I've been stuydying Austrian economics in my spare time for about a year so i'm familiar with some things but have many more things to learn and books to read. I say that so in case my questions are "bad" or "stupid" I won't get blasted. I'm here to learn and come in peace!
So I'm reading Antitrust The Case for Repeal, by Dominick Armentano and have some questions. He states a few things without much support (or at maybe I'm just missing it) which leads me to think the book may presuppose some knowledge I don't have.
So here goes.
1. Why would additional sales brought about by reduced prices "tend toward competitive equilibrium"? Page 36 paragraph 3
2. On page 37 paragraph 2 he states there is little evidence that free market collusion leads firms to capture monopoly profits. I was just hoping someone could expand on that. It seems he either assumes the reader knows this or we are supposed to take his word for it.
3. Why is it a debatable procedure for empirical studies to use accounting profit data to draw conclusions about economic profit? Pg 44
Thanks in advance to anyone who responds.
Jeff:I say that so in case my questions are "bad" or "stupid" I won't get blasted. I'm here to learn and come in peace!
There are no bad questions, only bad positions. You are doing fine.
I'm not familiar with that work. Your questions are very specific. If you don't get answers here, we might be able to get you Don's email address.
If you find something evil that wobbles, push it. - Gary North
As far as question 3 goes i guess its just my own lack of knowledge. I don't know the difference i guess between economic profit and accounting profit.
Here is the full passage
"What happens if a free-market monopolist attempts tosubvert this competitive process and discourage rivalrousentry by lowering prices? The reduced prices would induceadditional sales, and the market situation would then tendtoward the traditional competitive equilibrium."
Here is a link to the book as well. thx
Jeff
"
'little evidence that free market collusion leads firms to capture monopoly profits'
I did not read the source you mention, these are standard answers.
The usual argument is that collusion does not work unless there is a way of measuring compliance, and punishing non compliance. And preventing others from entering the same market. There also has to be no way for consumers to avoid purchasing the monopolized profit.
Why is it a debatable procedure for empirical studies to use accounting profit data to draw conclusions about economic profit?
Accounting statements make many assumptions so that they can get to a bottom line earnings number. If the assumptions are changed the numbers change. Accounting statements are really the starting point of an examination, not the ending point.
So basically he just means historically firms that attempt collusion usually are unsucessful because one of the firms will usually not comply with the original compliance agreement and there are still some alternatives for consumers (non colluding firms) to purchase from?
I can see that for the most part and i agree that its impossible over the long run to profit by non productive means but once possible exception would be OPEC right? That is a cartel that colludes. Or is that a bad example because OPEC is a group of governments with the ability to use force? I know OPEC is bad economically for consumers but they do profit and have for many years correct?
Thanks for your reply btw.
OPEC - Traditionally OPEC has been rife with cheating.
I know OPEC is bad economically for consumers - Why? It is not really clear what they do. When oil producing nations need money, guess what they break the quota. I would say a consumer benefits from professional organizations, including OPEC. The problem is when the government enforces collusion.
The real problem is people find substitution goods, or they do not use overpriced goods. Fuel efficient cars and home insulation can be substitued for energy.
A better example is medical care in the US. There the US goverment enforces the monopoly of the AMA and other organizations. But that is the problem, it is hard to enforce collusion without violence.
Look at Microsoft and internet browsers. They could not stop Netscape (now firefox) even after Netscapce went out of business. The whole anti trust thing has become a farce.
Jeff: 1. Why would additional sales brought about by reduced prices "tend toward competitive equilibrium"? Page 36 paragraph 3 2. On page 37 paragraph 2 he states there is little evidence that free market collusion leads firms to capture monopoly profits. I was just hoping someone could expand on that. It seems he either assumes the reader knows this or we are supposed to take his word for it. 3. Why is it a debatable procedure for empirical studies to use accounting profit data to draw conclusions about economic profit? Pg 44
1) Don't know
2) They must maintain their competitive advantage if they wish to remain a monopoly. If they don't charge competitive prices, and if they don't pay their workers enough, a market actor will come in and bid resources away from them. This historically holds true, look at Ford, Carnegie, and Rockefeller.
3) Accounting profit can't include the true measure of inflation, thus, "profits" may be blurred by changes in the objective purchasing power of money.
As for question 1, I think that he means that if a firm lowers its price below the equilibrium, people will buy more of that good to a point where the firm will run out of inventory and capacity (supply) either has to be increased or they will have to raise prices back to equilibrium.
"I know OPEC is bad economically for consumers - Why? It is not really clear what they do. When oil producing nations need money, guess what they break the quota. I would say a consumer benefits from professional organizations, including OPEC. The problem is when the government enforces collusion. "
OPEC is bad for consumers because its a collection of governments controlling oil production as opposed to a private companies. You're not arguing that a intergovernmental organization like OPEC is better than private enterprises competing are you?
thanks for answering number 2. I think the wording is what confused me. I'm familiar with and agree with your comments. I think since he used the term evidence it made me think he was referring to specific real world examples or that he might have been referring to more arguments that go into greater detail than what you said.
As far as question 3 goes i see your point that accounting profit doesn't take into account inflation but if that's true of every business than isn't still an acceptable measure of profit when comparing firms since each company loses their purchasing power? If the purchasing power goes down it goes down for everyone so for comparison sake why does it matter?
I see your point but if they can afford to do this let's say for a few years before they have to increase supply doesn't that create a barrier of entry and a misallocation of resources at least for those few years before they would have to increase supply? What free market mechanism keeps them honest if every time someone tries to compete they just lower prices below equilibrium to prevent entry or bankrupt a less efficient firm.
