Monopoly and Competition: Government Intervention and its Effects on the Free Market
(Originally posted at damienmanier.com)
One of the roles of government, debated even among those of a
libertarian or small government perspective, is that of regulating
monopolies and ensuring competition. On a larger political scale, the
debate may focus on how free or how socialized should a market be, but
among those that believe the markets should be as free as possible there
is still concern over monopoly practices and how the government could
be used as a tool to respond to them. The first step in understanding
and forming conclusions in this debate is to determine a definition of
monopoly. The three offered here are: One seller or producer of a good
or service; the establishment of a monopoly price; and a firm or
corporation that has been granted market power and special status by the
government, either directly or indirectly. Also, the requirements for
competition must be established, which economic textbooks may point to
as: many small buyers and sellers; standardized product; and no barriers
to entry or exit.1 After close inspection of
the definitions of monopoly and the textbook requirements for
competition, I hope to demonstrate that “barriers to entry or exit” are
the only true requirement to competition and that all barriers are due
to coercion, either from government or criminal activity among
businesses and individuals.
The first definition of monopoly is that of one seller or producer of
a good or service. This is the most literal definition (“monos” means
“only and “polein” means “to sell”) and the most common understanding of
the word monopoly. While this is a very clear cut and precise
definition of monopoly its application is much less so and its use to
justify government intervention is even more hazy. The application of
this definition becomes difficult when one has to determine what
constitutes a single product or service. Since there will be some sort
of differentiation between every product offered by different people one
could rationally claim that everyone is a monopolist. For example,
while Hershey's Chocolate company may not be a monopolist of chocolate
they are monopolists of “Hershey's Kisses” and John's doctor is a
monopolist of medical services to John. This is further complicated if
we accept that fact that the point that the differentiation is
substantial to lead to a product being categorized by a different
product is solely in the mind of the consumer and can not be defined by
any specific attributes or by committee. The second flaw with the use of
this definition is when it is used to justify government intervention
in the markets based on misconceptions of individual rights and freedom.
While individuals do have the freedom to act on available choices they
are not entitled to any certain number of choices. If there truly was
only the choice of purchasing a product or service from one producer or
not purchasing it at all then the individual is free to act on that
choice, not require more choices be made available to him. Murray
Rothbard uses the example of “Crusoe and Friday bargaining on a desert
island” where they “have very little range or power of
choice; their power of substitution is limited. Yet if neither man
interferes with the other's person or property, each one is absolutely free.
To argue otherwise is to adopt the fallacy of confusing freedom with
abundance or range of choice. No individual producer is or can be
responsible for other people's power to substitute.”2
The second definition, achieving monopoly price is explained
best by Ludwig von Mises: “If conditions are such that the monopolist
can secure higher net proceeds by selling a smaller quantity of his
product at a higher price than by selling a greater quantity of his
supply at a lower price, there emerges a monopoly price higher
than the potential market price would have been in the absence of
monopoly.”3 The concerns raised by the
proponents of this defintion are that a single producer or a cartel made
up of a few producers will restrict supply in order to gain increased
profit margins at a higher price point on the supply-demand curve.
However, this will only be profitable for products or services whose
prices are inelastic above the “theoretical” competitive price. The
flaw in this defintion is determining “competitive price” versus
“monopoly price.” Since in the free, or unhampered, market every seller
will “absolute control...over the price he will attempt to charge for
any particular good...the question is whether he can find any buyer at
that price. Similarly,...any buyer can set any price at which he will
purchase a certain good; the question is whther he can find a seller at
that price.”4 Naturally, sellers will
seek the highest price and consumers will seek the lowest price and
whatever price they agree on, absent coercion, is the competitive price.
Along the same line, how would one determine if the producer was
moving from a “sub competitive price” to the competitive price for their
goods as opposed to moving from the competitive price to a monopoly
price. The “demand curve is not simply 'given' to a producer, but must
be estimated and discovered” and any restriction may simply be a
correction of past supply to demand errors by the producer.5 These flaws lead to the
conclusion that there can be no definable monopoly price on the free
market since all prices are based on free-exchange between buyer and
seller and whatever terms they come to are by definition the competitive
price.
The third definition of monopoly is the original definition of
government granted, direct or indirect, market power or protected
status. Lord Coke, a definitive source of Common Law in 17th
Century England, defined monopoly as “an institution or allowance by
the king, by his grant, commission, or otherwise . . . to any person or
persons, bodies politic or corporate, for the sole buying,
selling, making, working, or using of anything, whereby any person or
persons, bodies politic or corporate, are sought to be restrained of any
freedom or liberty that they had before, or hindered in their lawful
trade.”6 The formation of monopolies
and the negative consequences of monopoly power is made possible only
due to government intervention and it is therefore ironic that one of
the few areas where limited government advocates tolerate government
intervention is in the regulation of monopolies. Monopolies are created
through barriers to entry into their market and government is the
creator of these barriers, which include explicit grants of monopoly
status, in industries deemed “public utilities” or “natural monopolies”,
patents, license requirements, and economies of scale.7 Another barrier is the
entire system of corporatism, the alliance between big business and
government to create regulations and other burdens on new entrants into
the market in order to hamper competition.
