Even without government intervention, can monopolies appear under free-markets?

I've read that government favoritism is what makes certain businesses assume control over a market, and although I believe that, it still bothers me that if a business were to progressively succeed against its competitors, and assume control over them. Can this happen? And if it does, should the government leave the monopoly alone, or would intervening in such matters go against the laissez-faire principles?

That's a veritable can of worms. My brother (who's a competition lawyer) and my father argue about this all the time (my brother is convinced there's no such thing as a natural monopoly and my father otherwise).

As some food for thought, let's imagine I have a natural wonder in my back yard called "Jimmy's magic cave". Now let's imagine I start selling tickets to the magic cave and it really is a magical experience and I get roughly 20 million visitors a year to my cave from all over the world. As it's my cave and it's the only one that exists, we can hardly dispute that I have a monopoly over this particular business.

However, and my brother would argue, although I've got the only magic cave you have to admit that Chichén Itzá in Mexico is pretty fancy too... as is the great wall of China. So if my prices are too steep, people are likely to just skip my wonder and go visit someone elses.

Similarly, even if you have a monopoly over fixed line telephone cables in a particular area, another company could always start up a satellite or cellular phone company. Planes compete with trains, cars and boats etc. So in the long run, if government wasn't creating monopolies left right and center, just how likely is it that any one company would end up owning all the trains, plains, buses, roads and canals (for example) or that a tour operator would be able to obtain every wonder in the world?

To be perfectly honest, I have no idea but it's certainly an interesting question... it might turn out to be one of those "what is the meaning of life" type questions though, which are just a PITA.

The government? I thought we were talking about a free market. But what precisely bothers you about a free-market monopoly? Unlike a government monopoly, it isn't like once the monopoly is achieved, it is inviolate. The business still has to contend with the possibility of competitors entering the market if it raises prices and obtains high profits. If it doesn't do that, what's the danger? On the other hand, Rothbard extends Mises' socialism argument to show that a free-market monopoly cannot persist anyway. If a firm has no competitors, it becomes subject to the same calculation problems inherent in a socialist system, and will become uncompetitive and lose its position of dominane.

Producers vie for the consumer's favour not just within industries but across industries. That money you could've spent on a holiday may just as well be used to by a plasma screen television. So besides competition in the market for corporate control and within an industry, firms also face it from outwith, and must also face the possibility that consumers will simply not put up with high prices and cease consumption.  

JAlanKatz:

The government? I thought we were talking about a free market. But what precisely bothers you about a free-market monopoly? Unlike a government monopoly, it isn't like once the monopoly is achieved, it is inviolate. The business still has to contend with the possibility of competitors entering the market if it raises prices and obtains high profits. If it doesn't do that, what's the danger? On the other hand, Rothbard extends Mises' socialism argument to show that a free-market monopoly cannot persist anyway. If a firm has no competitors, it becomes subject to the same calculation problems inherent in a socialist system, and will become uncompetitive and lose its position of dominane.

 

I'm convinced of the benefits of Austrian economics (even though I'm still a newb). The thing that bothers me is that, once a company has complete control over a market, and starts diversifying (starts turning into a conglomerate), it would be like a government assuming complete  control over several aspects. However, I hadn't read before what you said about such a company becoming subject to the calculation problems of socialist states. That really caught me off guard, thanks!

What do you consider a monopoly and for how long?  All monopolies die in the long run as other businesses complete for the same customers.  Keep in mind that in the absence of government protection temporary monopolies see competition from all over the world.  The most powerful government protection is in the form of patents and copyrights.  If you remove this protection then a ton of the market influence of the largets companies suddenly dissapears.  Patents are followed closely by limited liability.  If the people who made the Love Canal had to bear the full brunt of their destruction then the Love Canal would have never happened. 

Even in our system with tons of protection from patents and copyrights, super wealthy and powerful corporations like Microsoft now, IBM and GM a generation ago, are constantly having market share ripped from them.  Where did Google, Amazon and Ebay come from?  Who will win between Microsoft-Yahoo or Google, or someone else?  The ultimate examples of government as the agent ensuring monopoly are AT&T and Standard Oil.  AT&T lived for years on government protection from wireless, FM, stallites, cable TV, the power company etc.  (The Baby Bells still are protected from most of these competitors.)  Standard Oil had a 98% market share in the US but got into a price war in Europe with BP and Shell.  The result of which was an incremental raising of prices.  As prices went up their market share went down.  When Standard Oil was broken up the company had under a 70% market share.  Contrast that with AT&T who kept their market share in local phone service for at most of the 1900s.