I agree that over the long hall supply would have to be increased or they would run out of inventory but is it not conceivable that in the case of a very large monopoly the gap between lowering prices below equilibrium and having to increase supply (or run out of inventory) could take years? Making competition virtually impossible in any practical sense.
Or what about a large company that produces many things for instance but has a monopoly in only one of them. For example, let's say I'm a producer of TV's, computers, automobiles, and hairspray and i have achieved a monopoly in hairspray through honest means and free market competition. What prevents me from using my profits from the TV's, cars, and computers to subsidize my losses in hairspray (assuming I'm lowering prices below equilibrium to maintain my monopoly). I could do this indefinitely i would think. Now i understand to do it forever would be pointless because i would never profit from producing hairspray but i could do it for as long as it takes to prevent a potential rival in the hairspray market from gaining entry and then go back to profiting once they are bankrupt could i not? if so doesn't this mean i have achieved a monopoly price and misallocated resources?
What prevents me from using my profits from the TV's, cars, and computers to subsidize my losses in hairspray (assuming I'm lowering prices below equilibrium to maintain my monopoly).
Why are you losing money on a product you have a monopoly of? How are you competitive in TVs if another business unit operting at a lose is siphoning off cash. You need to break up your conglomerate.
The idea behind a monopoly is you need a product where as you expand production your profit =revenue-costs never becomes zero. You can stay profitable no matter how big you get. So you keep growing. In general this does not happen. The closest thing was the Mongol Empire;) The question is if you can use your profits from hairspray to subsidize other businesses. Microsoft sort of tried this by using Windows profits, back when they were huge, to getting into other businesses. For a time they were successfull wiping out competitors Lotus spreadsheet, Borland Paradox database, and Netscape Navigator. MS now has a lot of competition, and Netscape still lives as Firefox. xbox competes with Wii and PS2. MS did not survive long as a monopoly.
geo8rge: What prevents me from using my profits from the TV's, cars, and computers to subsidize my losses in hairspray (assuming I'm lowering prices below equilibrium to maintain my monopoly). Why are you losing money on a product you have a monopoly of? How are you competitive in TVs if another business unit operting at a lose is siphoning off cash. You need to break up your conglomerate. The idea behind a monopoly is you need a product where as you expand production your profit =revenue-costs never becomes zero. You can stay profitable no matter how big you get. So you keep growing. In general this does not happen. The closest thing was the Mongol Empire;) The question is if you can use your profits from hairspray to subsidize other businesses. Microsoft sort of tried this by using Windows profits, back when they were huge, to getting into other businesses. For a time they were successfull wiping out competitors Lotus spreadsheet, Borland Paradox database, and Netscape Navigator. MS now has a lot of competition, and Netscape still lives as Firefox. xbox competes with Wii and PS2. MS did not survive long as a monopoly.
I'm losing money so i can charge a below market price preventing entry. The profits i make in TV's and the other products are greater than the losses I incur from my monopoly pricing of hairspray.
The book I'm reading and anti trust law discusses monopoly pricing where a firm could lower prices below market value to prevent entry or put competitors out of business. The Austrian view basically seems to say this is impossible. I'm just offering examples where it appears possible to my self. I'm not saying I'm right but I'm seeking further explanation.
monopoly pricing where a firm could lower prices below market value to prevent entry or put competitors out of business
Market value is the value something sells for. So you cannot sell below market value. You can sell below other competitors. You can sell below cost(which is also hard to determine). You could sell for below the price you could have got. I do not understand that use of market value. how do you define market value?
One model for a business is that as it expands production cost drops but after a certain size cost per unit starts to rise. When cost=revenues the company is as large as it gets. A 'natural' monopoly costs are lower than revenue no matter how much is produced. So the only limit is what all the customers can buy.
http://en.wikipedia.org/wiki/Natural_monopoly
Jeff:As far as question 3 goes i see your point that accounting profit doesn't take into account inflation but if that's true of every business than isn't still an acceptable measure of profit when comparing firms since each company loses their purchasing power? If the purchasing power goes down it goes down for everyone so for comparison sake why does it matter?
Inflation is not everywhere and always the same; some people/firms are affected more and earlier relative to others. The problem with inflation is that it causes relative distortions; it doesn't occur instantaneously. The firms that get the inflation earlier will have their profits inflated more relative to those who get it later, because by the time the latter gets the inflation, prices will have risen, as well as costs.
I'll try my hand here
1) Generally, the lower the good is selling for, the more people will buy it. As long as business can still make a profit from the price, they will produce more to satisfy the consumer demand. Often times it is a better idea for a business to (accept) lower sells prices and raise production in order to make maximum profit. The market equilibrium is the point where supply crosses demand, this will also tend to be the point where production costs = selling costs. Basically, if you think about it as reduced production costs, rather than sale price, it will make more sense.
2) Number 2 is simple. Free markets simply can not create monopolies. If a firm attempts to set its own price above the market equilibrium level, the chance for profit will cause more firms to enter the market. This is excluding economies of scale and the like, which would allow a firm to seize a large portion of the market if it were to set its prices below what its competitors can profit from. BUT- that is something to be cheered, not hated. Without government regulation, businesses simply can not exclude other businesses from entering a profitable market. Check out the definition for a monopoly, it may make a little more sense to you as well.
3) Accounting profit and Economic profit are not inextricably linked. Check out their definitions and it may make more sense.
I do hope that people don't feel like they will get flamed for posting (good) questions on the forums. It annoys me that there is so much bickering and personal attacks on people in such an educated forum. Thank you for posting your question! Hope I was able to help.
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