The most obvious, and accepted as necessary by some, way the
government creates monopolies is by granting exclusive franchises to
industries deemed “public utilities.” Some common examples have been
energy providers (gas and electric), telephone service providers, and
cable tv. The rationalization used is that certain industries, due to
high fixed costs, economies of scale, and land usage limitations, are
better served by having a single provider. The conclusion is that
government should choose a single provider and protect them from
competition while at the same time heavily regulating the selected
monopoly to prevent monopoly pricing and pass the savings of the
increased efficiency on to the customer. However, history does not seem
to support this theory. Many industries that claim they are “public
utilities” were competitive in the past or became competitive after time
spent with protected monopoly status and the customer did not see great
advantage in the monopoly years, especially when taxes used to
subsidize the utilities are taken into account and other government
intervention is not present in the competitive years. “In one of the
first statistical studies of the effects of rate regulation in the
electric utilities industry, published in 1962, George Stigler and
Claire Friedland found no significant differences in prices and profits
of utilities with and without regulatory commissions from 1917 to 1932.”8 Also, substitutes or
alternative technology prevents the formation of “natural monopolies” on
the free market. For example, when three competing gas companies tried
to merge in 1888, an inventor named Thomas Edison “introduced the
electric light which threatened the existence of all gas companies” and
while all had “heavy fixed costs which led to economies of scale...no
free-market or 'natural' monopoly ever materialized.”9 In 1940, economist Horace
M. Gray noted that “public utility status was to be the haven of refuge
for all aspiring monopolists,” to include, “radio, real estate, milk,
air transport, coal, oil, and agricultural industries...who found it too
difficult, too costly, or too precarious” otherwise. The label of
“public utility” is arbitrary and history has shown that government
designated monopolies to do serve the public well and stifle innovation
and technological progress as well as violate the rights of
entrepreneurs who wish to enter protected industries.
One of the first industries to be deemed a “natural monopoly” or
“public utility” was the telecommunications industry, led by AT&T.
Initially the monopoly was due to patents that Alexander Graham Bell
held from 1876 to 1894. During this time period AT&T held between
85-100 percent of the market power for telephone systems and adoption
was slow with average daily calls per 1,000 people increasing from 4.8
in 1880 to only 37 in 1895; the number of telephones per 1,000 people
also increased slowly from 1.1 in 1880 to 4.8 in 1895. However, after
the patents expired and competition was able to set in daily calls per
1,000 jumped from 37 in 1895 to 391.4 in 1910 and telephones per 1,000
people also increased much more rapidly, going from 4.8 in 1895 to 82 in
1910.10 The government, however,
did not see this competition and rapid expansion of services and options
as a good thing, instead they saw it as “duplicative,” “destructive,”
and “wasteful” and during a Senate Commerce Committee hearing in 1921 it
was stated that “telephoning is a natural monopoly.”11 This was in spite of the
apparent boom in competitors and service. AT&T lobbied for this
“natural” monopolization and put itself “squarely behind government
regulation, as the quid pro quo for avoiding competition.”12
From the AT&T case we can see that it was able to form its
original monopoly, before the government explicitly granted it monopoly
status, through another government barrier to competition, patents.
Patents are probably the most common and most accepted, among
capitalists, form of government barriers to competition since they
supposedly protect the innovations of individuals and allow them to reap
the benefits of research, investment and ingenuity without someone else
profiting from an idea they did not share the costs in discovering.
However, there is strong evidence that patents are unnecessary and in
fact stifle innovation instead of promoting it as intended. The
telephone industry demonstrated this earlier but another example would
be in the field of steam engines and steam power. In 1768, James Watts
patented the steam engine and used his political clout to extend the
patents until 1800. He aggressively pursued his competitors with patent
violations and prevented many innovations from taking place in the area
of steam power or improvements in the steam engine. As a result,
“during the period of Watt's patents, the United Kingdom added about 750
horsepower of steam engines per year. In the thirty years following
Watt's patents, additional horsepower was added at a rate of more than
4,000 per year. Moreover, the fuel efficiency of steam engines changed
little during the period of Watt's patent; however between 1810 and 1835
it is estimated to have increased by a factor of five.”13 The book, Against
Intellectual Monopoly, documents many examples like this in almost
all fields. Without patents, the original innovators will still find
advantage since people are only likely to imitate successful innovations
that would mean the original innovators would have time to establish
themselves and gain market power and brand name recognition before
competitors really started entering the market.
