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Privileged Producers

Mises Daily: Monday, September 28, 1998 by

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Some months ago, at a hearing before the U.S. Senate Judiciary Committee, the head of the Netscape corporation asked the audience in the room how many owned a personal computer and then how many of those used Microsoft's Windows operating system. Upon a show of hands demonstrating that almost everyone in the room who owned a computer used Windows, he concluded that he had just proved that Microsoft had a monopoly in personal computer operating systems. No one in the room questioned his conclusion at the time and, to my knowledge, no television commentator or newspaper reporter questioned it later, when the incident was telecast and described in the press.

Everyone, it seems, took for granted the prevailing belief that the essential feature of monopoly is that a given product or service is provided by just one supplier. On this view of things, Microsoft, like Alcoa and Standard Oil before it, belongs in the same category as the old British East India Company or such more recent instances of companies with exclusive government franchises as the local gas or electric company or the U.S. Postal Service with respect to the delivery of first class mail. What all of these cases have in common, and which is considered essential to the existence of monopoly, according to the prevailing view, is that they all represent instances in which there is only one seller. By the same token, what is not considered essential, according to the prevailing view of monopoly, is whether the sellers position depends on the initiation of physical force or, to the contrary, is achieved as the result of freedom of competition and the choice of the market.

Microsoft, Alcoa, and Standard Oil represent cases of a sole supplier, or at least come close to such a case. However, totally unlike the cases of exclusive government franchises, their position in the market is not (or was not) the result of the initiation of physical force but rather the result of their successful free competition. That is, they became sole suppliers by virtue of being able to produce products profitably at prices too low for other suppliers to remain in or enter the market, or to produce products whose performance and quality others simply could not match.

This is confirmed even by major antagonists of these firms. With respect to Standard Oil, the U.S. Supreme Court declared in its 1911 decision breaking up the company: "Much has been said in favor of the objects of the Standard Oil Trust, and what it has accomplished. It may be true that it has improved the quality and cheapened the costs of petroleum and its products to the consumer."

With respect to Alcoa, the presidingjudge in the antitrust case against it said: "It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel."

In this instance, the judge clearly appeared to find no significant distinction between cases in which competitors were excluded by means of physical force and cases in which they were "excluded" by means of superior productive performance. Indeed, he seemed to think merely that the latter was a more effective form of "exclusion."

Like Standard Oil and Alcoa, Microsofts eminent status in its field is also the result of productive accomplishment. Its productive accomplishments can be found in all of its improvements in personal-computer operating systems from DOS 1.0 to Windows 98, and in its growing leadership in providing applications that most successfully exploit these improvements, such as word-processing, spreadsheet, database, and programming-language programs.

What all this points to is that there is something very wrong in thinking of monopoly as being constituted by any case in which there is just one seller. The critical element is what is the foundation of that situation? Is it the initiation of physical force by or on behalf of the seller or is it the sellers superior performance under free competition?

In the first case, there is something present that is clearly against the interests of the buyers. The buyers are being forcibly deprived of something that is better in order to allow the success of something that is worse and could not succeed under free competition, i.e., without the aid of the initiation of physical force. In the second case, the buyers are clearly better off: the sole seller is the sole seller because his product or service is better than the alternatives, and the buyers have chosen it and him over the alternatives. Here the result is the outcome of free competition, not of its suppression.

Furthermore, once the status of sole seller is achieved under the freedom of competition, it can be maintained only by that seller continuing to offer a better combination of price and quality than any potential competitor. This is because newcomers are free to challenge him at any time.

Once the essential importance of the presence or absence of the initiation of physical force as the foundation of "monopoly" is recognized, it becomes obvious that the concept of monopoly needs to be radicallyreformulated. It is profoundly wrong to have a concept that groups together and thus treats as the same, situations that are of a fundamentally opposite character. Whats wrong with it is the same sort of thing that would be wrong with putting both food and poison in the same category and then either eating both or avoiding both.