A monopoly, if defined as a limit on the supply of a good that can be produced, is impossible under the free market.

Your confusion stems from the fact that many monopolies have used the fact that some markets are supplied by a single firm, without limit, to legitimize their actual monopoly. This is a popular tactic of people enjoying political privileges. Most famously slave plantation owners in the house of commons tried to discredit the abolitionists by saying that working conditions in the Manchester factories were slave-like.

Stranger:

A monopoly, if defined as a limit on the supply of a good that can be produced, is impossible under the free market.

Innovative firms, dominate other forms, which transpires into a monopoly. Ultra-innovative firms can theoretically sustain a perpetual non-coercive monopoly by utilizing its profits from prior innovations to invest in more innovation. Although these monopolies temporary, trade secrets can sustain the monopoly.

Geographical monopolies can theoretically exist. The most common variants of geographical monopolies include the infamous state, geographical barriers (like the Native Americans vs. Europeans), and transportation barriers (you have to spend resources displacing to different retail stores, which increases the prices by a microscopic amount, like a tariff). These can be sometimes considered as a natural monopoly

In fact, trade secrets is a form of geographical monopoly. You can geographically exclude others from seeing your innovations. Borders, walls and prohibition of free movement in private property restrains the dispersion of knowledge.

The only types of monopolies are geographical monopolies.

Hey, I was wondering how economic coercion would be prevented in a free market. For example the monopolizing of supplies of water in a desert, food in an area where the only good soil is owned by one person, or shelter somewhere extremely cold (Or for an extreme example, oxygen on Mars).

This is how Wikipedia defines economic coercion:

Economic coercion is when a controller of a vital resource uses his advantage to compel a person to do something he would not do if this resource were not monopolized. If someone is the owner of the only water supply, then the owner can compel the thirsty person to pay an exhorbitant price for that water or have him perform enormous labor. This is also referred to as a form of exploitation. It has been argued that as the global economy has expanded greatly in scope, economic coercion has replaced other forms of coercion such as coercion involving physical or military force.

Robin:

Hey, I was wondering how economic coercion would be prevented in a free market.

The market wouldn't prevent economic "coercion".  And neither would attacks from super-advanced space aliens be prevented. Market failure!

Robin:

Hey, I was wondering how economic coercion would be prevented in a free market. For example the monopolizing of supplies of water in a desert, food in an area where the only good soil is owned by one person, or shelter somewhere extremely cold (Or for an extreme example, oxygen on Mars).

It wouldn't be prevented.  Individual market participants would have to make plans for water (or oxygen) before moving to Mars or the desert.

One can't expect to go live in the desert without water, and then the person with access to water, has to provide it regardless of cost or scarcity.  I mean, what if they only have enough for one person to survive?  Should you be entitled to the water they use for their own survival?  And how can you determine what their needs are?

What is viewed as coercion, can very easily become exploitation by the consumer, if we remove all negative consequences from their acts.  In fact, that is how current market socialism works.  Regardless of means or merit, people receive goods and services at someone else's costs.  Eventually, this becomes a disincentive to work and provide for one's self.  And it becomes a discentive for the person providing, because they receive less than they make, and they see the recipient receiving for free....

 

And of course, as we saw in Soviet Russia, when the producers start to become free riders, it's time to send them to the gulags!  NO FREE RIDERS!

Thanks for the response, I understand what you mean, but what if someone was born in a place with dwindling resources? They wouldn't be able to make plans for water (or oxygen). And that would be coercion, right? Someone could be forced to perform enormous labor or else they would die.

Again, thanks for the responses.

Markets provide information with regard to increasing scarcity via the price mechanism... prices rise if a resource becomes rarer. Which is also an incentive for profit-seeking entrepreneurs to alleviate the scarcity by providing the resource. So it is definitely possible to plan ahead. Very few people fail to realize rising prices tend to reflect rising scarcity.

it only seems to happen, when the firm is extremely good at what it does. Standard Oil attained a monopoly, albiet some intervention, but Standard Oil was revolutionary in its practices, and remarkably resourceful and priority oriented-that it was able to lower its prices so much

Robin:

Thanks for the response, I understand what you mean, but what if someone was born in a place with dwindling resources? They wouldn't be able to make plans for water (or oxygen). And that would be coercion, right? Someone could be forced to perform enormous labor or else they would die.

