July 15, 2012 by galudwig
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.
A valid question, no doubt about it.
Ways in which corporations cannot keep out competition on a free market
First of all, Jon, thanks for the comment. Secondly, I would ask you: which specific steps can a monopoly (in a free market) take to prevent competitors from entering the market?
- cartels or price-fixing agreements are inherently unstable because every individual member always has an incentive to break it
- if a monopoly buys out all potential competitors, it provides everyone with an easy way to make money: threaten to compete and get bought out; the price at which you are bought out must logically be higher than what you expect to be earning from competing, otherwise you would not sell
- agreements with distributors/wholesalers to deal with one company only merely shift the monopoly problem one level higher/lower as it can only effectively keep out competition if there is only one distributor/wholesaler
- the start-up costs can be made very high, but primarily through the use of the state; I’m not sure what kind of free market ways exist for market players to effectively make start-up costs higher for a whole industry, but it’s possible I’m forgetting something obvious here, feel free to enlighten me 🙂
What anti-trust accomplishes
Jon goes on as follows:
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.
That is true. Anti-trust suits are filed against companies which have a ‘high’ market share and subsequently ‘abuse’ their market power to raise prices.
One big problem with such anti-trust suits is the problem of defining when market share is ‘too high’ and when market power is ‘abused’. As I noted with the example of iTunes, this can lead to situations which are rather absurd. More on this example can be found on this Yahoo article from a few months ago.
The (political) rationale behind the existence of this legislation is the fear of monopolies. But this already assumes that monopolies are inherently bad, which, as is my contention, they are not on a free market.
Allow me to complement my points in my earlier article with a few additional ones, which will hopefully shed more light on my position:
- in a sense, every company is a monopoly, depending on how the industry is defined. Burger King has a monopoly on whoppers. Versace has a monopoly on the clothes he makes. Surely, they have the right to price their products however they please, usually with profit maximization in mind
- corporations routinely lobby for regulations and sit on the board of regulatory boards in an attempt to use the coercive powers of government to limit actual competition, resulting in real anticompetitive behavior due to regulatory capture
- the history of antitrust legislation exposes less than noble motivations than those that usually drive the argument for its continued existence today
All this leads to my contention that introducing a layer of coercive monopoly (aka the government) to negate the perceived bad effects of natural monopolies can impossibly do any good. On the one hand, it introduces ways for corporations to engage in real anti-competitive behavior, and on the other, it is prohibitively difficult to accurately and objectively distinguish between monopoly pricing and normal market competition.