Sun, 09 Nov 2003

Monopoly, Competition, and Antitrust

I've touched on monopolies quite a number of times before (licensure-is-censure, patents-form-monopolies, price-cost-value, the-non-problem-of-public-goods, tragicomedy, unions-are-for-the-unions, and where-is-the-freedom. ) It's interesting that monopolies come up so much, because they aren't the serious problem that so many people make them out to be.

Monopolies

A monopoly isn't necessarily a bad thing. A monopoly might be the result of one efficient firm putting all other firms out of business, because they were all inefficient and wasteful. That's a good thing, without question. The chief problem of a monopoly is when it can charge monopoly prices. A monopoly price is when the monopoly deliberately restricts its production because it sees that it can make more profit by selling less and charging even more.

Even so, this isn't necessarily bad. Consider that I can charge monopoly prices for my time, if it makes sense. Nobody else can sell my time. Similarly for my software. If I choose to sell my software, I can charge monopoly prices for it, because nobody else can sell software exactly like it.

So let's be clear: it's not just the existance of a monopoly; it's not just its ability to charge monopoly prices; it's actually how high those monopoly prices can be. That is affected more than anything else by the ability for other firms to enter the monopoly's market and compete. Consider the case where a monopoly exists in a market which is easily entered. Why is there such a monopoly? Why wouldn't someone enter the market? Simply enough, because there might not be any profit in it. The existing monopoly might not be charging monopoly prices. If it isn't, and it's an efficient firm, there might be no room for another entrant into the marketplace.

To sum up, monopolies are a problem only because of monopoly prices, only because of excessive monopoly prices. They arise only because it's hard to enter the market.

Set that thought aside.

Competition

Now I want to talk about competition. When two companies compete with each other, they're offering products that can substitute for each other. Clearly, unless two products are absolutely identical, the method of delivery is identical, and the reputations of the companies are identical, the companies are not perfectly competing. Given that laundry list, it's safe to say that in the real world, there is no such thing as perfect competition. Any two companies are always offering different products. so whether these products compete is a judgement call rather than an exact comparison. There's no bright line: on this side there is competition; on that side not. For example, within the broad market category of "Audio Entertainment", records, tapes, CDs, and live concerts compete with each other. They're not identical, but you can find the same song by the same artist in each media.

Similarly, you can have products which are wildly different, but all of which substitute for each other. For example, Black and Decker has created a electric jar opener. It competes with the metal wedge jar opener you screw to the underside of a kitchen cabinet, with the little bit of rubber sheet that helps your hands get a grip, and of course your bare hands. All of these will open jars; they are all vastly different.

You can go beyond that level of competition to a higher level of competition. You can buy food in cans, instead. Or dried in a box, or fresh, or go eat in a restaurant. The point here is that there are many ways to get at preserved food; some of them more competitive than others.

Set that thought aside. We'll combine these thoughts in a moment.

Antitrust

Now I want to talk about antitrust laws. They exist to solve a problem. The problem is that monopolies are the inevitable result of competition and consolidation (one firm buying another, or two firms merging), AND that monopolies are always bad. Antitrust laws exist to solve a problem which is quite rare. That means that antitrust laws create a problem.

Antitrust laws have the effect of randomly applying the brakes on a car regardless of whether there is something to stop for or not.

From the monopoly section, recall that monopolies aren't always bad. And yet, if you look at the cases where antitrust law is invoked, you'll see that they make no distinction between a monopoly which can charge excessive monopoly prices, and a monopoly which cannot. They take no note of whether a market is easy or difficult to enter.

From the competition section, recall that competition is not an either/or thing. It is a gradation between products; no hard line exists. Therefore, to say that a market segment is monopolized, is to say that customers are unwilling to choose products from another market which substitute for it. It is also to say that nobody will enter the market once monopoly prices appear.

Perhaps, you might wish to argue, antitrust laws could be used in those market segments which are difficult to enter. No. Even then a public policy is served by allowing some monopoly prices to be charged. Consider that if a market segment is hard to enter, there must be a reason for it. Perhaps much concrete needs to be poured, or many people employed all at once. If the market is hard to enter, it must be that a large investment is needed. If you were planning a society in detail, and had full control over everything, you would reasonably be reluctant to create too many firms in this type of market segment. By allowing some monopoly prices, you give potential competitors an incentive to enter the market ... but not too much of one.

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