No, that still wouldn't be coercion.  Whose fault is it that resources are short?  You could say that parents should plan better, that conceiving and giving birth to a child in a situation with limited resources isn't such hot idea.

I understand what you are getting at, but it is hard to find good examples of it.

 

Robin:

Thanks for the response, I understand what you mean, but what if someone was born in a place with dwindling resources? They wouldn't be able to make plans for water (or oxygen). And that would be coercion, right? Someone could be forced to perform enormous labor or else they would die.

Again, thanks for the responses.

This is the same thing as work or starve. If my parents don't work, my family will most likely starve. I don't think you can call it coercion. The fact that water resource is dwindling is the result of nature, not the result of humans unless the humans...were of course..unwise in their water usage. I don't think you can argue that nature is coercing humans to horde resources.... It is a fact of reality.

 

Coercion would have to involve some sort of actions. For example, telling people to pay their taxes or you will throw them into jail. Where as a water horder said pay me and I won't do anything to save you. The water guy won't do anything, good or bad. He will just let you die on your own. The government will do something to you if you don't pay up, maybe even kill you.

 

 

Robin:

Thanks for the response, I understand what you mean, but what if someone was born in a place with dwindling resources? They wouldn't be able to make plans for water (or oxygen). And that would be coercion, right? Someone could be forced to perform enormous labor or else they would die.

Again, thanks for the responses.

That wouldn't be coercion, that would be bad luck. Under no other arrangement than the free market would this unlucky bastard be able to obtain more of these scarce resources.

I think it's remotely possible for a free market monopoly to exist, but it would not be able to charge so-called "monopoly prices" only because if they did, then venture capitalists and entrepreneurs would see an opportunity to make a profit by competing against the said monopoly.

I totally agree, the whole discussion about monopolies is futile, as any monopoly, other than a coercive one, can never exist for long. Most of the examples used in the threat - Water, oxygene etc- incline that there is an inherent value in the good and that only the monopoly can provide it. But if you are not willing to pay the price you have a lot of options in a free market to avoid that. Not crossing the desert with a shortag of water might be one, another to take enough water with you upfront. A very scarce good in very high demand will always lead to entrepreneurs trying to enter the market, often enough through new inventions that lead to the production of  goods that deliver the same result, that is cater to the same desire of the costumer, as the monopolized good.

 

It can definitely still happen. A firm may have exclusive control over a resource that prohibits entry from other competitors, or there may be economies of scale. The DeBeers group was a perfect example of a company with market power. By stepping in the government can improve the welfare of consumers.

Danja:

It can definitely still happen. A firm may have exclusive control over a resource that prohibits entry from other competitors, or there may be economies of scale.

This is false.  They cannot prohibit entry, they can only have total control of a resource.

Danja:

The DeBeers group was a perfect example of a company with market power.

DeBeers operated via cartelizing and coercion.

Danja:

By stepping in the government can improve the welfare of consumers.

This is nonsense.  The Soviet Union stepped in absolutely, and ended up driving people to abject poverty and starvation.

At the Austrian School (mises.org) it's canon that central planning, cannot organize the market.  That every intervention leads to a crisis.

As you said, the DeBeers group WAS a group with market power, but there are competitors even for DeBeers,no?. Would you mind to give me "one" historic event where the government improved the welfare of consumers? What kind of resource may a firm have that would prevent entry from competitors? Mind it is not the good that is desired by the consumer, but what the good delivers.

Thanks for the help, everybody.
Hey, I'm having a debate with some other people, and they don't think government helps corporations create monopolies very often. Is there any site that has a bunch of examples of government-created-monopolies?

Robin:

Thanks for the help, everybody.
Hey, I'm having a debate with some other people, and they don't think government helps corporations create monopolies very often. Is there any site that has a bunch of examples of government-created-monopolies?

The original definition of the word monopoly, was a state granted exclusive privilege in the market.  People, in a more enlightened time, knew that only government could eliminate competition, and award monopoly power through regulation.  The USPS or any state run postal service is an example of monopoly.

You really just need to think about it.  The government has monopoly in law.  In security.  In national defense.  It has a monopoly on the political process.  It has a monopoly over which drugs and foods can be sold in the market (and thus the ability to pick winners and losers).  It has a monopoly on the communications industry.  It has a monopoly on the energy industry.  The government exercises monopoly power over banking, credit, money creation.