What I suggest is a definition of monopoly that excludes the results of free-market competition and includes only the results of forcible violations of free-market competition. The definition, I suggest is, indeed, a modernized version of the original, seventeenth-century definition of monopoly as an exclusive grant of government privilege. To be specific, it is: Monopoly is a market or part of a market reserved to the exclusive possession of one or more sellers by means of the initiation of physical force.

On this definition, of course, Standard Oil, Alcoa, and Microsoft are not monopolies, while the old British East India Company, the U.S. Post Office, and the local gas and electric companies, all operating under exclusive government franchises, are monopolies. But what is equally significant about this definition and its highlighting of exclusiveness based on the initiation of physical force is that it makes possible the extension of the concept of monopoly to important instances constituting violations of the freedom of competition other than those in which there is just one seller of a given good or service.

For example, there are many thousands of French wheat farmers. However, to the extent that France has a protective tariff designed to keep out lower-priced foreign wheat and thereby to reserve the French wheat market to the exclusive possession of French wheat farmers, French wheat farmers are given a monopoly of the French wheat market.

Similarly, to the extent that France or any country has, or has had, legislation designed to protect large numbers of small merchants, such as butchers, grocers, and haberdashers against the competition of more efficient large chains, that too constitutes the forcible reservation of a market or segment of a market to the exclusive possession of one set of producers and the simultaneous forcible exclusion from that market of other producers. Such a situation is simultaneously monopoly for the inefficient, protected producers and a violation of the freedoms of entry and competition of the more efficient producers who are forcibly excluded from the market.

Indeed, seen in this light, while monopoly does not necessarily exist when there is just one seller of a given good or service, it does exist in a case in which the production of a good or service is legally open to everyone in a society except for just one potential producer who otherwise would enter and compete in that industry.

That party's freedoms of entry and competition are violated. He is forcibly excludedfrom the market, which is thereby monopolized against him. For example, if early in the present century, the U.S. government had declared that the production of automobiles was legally open to everyone with the single exception of Henry Ford, or the single exception of General Motors, its action would simultaneously have constituted a violation of the freedoms of entry and competition of these parties and the monopolization of the automobile industry against them--with, of course, very serious negative consequences for the future development of the automobile industry and the standard of living of the average person.

This is the present situation of Bill Gates and Microsoft. So far from being a monopolist, they are the targets of promonopoly interference by the U.S. government. This is what exists when the government seeks to reserve the internet browser market, or any part of that market, to Netscape and others--when it says, in effect, all shall be allowed to enter and compete in this market except Gates and Microsoft, who are to be forcibly excluded from that market either totally or in part.

Gates and Microsoft have already been the victims of promonopoly interference by the U.S. government, when they were prohibited from culminating their purchase of the Intuit Corporation and its leading software product Quicken. They had wanted to enter an important segment of the market for computer financial software and associated computer financial services through that purchase. But they could not. They were forcibly excluded from that market. Their freedoms of entry and competition were violated. The market was monopolized against them.

I believe that as a result of that act of monopolization against Gates and Microsoft, I and many other computer users have been deprived of such potential advances as the ability easily to integrate the generation of invoices with inventory control, which would have been a likely outcome of Microsofts integrating the features of Quicken with its existing database programs, such as Access. That couldnt happen, because the government decided to protect me from Microsoft.

Now the government wants to protect me from Microsofts web browser. I can only say that as a buyer of computer software, I dont want this sort of "protection." I want the right to choose to buy or not buy anything Microsoft wants to sell me and the right to accept anything they want to give me when I buy their Windows operating system. I see no more good reason to reserve the internet browser market, or any part of that market, to Netscape than I see to reserve the market for pork chops to a special set of pork butchers. Its the same kind of promonopoly interference.

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George Reisman is professor of economics at Pepperdine University's Graziadio School of Business and Management in Los Angeles and is the author of Capitalism: A Treatise on Economics (Ottawa, IL.: Jameson Books, 1996) and translator of Ludwig von Mises's Epistemological Problems of Economics (New York: New York University Press, 1976).

Copyright c 1998 by George Reisman. All rights reserved. This article may not be reproduced except by permission of the author in writing.