Can someone explain as briefly as possible, or point out some good articles on why America regulates monopolies. Is it some sort of Gov’t power trip? Or does the Gov’t just try to keep the market as competitive as possible to stay efficient?
If someone has a monopoly, they can charge whatever they feel like for the thing that they have a monopoly, and if it was something that you need, you’re forced to pay.
But with a monopoly in full-effect it cuts cost of production so that isn’t neccesarily true. More is produced for minimal costs, and therefore is most effective.
Would YOU trust human nature to keep the cost of a product to a fair minimum when someone has a monopoly? Remember that businesses don’t exist for the good of the consumer and to help our fellow citizens get by; they exist to make the owners and whoever else can get their fingers in the pie a shitload of money - the bigger the better. And if you don’t have any competition, the hell with customer service or competitive pricing.
A lot of relativley small companies have monopolies on many obscure products; go try and buy a nose tagging machine for fish, and you’ll pay about $10,000 for $40 worth of machine, and you’re really screwed if you need a new part for it. Not very much fun…
There are a couple of problems with monopolies:
One of the ways that prices are controlled in a free market system is competition. Companies that are in competition with each other will try to provide their goods/services at a lower cost than the competitor. This benefits the consumer, but it also benefits the company, since the company will have an incentive to find the most cost-efficient means of producing those goods/services. With a monopoly, there is no incentive to keep costs low in order to edge out the competition…there no competition, so the monopoly will be able to charge higher prices for their goods/services than they would have been able to in a competitive environment. There is also no incentive for the monopoly to keep production costs low…they know they since they have a lock on the market and can charge whatever they want for their goods/services, they won’t need to be as concerned about the costs of production.
Another thing monopolies can hurt is the quality of goods/services. Companies that produce better quality goods/services have a better chance of grabbing a larger share of the market, especially if those goods/services are at a lower price than the competition. If the monopoly knows that it has a lock on the market, they don’t have much of an incentive to produce the highest quality product possible. Example: as an audiologist, I’m quick to avoid ordering hearing aids from companies that have poor or mediocre quality control, and tend to favor manufacturers that produce a more reliable product. If there was a monopolistic producer of hearing aids, I would have no alternative in ordering hearing aids…I would simply have to order those hearing aids regardless of their quality or value. An unpleasant situation.
Cost of production is cut, but that doesn’t lead to lower prices for the end user, because the company, without anyone else threatening to undercut them, has no incentive to lower their prices.
To address the lower prices and production costs…
Anyone remember when Nike moved to Malaysia? Bush the first was touting how prices would come down because costs would. did they?
Should this not be in ‘Great Debates’?
I would guess that it was because Nike didn’t have a strong enough incentive to lower their prices. If your example was meant as an argument in favor of monopolies, I don’t see where you’re going with it.
Of course a monopoly tries to keep its production costs as low as possible - any firm does. Lower costs = more profit. But they aren’t going to pass on the savings to their customers because they have to reason to. They’ll charge whatever gets them the most profit. A monopoly firm can, in effect, cut back on the quantity of production to create an artificial shortage which keeps the price up. So people who buy from them will be paying too much, and people who would be willing to buy it for less than it costs to make will not get a chance to. Any introductory economics textbook should have a chapter on this, complete with (very helpful) diagrams.
Being bigger does not necessarily mean being more efficient. In any market, firms will tend to the most efficient size (in theory) because wrong-sized firms can’t compete. There are (relatively rare) cases when it is clearly more efficient to have only one firm in a business. For instance, it makes sense to have one integrated set of telephone wires and one highway system. In this case there is said to be a “technical monopoly” or “natural monopoly.” Usually the gov’t steps with regulation or complete control to keep inefficient arrangements from developing and to keep a monopoly company from charging too much.
Also, if you consider individuals’ utility to be measured by the largest amount they’re willing to pay for a good/service or the smallest amount they’re willing to accept for it, then a competitive market maximizes total utility. It’s hard to explain this clearly without diagrams, though. So I won’t even try.
I saw a special that claimed that prices indeed fell after Standard Oil became a monopoly and that the same happened with other monopolies. The program also told of a small company that refused to sell to Standard Oil. Rockefeller told them that they better sell or they would soon be out of business. Seemed to me that he could have been a real SOB and just let them go out of business.
