Tue, 10 May 2005

Monopolies and market power

Various people, David Isenberg among them, seem to think that a monopoly has market power. It uses that power to dominate its market. By dominating its market, it is able to restrict its output and raise prices, creating profit margins that are only accessible to monopolies.

That would seem to be obvious, wouldn't it? No, as I've written before. In a free market, you will sometimes have market conditions that allow a single firm to out-compete everyone else. Perhaps the firm is incredibly flexible, has some really smart employees, has a first-mover advantage, or was simply surrounded by morons. They have managed to put everyone else out of business. By the definition, they have a monopoly.

They have gotten their monopoly by being successful. We want to reward success, so we should not get in the way of monopoly formation. "But won't they create monopoly pricing?", you ask. Not necessarily. Perhaps they have achieved their monopoly by lowering their prices so low that nobody else could compete. They are a monopoly, they are dominating the market, and they have the market power to exclude competitors. Yet none of these have any negative consequences. It is monopoly prices that are the negative consequences. I must mention here that nobody tries to do this anymore, because these days a monopoly is presumed to have the power to charge monopoly prices.

What matters more than anything else is whether a monopoly has the ability to restrict entrants. Clearly any business has the ability to *offer* monopoly pricing to their customers. If they can restrict competitors while offering monopoly pricing, then market intervention can be justified. In no other case does it make sense.

On the other hand, perhaps you have a market which is already being interfered with. Let's say that some infrastructure was created under one set of laws which benefits an existing company. Now the laws have been changed to make that infrastructure harder to create. This may have the side effect of restricting entry into the market, giving the company a monopoly and the ability to charge monopoly profits. In that case, either more or less market intervention is necessary. Either the company should have its prices set by a government board, or else the increased cost in building the new infrastructure should be subsidized, or the company should be forced to share the infrastructure with competitors.

I hope that you can see here that regulations do not lead to freedom. Regulations lead to more regulations. Perhaps a better solution is to go back and look at the reason the infrastructure was made more expensive. Maybe the problem wasn't as bad as to warrant all those regulations? Perhaps that law would be best repealed? That would require that legislators would have to admit to making mistakes. This would give their opponents ammunition in the next election cycle. That's probably why politicians only admit to mistakes when they plan to retire anyway. That's why I don't hold out too much hope for reform.

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