kunilou if I hadn’t have watched that special I would agree entirely, but the point wasn’t that Standard dropped the prices to drive out competition, but that prices fell slightly after they’d accomplished their goal.
I’m not sure this fits in here, but to me it does. Our government creates a type of monopoly when it supports products such as rice, sugar and peanuts. It doesn’t take a rocket scientist to figure out that we cannot grow these products cheaper than third world countries. In effect we are all being taxed so that the domestic farmers of these products can get a higher price for their goods, while foreign producers are barred from our market. I have seen posts talking about the use of “slave” labor in harvesting at least the sugar cane in Florida. We send aid to third world countries that would be better off if we furnished them with a market for items they can produce. Why the hell do we put up with this type of state controlled monopoly?
Monopolies are “bad” in that they allow the monopolizing company to do whatever they want, without fear of competitors stealing their business if they screw up. If a monopoly uses its power benignly, then everyone can benefit.
On the other hand, human nature being what it is, most monopolies end up abusing their power at the expense of consumers. Just look at the price of Microsoft Office as an example – people have to pay through the nose for it because Bill Gates knows there’s no viable alternative for you to use instead.
At the time AT&T was broken up, there was much hue and cry about pointless and destructive government meddling. But now that we have widespread mobile-phone use and calling plans that offer per-minute rates a fraction of what they used to be, who’s complaining? Does anybody seriously believe that the telecommunications revolution would have happened if we were still under Ma Bell’s beneficent thumb?
The only problem, perhaps, is that we have an overkill of competition, and a confusing marketplace. Plus the fact that despite the multitude of “10-10-xxx” offers, the fact is that the majority of them are run by the same three or four companies.
But I don’t know any telecommunications observers who seriously argue, with almost twenty years of hindsight, that the breakup of the AT&T monopoly was anything but a net positive.
Perhaps so, Cervaise, but in some respects a monopoly can grow and provide in a manner that competition wouldn’t otherwise allow. Though the breakup of AT&T might have led to a good thing, can we then say that they should have never been there in the first place? (you yourself note other points I would mention)
Allowing monopolies to exist and then busting them can be more beneficial than either extreme. Then again, IBM used to have a virtual monopoly in the 80’s. Ain’t the case now, and no one had to bust them for anything (though the government did perform several investigations into suspicious of anti-competitive behavior, just to be safe).
Monopolies cannot do “whatever they want.” They must obey the demand they face for their goods, just like everyone else. True, monopolies need not fear that they will lose business to other producers, thereby allowing them to set a price such as to generate higher profits relative to the competitive market case. However, they still must contend with the fact that consumers may simply not purchase their goods at all, lowering demand and thus lowering profits.
As for your Microsoft Office example, Microsoft is “abusing” their monopolistic power in the sense that the price for the software is higher than what would be expected were such an application produced in a perfectly competitive market (assuming this comparison even has meaning; would a situation ever arise where many producers all produce essentially the same word processing application?). However, demand is demand, and apparently there are people out there willing to pay the “inflated” price for the software, since Microsoft is still in business. Microsoft Office is worth $500 (or whatever) to someone, $400 to someone else, and this wouldn’t change whether the actual price of the good was $1000 or $100. Economically speaking, there’s nothing wrong about monopolistic pricing. It’s merely an inefficient allocation, since, if the price were lower, more units would be sold and Microsoft would still make a profit (though their profit would be lower overall). And again, it’s only inefficient relative to a competitive market case, which may or may not even have real meaning in this particular example. Whether it’s socially fair or just for Microsoft to charge higher prices is a completely different matter (and more of a GD topic).
Monopolies do have competition in that if they change too much they could incite others to form a rival company to undersell them.
What bothers me most about the government “busting up” monopolies is that government creates and/or protects so many monopolies- power companies, cable, garbage, taxi services, post office, schools.
A monopoly will conduit itself reasonably well if they do not have a political machine to do their dirty work.
As for Microsoft having a monopoly, just because someone doesn’t want to use another company’s product doesn’t make the first company a monopoly.
There is not one big sugar plantation. There is not one rice plantation. There is not one peanut plantation. Instead, there are different farms in each industry (rice, sugar, peanuts) which are suppliers of a good (again rice, sugar, and peanuts). When you have more than one supplier in a particular industry, you don’t have a monopoly. Each of those farms compete with each other to gain customers/clients.
