The Problem:
The philosophy behind the existence of government owned and/or regulated monopolies in the United States (utilities, transportation, etc.) is deeply flawed and misguided. In my economics class, I was taught to believe that private monopolies were bad for consumers because the monopolist would price gouge due to no competition and that an appropriate solution to this problem (aside from anti-trust laws) is to have the government either takeover or heavily regulate the monopolist company. "The Theoretical Private Monopoly" graph below shows how this was explained to me:
A private monopolist would purposely produce a low quantity, QM, and charge a high price, PM. to make excessive economic profit. This was simply evil and so I was then shown "The Theoretical Government Owned/Regulated Monopoly" graph below, which shows the "solution" to this price gouging:
The government, I was told, would produce at quantity QR, charge price PR, and only seek normal profit in order to keep prices low for consumers.
Sounds great to me… except, this is not reality. Oh yes, it looks amazing on paper... and quite convincing too. The intellectual elite must feel very proud coming up with all of these fancy graphs. But it really doesn't make sense, and in fact, flies in the face of reality. Just because there is no competition at the moment does not mean the threat of competition does not exist, and, this is where the incentive comes into play for the monopolist to keep prices low. It makes sense that in a market that allows private monopolies, the monopolist would keep prices low, not high, to maintain its hold on the market. If it does not, new competition has the potential to produce more efficiently and at a lower cost, essentially ending the monopoly currently in existence. Private businesses are always seeking to cut costs, which, in the end, allows them to reduce prices. The same holds true for monopolies as well… except for… you guessed it… government monopolies!
Government monopolies do not have to be concerned with competition or the threat of competition since the government has deemed competition illegal (ie. USPS). Because of this, the government monopoly has no incentive to run efficiently or to cut costs since they are not seeking economic profit and therefore just raise prices when their costs increase in order to break-even. Does this sound familiar to any New Yorkers?… Oh, that’s right; the MTA just raised its prices…again!
The Solution:
The solution that makes most sense is to repeal anti-trust legislation and allow for private monopolies in the free marketplace. A monopolist would have a long-term self-interest in keeping prices low in order to keep his company's status as a monopoly. Some may say, however, that barriers to entry prevent new competition from arising in certain markets, and thus, create conditions that allow monopolists to charge extremely high prices without even the treat of competition. I have found this to be a common fallacy made even by the most prestigious economists. As technology improves over time, newer and more efficient methods of production are introduced into the marketplace. The world sees this play out on a daily basis. And because of this, eventually, monopolies collapse. Case in point: The United States Postal Service's monopoly on standard mail. With the introduction of the Internet, and more specifically, email, the monopoly status of the USPS has been completely undermined, and eventually, it will cease to exist. The same also applied to AT&T's monopoly in the 1970s on telecommunication services. Again, technological advances caused it's monopoly status to crumble. It's important to note, both the mail and telecoms services are/were seen as natural monopolies, where competition was said to be close to impossible due to the nature of the business. Again, this was the argument for government regulation and ownership of the monopoly.
(As a quick side-note in regards to barriers to entry, I must also mention the merging of political and economic power, which happens under our current system, with the result being regulations and decreased competition1. In a true laissez-faire system, political power and economic power are separate and collusion with government bureaucrats is impossible due to the fact that the government would not have a hand in economic matters. Ayn Rand referred to this collusion as the "Aristocracy of Pull," defined as "a new group of powerful [business]men who have reached their status not by means of talent or initiative, but by means of political connections."2)
Why private monopolies are viewed as something bad I have no idea. It is said they are anti-competitive but I feel they are the epitome of competition. As in any competition, there are winners. Monopolies are simply the winners of the specific industry they are a part of. To use a sports analogy, the free market is like baseball. Teams compete to win. In the history of baseball, the New York Yankees have the most World Series championships than any other team by far, with 27 wins in the American League. The second place team, the Boston Red Sox, have only 7. If baseball operated under anti-trust laws, the New York Yankees would be fined severely and broken up. Does this seem fair? We have to understand that in competition, there will be winners and losers. It's a fact of life. Businesses should be treated no differently. A company that has achieved monopoly status in a free market did so because it was the absolute best. A lack of competitors does not mean something nefarious was going on or that monopolists are even safe from competitors. Monopolies must still compete, albeit indirectly, with the constant threat of new entrants to the market.