The requirement of Licenses to conduct a particular type of business
or to work in a particular field are another widely accepted form of
government intervention that creates a barrier to entry for potential
competition. One of the reasons for this is that licenses are not sold
to the public as protection for existing businesses from potential
competitors or as a restriction on the supply of labor to artificially
raise wages above market level for favored professions, but instead is
billed as a means to protect the consumer by ensuring quality service.
However, just like the other barriers to competition, licenses, when
required by law, do more harm to the consumer by reducing available
options when there is a strict quota on the number of licenses available
or when smaller competitors can not afford licensing fees; monopoly
pricing due to cartelization since “the governmental administration of
licensing is almost invariably in the hands of members of the trade”14 who have an obvious
interest in limiting entry into their field to individuals who are of
similar mind to keep prices higher.
All of the barriers mentioned so far and others have become
part of the system of corporatism that is actually the dominant force in
US and western markets, not capitalism. The high fixed price that
leads to economies of scale and prevents smaller businesses from
competing is government. “It is no surprise, then, that throughout U.S.
history corporations have been overwhelmingly hostile to the free
market. Indeed, most of the existing regulatory apparatus--including
those regulations widely misperceived as restraints on corporate
power--were vigorously supported, lobbied for, and in some cases even
drafted by the corporate elite.”15 In this essay we have
mostly focused on the direct barriers to competition placed by the
government but there are also many less obvious ways that government
intervention helps favored corporations such as inflationary credit
expansion, where the first to receive the new dollars will get to use
them before the inflationary effects kick in and corporate law itself
that allows the individuals who act, or make decisions, in a business to
separate themselves from the liabilities involved with those decisions
causing a serious accountability issue in our markets today. A
“corporation is an artificial being, invisible, intangible, and existing
only in contemplation of the law.”16 This arbitrary grant of
artificial personhood status to businesses is yet another barrier to
free competition and a fraud is committed when corporate law is
presented as part of capitalism and the free market or as advantageous
to consumers.
In conclusion, monopolies, oligopolies, unnaturally high market
concentrations all stem from government intervention into the free
market placing various barriers to the entry and exit of competing
businesses. This is done in the guise of regulating or promoting
capitalism but is actually within a system of corporatism, the alliance
of big business and big government. Big business works with big
government to “socialize costs in exchange for a share of profits.”17 Big business also likes
big government because “it has a competitive advantage over small
business in doing business with it and negotiating favors. Big
government, in turn, likes big business because it is manageable; it
does what it is told.”18 This alliance has
distorted our markets and increased the power of both partners at the
expense of competition, consumers, and citizens.
1Jacqueline Brux, Economics Issues
and Policy Fourth Edition, (Ohio: Cengage Learning, 2008), 246.
2Murray Rothbard, Man, Economy, and
State: A Treatise on Economic Principles (Alabama: Ludwing von
Mises Institute, 2004), 653.
3Ludwig von Mises, Human Action: A
Treatise on Economics (Alabama: Ludwig von Mises Institute, 2008),
278
4Murray Rothbard, Man, Economy, and
State: A Treatise on Economic Principles (Alabama: Ludwing von
Mises Institute, 2004), 662.
5Ibid., 690
6 Quoted in Richard T. Ely and others, Outlines
of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp.
190–91.
7Jacqueline Brux, Economics Issues
and Policy Fourth Edition, (Ohio: Cengage Learning, 2008), 251-253.
8Thomas DiLorenzo, "The Myth of Natural
Monopoly", The Review of Austrian Economics Vol.9, No.2 (1996),
49-50.
9Ibid., 48
10Adam Thierer, “Unnatural Monopoly:
Critical Moments in the Development of the Bell System Monopoly”, The
Cato Journal Vol. 14 No. 2 (Fall, 1994)
11Ibid.
12Ibid.
13Michele Boldrin, David Levine, Against
Intellectual Monopoly (New York: Cambridge University Press, 2008),
1.
14Murray Rothbard, Man, Economy,
and State: A Treatise on Economic Principles (Alabama: Ludwing von
Mises Institute, 2004), 1095.
15Roderick Long, “Corporations Versus
the Market; Or, Whip Conflation Now”, Cato Unbound, 10 November
2008.
16Frank van Dun, “Is the Corporation a
Free-Market Institution?,” Ideas on Liberty, March 2003.
17Robert Locke, “What is American
Corporatism?,”, Front Page Magazine, 13 September 2002.
18Ibid.