Another thing is that agriculture is not a very “stable” industry (apologies if that is not the correct word). One year you may have a great harvest for sugar, and the next year 3 hurricanes pass by and destroy it all. What the government does is try to stabilize that market by giving subsidies and buying excess crop, so that the market price remains at more or less a constant price (or at least don’t change as much as it would otherwise do). See, if supply is too short, quantities of the good decrease (duh!) and prices for the remaining quantities increase (not good for the consumer). If there is too much supply, quantities increase (duh!) and prices fall (not necessarily good for the producers).
Whether or not to let foreign producers sell their goods here is another thing. I think many countries have trade agreements and tariffs and quotas on goods to protect what they produce. It may seem good for the government that the economy of the country will be better off if the goods produced in the country are protected and can have a larger market share than imported products. Not to say trade is bad, it is not and it is beneficial when one country produces more of one good than of another. If country A produces more oranges and country B more apples, country B will export their apples to country A and import their oranges. Country A will import country B’s apples and export their own oranges.
[All this written by a microeconomics student. Please, if a professor is around that may correct me, he/she is welcome to do so.]
Foist, exogenous changes in the market, were there any? Economic theory’s observations in re monopolies (quite well supported empirically) are relative to the same conditions in a fully competitive market. It is a static analysis. Prices may fall under a monopoly if exogenous changes such as demand level, cost of production/distribution etc. fall. Theory says, and this is well supported, that it will not be as much as in a competitive market.
Secundo: what time period and general price changes are we talking about. Often a source of confusion.
This is all very interesting, but I want to add my 2c. I do not accept the claim that monopoly power always results in lowest cost. My daughter worked for a small publisher (8 employees when she started, 12 at the end) that had found a profitable niche. Then it was bought by a major publisher and immeditately started to lose money. This was because of the five layers of administration a share of whose cost was now allocated to them. Also, everything took longer since it had to be approved by those five layers of administration. Now you may say that there are many publishers, but that is the wrong way to look at it, since you rarely want to buy a book, but you want to buy the book you want to buy and only one publisher publishes it (unless it was written before Mickey Mouse was created, in which case it might be out of copyright).
IBM is a case in point. They essentially had a monopoly. I don’t want to get into the question as to whether they created it illegally, since it doesn’t matter for the point I wanted to make. Which is that over the years they had grown so inefficient that when they were blindsided by microcomputers, they proved utterly incapable of competing with the likes of Compaq and Dell. Compaq went the way of all too successful companies that lost their focus and my recent experience with Dell tells me that the same thing is going to happen to them. So what happens to monopolies is that they grow fat and lazy.
The worst monopoly is the government monopoly since they can pass laws to protect themselves. The PTTs in most European countries is a case in point. When I spent a year in Switzerland it cost two or three times as much to call North America as the call in the other direction. The same when I was in Japan just a few years ago, only the disparity was more like a factor of 5 or 10. Much as I hated Bell, they were better than govt monopolies. It was even better when they were broken up, although they seem to be coming togther again.
The latest versions of MS Office are priced out of sight. And I can no longer buy a copy and install on both my wife’s and my computer. So I will not buy it at all and hope my wife’s clients don’t demand she use it.
Imagine someone owns all of the keyboard producing companies in the world. You need to type. Will you pay $300 for a keyboard? Open your wallet, that’s what they’ll be charging.
American anti-trust law is not to destroy, or inhibit the creation of, monopolies. Monopolies are not against the law. If a company can devise a workable business that no one else wants to compete for, more power to 'em.
The laws of economics say, however, the odds are very good that if one company is making money doing something,then other companies will eventually want in on the action. We (Americans) generally consider this a good thing, as competition for the customers’ dollars leads to greater efficiencies and lower prices.
Fortunately (or unfortunately,depending on your view)we also believe in fair play,and this is where the anti-trust laws come into effect. Monopolies generally have a great number of advantages over the newcomers - more customers, established products,greater economies-of-scale, bigger warchests,etc. The laws are very clear that the big boy on the block cannot use these advantages to unfairly stifle competition. It’s true that large market-share holders are not allowed to do some of the things that smaller companies are allowed to do (or that even they were allowed to do when they were smaller), but that is the social cost very successful companies have to pay to keep the playing field as level as possible.
Theoretically,at least, this benefits the consumer because innovation is not choked off. Microsoft is a perfect modern example of a monopolist wielding their power in an unfair and competition-stifling manner. (And they were not convicted for being a monopoly-although they were judged to be a monopoly- but for unfair trade practices.)