations which are unwilling or unable to compete on price choose to use the government in an attempt to stay in business, at the cost of the consumer. Do we really want the government to be mandating higher  prices in order to guarantee competition? Is this not a complete contradiction in terms?

Monopoly

Countless people assume that there is an inherent tendency toward monopoly present in the free market. Exactly the opposite is the case. Gaining and keeping a monopoly in a free market is the hardest thing in the world, because one is open at all times to competition from new entrants and the monopoly must be earned by providing the best quality at the lowest price to a multitude of discerning customers.

When a corporation achieves a monopoly in a free market, it means that it is the very best at what it does. It also means that at any point in time, a competitor may arise who may be even better. Also, certain industries are naturally inclined toward few producers. It would make no sense to deny reality because of the mistaken idea that any monopoly is intrinsically bad.

On the other hand, government legislation to curtail monopoly leads to absurdities. As an example, consider the possibility of an upcoming crackdown on iTunes. iTunes almost controls 80% of the music distribution niche, opening it up to potential anti-monopoly legislation. Because of this, Apple is not free to raise its prices or gain more market share as either may trigger the state troopers, when all they are doing is giving the people what they want.

My point is: a monopoly in a free market is not a bad thing. The reason why people expect the worst is because we know only of monopolies that are the result of state interventions, which are a very bad thing.

Artificially inflating prices

It is not possible to ‘artificially inflate prices’ on the market because this would imply that there is such a thing as a ‘just’ or ‘objective’ price. In fact, all value is subjective and all prices are the result of the preferences of consumers.

Prices can be tampered with only through government intervention. Imposing maximum or minimum prices creates artificial imbalances which must necessarily leave consumers worse off than under a free market.

It is true that a cartel that fixes prices at certain levels can achieve similar results. However, such cartels are inherently unstable for two reasons:

  • the cartel would have to involve the overwhelming majority of producers in an industry to be effective
  • every member of the cartel has a profit-incentive to break the price or quantity agreement

The result of this inherent instability is that price-fixing on a large scale is virtually always attempted through the government and not in spite of it.

Limited Government and Anarcho-Capitalism

Obviously there is still a large gap between defending the free market in areas in which it is usually opposed, as I did above, and advocating the complete abolition of the government, which I also consider to be my duty as a concerned citizen. But for me, the one led to the other.

However, to go back to Atticus’ much-appreciated comment:

I hope you are wrong [on limited government being impossible]– there are a few of us out there still fighting the good fight

As libertarians, we stand together against further encroachments upon our liberty by the government and we oppose the trend of ever bigger government we have experienced for many decades. In this sense we are allies.

Limited government capitalists and anarcho-capitalists also both propose to move the state in the same direction (out of our lives, both in the social and in the economic sphere). The only disagreement is where to stop.

So to me, all libertarians are fighting the good fight in the great boxing match of the political debate. We all recognize the evil that is the state and are trying to knock it out. But the evil must stay down, for if it is allowed to get up, it will live to fight another day.

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4 thoughts on “Corporations Abusing the Market and the Difference between Moderates and Radicals

  1. Toward the end of this post I felt like I was being roused to action – like a sports team coach giving his team the big speech at halftime!

    We are certainly on the same team and hopefully when enough concerned citizens get together we can combat bad legislation and more big government. I am happy we can both have educated discussions about the finer points of limited government/anarcho-capitalism. It is a great relief to have an intelligent discussion as apposed to arguing the same broader points about why entitlements and more government intervention is a bad idea…

  2. jon says:

    Really nicely put. However, for me the difficulty is still this:
    To some extent I agree with your point that: “when a corporation achieves a monopoly in a free market, it means that it is the very best at what it does. It also means that at any point in time, a competitor may arise who may be even better.”

    The difficult question, I think is, what happens when it’s not the case that “any point in time, a competitor may arise who may be even better.” That is to say, how do you deal with cases where a monopoly takes steps to prevent a competitor from entering the market as a competing provider of a particular product – e.g., entering into agreements with distributors or wholesalers to prevent competitors from entering the market, or making the start-up costs extremely high.

    To my understanding, anti-trust suits aren’t filed against a companies that are too big or too successful, but against groups that damage the economic environment of their competitors.

  3. […] from Brain and Mind left a thoughtful comment on my earlier post on corporations ‘abusing’ the market, in which he asks the following: How do you deal with cases where a monopoly takes steps to prevent […]

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