I was thinking this an obvious economics question, but once again, my fellow Dopers have succeeded in making me probe more deeply. Thanks one and all.
The whole concept of monopoly is limited. Capitalism prefers competition, and prefers to stop anything that hinders competition. Right? Not really. There are many other forms of competition than just between businesses that produce the same product. If my company company was the only one in the world that produced TVs, I’d still have competition from book publishers, computer manufacturers, and let’s be real, organized crime supplying mind-altering drugs.
The idea of monopoly prevails because: a) it’s easy to conceptualize in freshman economic books, and b) it’s easier for government anti-trust suits to identify a company that controls all of some object they can give a name to, than it is to identify companies who are destroying their competion through unfair business practices, but who don’t happened to have completely achieved their goals.
The original question stands.
In the eyes of gov’t monolopy=bad (for political reasons) even when it’s good.
In reality it depends on the product. Products can have elastic or inelastic demand. Elastic demand means that the demand is in direct relation to the price (high price=low sales). If a monolopy has a product that has elastic demand there is really little problem.
The company has a reason to keep the price low (not as low as a competive market but the math shows that the selling price is not that much highter for a highly elastic product).
If the product has inelastic demand then people will buy regargless of price for one reason or another. Some examples are gas/oil electric, parking in NYC. toll bridges, taxes. Also I want to point out that a few companies working in collusion act as a monolopy (if they collectivly own the market). Except for taxes there might be some variation of usage with price but not all that much. You still have to drive to work, heat your home, park your car, drive over that bridge on your way to work and pay you taxes.
Microsoft is an interesting case as his product is not truly a monolopy as there is competition. MS has increases there market share by anticompetive practices however and that’s why the gov’t steped in. Also it basically cost MS nothing to produce an additional copy of windows/office/ect. so they have some incentive to keep their prices down. If they have low enough prices then most will follow every step of the upgrade path:
win3.1>3.11>95>95rc2>98>98se>me>xp. IF their prices are higher then people will skip some steps win3.1>95>98>xp. So in some ways they are competing w/ themselves.
Looking at the Microsoft thing, I would say the biggest thing a monopoly adversely affects is innovation and experimentation. The more players fiddling around with a technology in differing ways, the more likelihood of a breakthrough, or at least finding a better direction.
The only advantage of a monopoly in this regard is standardisation. But I would rather struggle a little with converting file types to be able to use my Mac than never have to worry about compatibility, and use windows.
Another issue is something like diamonds: where the price of a product is artificially ramped up far, far higher than its realistic value just because the product is sold by a monopoly cartel thing.
Here there is a state monopoly telecoms company. They set what prices they want, offer what services and support they want, and there is jack nothing anyone can do about it. Eg there is still no ADSL for Mac or Linux users, and no opportunity for any smaller niche ISP to enter the market to offer such a service.
One more example would be Australia’s domestic aviation industry. It was a “duopoly” for years - recently one carrier went bust, now it is basically a monopoly with Richard Branson’s Virgin Blue struggling to survive and expand and give people another option than Qantas and its sky-high fares.
As ** mmmiiikkkeee** points out:
Monopolies are regulated because unregulated monopolies lead to an inefficient allocation of resources, at least in theory.
Monopolies need not consider a supply curve, per se, since they are the sole producer of a particular good. Thus, monopolistic pricing is purely demand driven. Demand itself is structured such that a larger quantity of a good will be demanded when the price is low and less will be demanded when price is high. Note that a monopoly cannot simply charge whatever it wants for a good. Even though it need not consider how production from other producers will impact supply (since the monopoly is the sole producer), it still must make decisions based on consumer demand.
The monopoly attempts to maximize its profits by considering marginal revenue. As an example of marginal revenue, say that a demand curve is such that 10 units of a good will sell for $5, while 11 units of a good will sell for $4.75, based on demand. The marginal revenue gained in this case would be $2.25 by producing the 11th unit [ ($4.75 x 11) - ($5.00 x 10) ]. With downward-sloping demand (raising the price = fewer units demanded), marginal revenue will decline as more units are produced since producing more units of a good requires that the monopolist lower the price of all it’s produced units in order to sell them. At some point, the marginal revenue gained by producing an additional unit will be exactly offset by the marginal cost to produce the additional unit, and the producer will stop producing, as profit would then be maximized.