The government nearly has a monopoly on education.  I am in Canada, the government has a monopoly on health care.

nhaag:

As you said, the DeBeers group WAS a group with market power, but there are competitors even for DeBeers,no?. Would you mind to give me "one" historic event where the government improved the welfare of consumers? What kind of resource may a firm have that would prevent entry from competitors? Mind it is not the good that is desired by the consumer, but what the good delivers.

Oh yes, there were competitors for DeBeers. The idea of monopoly meaning only a single firm is involved, is useless for real world applications. In the real world, firms exercise market power even when there is small competition, like there was for DeBeers. A good historic example of a successful anti-trust case is the Tobacco Trust in the early 20th century, where there was clear price gouging and after the government stepped in prices fell for consumers.

liberty student:

This is false.  They cannot prohibit entry, they can only have total control of a resource.

With total control of a resource, such as raw materials or technology, any potential entrant will have to pay a much higher price in order to set up production. This limits entry, competition, and thus create market power.

liberty student:

DeBeers operated via cartelizing and coercion.

 

Exactly

Is there a website that states the original definition of the word monopoly?

Also, is the health care in Canada really bad? Was the documentary "Sicko" totally false or what?

Robin:

Is there a website that states the original definition of the word monopoly?

Also, is the health care in Canada really bad? Was the documentary "Sicko" totally false or what?

It wasn't totally false, but definitely misleading. A better example of a good single-payer system is France.

Danja:

With total control of a resource, such as raw materials or technology, any potential entrant will have to pay a much higher price in order to set up production. This limits entry, competition, and thus create market power.

No.  Market power is determined by consumers, not by producers.

Danja:

liberty student:

DeBeers operated via cartelizing and coercion.

Exactly

Exactly what?  A free market is absent coercion.

 

Robin:

Is there a website that states the original definition of the word monopoly?

Have you tried Google?

Robin:

Also, is the health care in Canada really bad? Was the documentary "Sicko" totally false or what?

I didn't watch Sicko.  It's a lousy system, socialized medicine always is.

liberty student:

No.  Market power is determined by consumers, not by producers.

The consumers don't have any power if there's only one producer.

liberty student:

Exactly what?  A free market is absent coercion.

So there's no murder or theft in a free market?

Danja:

The consumers don't have any power if there's only one producer.

Sure they do.  The producer is only profitable by trading.  A trade takes two parties.

Danja:

So there's no murder or theft in a free market?

Uhm, no?  That's why it is called a free market.  It is absent coercion.  All trades are completed voluntarily, or freely.

 

 

liberty student:

Sure they do.  The producer is only profitable by trading.  A trade takes two parties.

The nature of an uncompetitive market is that consumers don't react to price increases by completely dropping out of the market. They do so only incrementally, and the producer can extract surplus from them in the meantime.

liberty student:

Uhm, no?  That's why it is called a free market.  It is absent coercion.  All trades are completed voluntarily, or freely.

Is this the new libertarian pipe dream, a world without murder and theft?

Danja:

liberty student:

Sure they do.  The producer is only profitable by trading.  A trade takes two parties.

The nature of an uncompetitive market is that consumers don't react to price increases by completely dropping out of the market. They do so only incrementally, and the producer can extract surplus from them in the meantime.

Ok, so they extract surplus.  Until they lower their prices, and then consumers return.  Consumers vote with their money.  Just because you have cornered a market, doesn't mean consumers will pay any price.  That's a fallacy.  Always has been otherwise so-called natural monopolies would be able to oppress people and diminish their prosperity absolutely.  I'm not aware of examples of this in the free market.  Are you?

Danja:

liberty student:

Uhm, no?  That's why it is called a free market.  It is absent coercion.  All trades are completed voluntarily, or freely.

Is this the new libertarian pipe dream, a world without murder and theft?

Why, do you dream about a world of murder and theft?  I'd rather be accused of aiming too high, than settling for too little.

That however, is superfluous to the definition of a free market.  Free markets are based on voluntarism, not coercion.  Coercion, by definition, is a component of an un-free market.

Danja:

The idea of monopoly meaning only a single firm is involved, is useless for real world applications. In the real world, firms exercise market power even when there is small competition, like there was for DeBeers.

Ok, than, before we can have a useful discussion we need to define what a monopoly is. I am rather sure though that we end up in defining a monopoly as anything that is a unique market position so basically if one firm sells chocolate covered cereals while another sells sugar coated ones, both have a monopoly. If you go down that road, than we should stop the whole discussion right now, saving you and me a lot of time.