1See The Answer to Regulations
2CliffsNotes: The Aristocracy of Pull
Implicit premise: Private monopolies have never and will never price gouge. (Because, apparently, price gouging is a fiction. As we can clearly see, it's rational for monopolies to price as though there were competitors, so monopolies are fine!)
ReplyDeleteThis post suffers from a surprisingly common problem for economic thinking: it presumes that corporations act in their own best interest, or, more strongly but here amounting to much the same, act rationally.
We can all certainly agree that it's rational for companies to price mindful of even hypothetical competitors. But that is no evidence whatever that the public is always safe from price gouging. There would have to be a separate empirical argument for that descriptive conclusion. Put perhaps more clearly, the point is that nobody needs convincing that monopolies ought not price in the way the government worries about.
Nope. I have never implied that private monopolies will never price gouge. What I do imply is that they do so at their own peril. However, it is wrong to assume that they will price gouge just because they are a monopoly.
ReplyDeleteYou are right to point out that corporation do not always act in their own best interest. Never have I said that. The sensible ones will, of course. However, the "rogue" companies again don't at their own peril. Free market forces will determine their fate if they act irrationally and decide to take advantage of their customers.
In response to your last point, I feel the problem in your economic thinking is that you equivocate economic power will physical force, by saying "But that is no evidence whatever that the public is always safe from price gouging. Safe? In a free market you are free to choose whether or not to buy something. If you feel a company is price gouging, don't buy their product or service. It's that simple. It is not the government's job to set prices or tell a company what to charge their customers. Free market forces decide.
This reply ignores the motivation for regulations-- to protect individuals.
ReplyDeleteThis reply makes a new, also false, assumption that individuals BOTH (1) Always know what is in THEIR best interests, AND (2) Have the freedom to always *not* perform a given activity in the market, or that there will ALWAYS be alternatives.
To bring this in focus, the first two paragraphs admit, rightly, the point the first commenter makes. But it, as the latter part of the third paragraph shows, can only be brought to bear if it makes these new assumptions.
Regulators are not interested in there being available ways of punishing, through material consequences, irrational corporate decisions. Regulators want to ensure that no individual suffers because of those decisions. YES, if the individual suffers, the corporation suffers. But, as you've acknowledged, this doesn't mean that the corporation will not make that decision. It, at best, means that they will ultimately suffer negative consequences. Regulation is designed to avoid the situation entirely. Further, from what we both agree to above about a corporation's best interest, this is not only in the interest of the consumer, but in the interest of the companies as well.
This latest commenter seems to suggest that we just need to focus on getting the *right kind of* regulations, rather than abandoning regulations entirely.
ReplyDeleteYes, but the initial post was only about government actions which, so to speak, subsume the monopoly in question. Clearly, we are all agreed that that is, at least generally, probably not the right kind of regulation.
ReplyDeleteNatural technological advances may eventually open up space for competitors in a market, but that doesn't mean the monopolist suddenly ceases to exist. What's to stop them from discovering the technology first and patenting it, using the excess profit built up to boost their R&D? What about simply buying out any competing companies at an enormous price as soon as they form? While this isn't usually feasible, having a near-total control of a market grants abilities beyond a normal firm.
ReplyDeleteThanks for your comment. My apologies for the delay in response.
DeleteIf a natural monopolist discovers new technology first, patents it, and uses excess profits to boost their R&D, I'm not sure where the problem is. That benefits me as a consumer and contributes to the progress of humanity as a whole. You are very right that it is possible a monopolist may figure out a way to remain a monopolist--there is nothing inherently wrong with that, assuming he isn't using the government to block new entrants or make it more difficult for them to enter the market. What is also true is that market forces will pressure him to remain competitive even without direct competition due to the threat of new entrants.