The problem with this situation is that it is inefficient when compared to a perfectly competitive market. In perfectly competitive markets, producers are price-takers; they do not set the price. Thus, the price they may charge for a good is fixed (it’s simply the going market price for that good). If a producer in a perfectly competitive market charges more than the market price, they lose all their customers. Charging less than the market price makes no sense, since they will simply lose money on each unit of the good sold. Thus, while the demand curve overall is still the same (higher price = lower amount of good demanded), the demand curve facing the producer is perfectly elastic. Since producers may only charge one price for their goods, marginal revenue is also fixed at the market price, and so producers will keep on producing until their combined supply meets the demand for the good at the market price. This usually occurs when the price/marginal utility equals the economic cost to produce the good, which is where the market price comes from in the first place.
Contrasting the perfectly competitive market case with the monopolistic case, the monopolistic market will see fewer units of a good produced and sold, and at a higher price. This results in market inefficiency called the deadweight loss.
Even though monopolies are inefficient, sometimes competitive markets aren’t feasible. knock knock alluded to situations where it would not be practical to have more than one producer in a market. Another possible situation may arise where the market is such that, due to economies of scale, it is only profitable for a single firm to produce a good; if more firms enter the market and compete, each firm will produce less, and costs may rise, making the venture unprofitable. And the list goes on.
It should also be noted that unregulated monopolies need not necessarily be inefficient. One way for monopolies to be market efficient is for them to exercise price discrimination; that is, to charge each consumer the maximum amount of money he/she is willing to pay for the good, based on each consumer’s individual demand. In this case, some units of the good would be sold at a higher cost while others would be sold at cheaper rate. Marginal revenue would once again exactly equal price and the monopolistic producer would continue to produce right up until the marginal revenue equaled the economic cost of producing the good, just as in the case of perfect competition. Overall, consumers would spend more money and producers would make higher profits, but the proper amount of the good, based on demand, would have been produced, eliminating the market inefficiency. Of course, price discrimination is usually illegal.
The bad thing about Monopolies, is that I’m always stuck being the stupid thimble or hat, & I never get to be the cool race car.
To put what istara said another way: if monopolizing were okay, you’d be using a computer with 4 megs of RAM running DOS 12.1.
The antitrust laws in America were written with the aim of serving the public good. When companies have to compete, innovate, struggle, lower prices, and produce superior products, the public benefits because 1) they get cheaper goods, 2) they get better goods, 3) they have a choice of goods. When a monopoly holds power, there is no innovation, prices tend to stagnate or rise to unreasonable levels, and quality does not improve.
I want to stress that it is not illegal to be a monopoly. It is illegal, however, to abuse monopoly power, or “to monopolize”. And once a company becomes a monopoly (as in the Microsoft case, where, contrary to k2dave’s statement, there was a legal ruling that Microsoft was a monopoly), an abuse of the monopoly power is almost inevitable.
Prices fell because Standard Oil undercut its competitors to drive them out of business. Because SO was a giant, it could afford to sell below-cost for as long as it took to drive out the competition. The same is true today with companies like Wal-Mart. When was the last time you saw an independent discount store in a town where there’s a Wal-Mart?
As for Rocekfeller being a nice guy and telling his competitor to sell out, it’s simply because he would rather avoid the costs involved in a battle. A few years ago, when Starbucks was moving in here, there were claims by several independent coffee shop owners that Starbucks had warned them to sell now or face the prospect of a well-supported Starbucks moving in across the street.
>> why America regulates monopolies.
More properly what america legislates is against certain practices which would result in a restriction of competition. I do not know that there is any legislation which makes it illegal to be a monopoly and some monopolies are mandated. Europe has similar legislation.
>> Is it some sort of Gov’t power trip?
There is nothing inherently good, bad, or inefficient about monopolies, competitive markets, oligopolies, and any host of different economic organization of private goods. All valuations are based on the context, underlying assumptions, and most importantly, the effect they create with respect to expectations.
Monopolies don’t have to broken up; indeed, there have been cases where, in fact, though a court found that a company was a monopoly they did not “trust bust” in any capacity.
Monopoly regulation is like regulation of anything else: there are ways to do things we’ll let you get away with, and there are ways to do things that we won’t. Anti-trust laws are simply a catch for one more form of damaging behavior.
(my beef about anti-trust laws lies in their apparent ambiguity; I am not the only person to have ever noticed this)