Now to gouging. I do not think that there is EVER a gouging taking place.If gouging was a reality this would imply that there is a "just price". Who is to decide what price is "just"? On what grounds? Labor? capital goods used up? Or gut feeling?

A price always enters the world if the two parties in a transaction agree to exchange. Now if the consumer is not willing to pay a price than no sale is going to happen. If no sale happens, that is if a consumer doesn't value the good he gets higher than the good he gives up, than there is no price and the seller sits on his goods until he is willing to lower the price.

The whole idea that some third party can judge about what price is "just" is a fallacy and has its roots in the english economists obsession for labor as the basis for prices.

 

liberty student:

Ok, so they extract surplus.  Until they lower their prices, and then consumers return.  Consumers vote with their money.  Just because you have cornered a market, doesn't mean consumers will pay any price.  That's a fallacy.  Always has been otherwise so-called natural monopolies would be able to oppress people and diminish their prosperity absolutely.  I'm not aware of examples of this in the free market.  Are you?

They won't pay any price, but the structure of an uncompetitive market is such that by restricting output and raising prices, it is still beneficial for some consumers to pruchase the product, while the others lose out. The firm makes money by doing business with less people. The firm gains in profits, but the consumers lose.

 

liberty student:

That however, is superfluous to the definition of a free market.  Free markets are based on voluntarism, not coercion.  Coercion, by definition, is a component of an un-free market.

The markets may be "free", but this doesn't mean nobody ever exercises coercion. That's what the threadstarter is asking, essentially. Coercion can arise in the free market, whether it takes the form of murder, theft, or natural monopoly.

nhaag:

Danja:

The idea of monopoly meaning only a single firm is involved, is useless for real world applications. In the real world, firms exercise market power even when there is small competition, like there was for DeBeers.

Ok, than, before we can have a useful discussion we need to define what a monopoly is. I am rather sure though that we end up in defining a monopoly as anything that is a unique market position so basically if one firm sells chocolate covered cereals while another sells sugar coated ones, both have a monopoly. If you go down that road, than we should stop the whole discussion right now, saving you and me a lot of time.

Now to gouging. I do not think that there is EVER a gouging taking place.If gouging was a reality this would imply that there is a "just price". Who is to decide what price is "just"? On what grounds? Labor? capital goods used up? Or gut feeling?

A price always enters the world if the two parties in a transaction agree to exchange. Now if the consumer is not willing to pay a price than no sale is going to happen. If no sale happens, that is if a consumer doesn't value the good he gets higher than the good he gives up, than there is no price and the seller sits on his goods until he is willing to lower the price.

The whole idea that some third party can judge about what price is "just" is a fallacy and has its roots in the english economists obsession for labor as the basis for prices.

 

There is no need to speak of a just price. What I meant was there is a price that arises from competition, however in the real world that ideal is hardly ever reached. The further you get from that ideal, the more consumers are harmed. When trade does not happen because a firm with market power is restrictign output, the consumers who would have gained now lose out.

Danja:

They won't pay any price, but the structure of an uncompetitive market is such that by restricting output and raising prices, it is still beneficial for some consumers to pruchase the product, while the others lose out. The firm makes money by doing business with less people. The firm gains in profits, but the consumers lose.

How do they lose out by choosing to spend their money elsewhere and avoid this "monopolized" product?  Obviously, they are satisfying their most pressing needs based upon the resources they have.  As prices go up, demand drops.  That's natural, as people shift their consumption to what is more appropriately priced, and continue to fulfill their needs.

I think we have a fundamental misunderstanding of how consumers order their needs, and why they act (trade).

Danja:

The markets may be "free", but this doesn't mean nobody ever exercises coercion. That's what the threadstarter is asking, essentially. Coercion can arise in the free market, whether it takes the form of murder, theft, or natural monopoly.

Once coercion enters a transaction, will you insist upon calling it free?  I certainly hope not.

liberty student:

How do they lose out by choosing to spend their money elsewhere and avoid this "monopolized" product?  Obviously, they are satisfying their most pressing needs based upon the resources they have.  As prices go up, demand drops.  That's natural, as people shift their consumption to what is more appropriately priced, and continue to fulfill their needs.

If there was no market power, they would not have resorted to the alternatives. True, substtution can make up some of the losses, but the essence of market power is that there are no perfect substitutes so welfare drops overall.

liberty student:

Once coercion enters a transaction, will you insist upon calling it free?  I certainly hope not.

No, but I would not say coercion will never enter transactions under a free market. If that's what you mean by free market, then it is a true utopia, uselss for real world theorizing.