The Most Vicious Form of Monopoly
Case One
Imagine in your mind’s eye a firm that continuously pumps out ever improving products and or services. Imagine further that this firm is able systematically to improve its product line with differentiation (adding new features or services to current products making them even more attractive to consumers). Even more stunning, through efficiency, hard work, and sheer brilliance, this firm continuously provides its products and services at ever-lower prices to its consumers. Imagine also that no government agency is forcing anyone to purchase this product, and no license or special grant of privilege has been imposed by the government rendering consumers with no other economic options. Rather, the superiority of the products this firm creates is so widely recognized that almost every industry uses them – to the exclusion of virtually all other would-be competitors. Suppose lastly, that the use of the products produced by this firm has markedly and measurably raised living standards, improved productivity and created wealth beyond imagination all around the world – in short, the existence of this firm and the products it has produced has resulted in a net increase in wealth and standard of living.
If you have a world view that is success oriented and grounded in reality, private property rights, intellectual property rights, free markets, individual freedom and liberty you would perceive such a capitalistic success story as something to be heartily applauded and regaled – it would be self-evident, no question about it, that this is an unadulterated success of capitalism. As a consumer, I would desire to buy more of what this firm produced unless someone else could do it better, for a price I was willing to pay. Or, if a competitor actually produced a functionally equivalent product (without violation of patent or copyright, of course) at a lower price, one might purchase the work of that competitor. Lastly, I could altogether concluded that I did not need these products anymore. Time actually would be working against this marvelous firm, as more time passed and they attracted economic profits competitors would find ways to chip away at their market share – it is axiomatic. However, it might take longer than some would expect but the forces of unfettered competition would clearly work in the favor of the competition.
Notwithstanding the a priori of success above, there are others who would not view such a firm as necessarily ‘good’, that to them such widespread success, regardless the obvious benefits and low cost to consumers, was problematic in and of itself - that it was "unfair" that anyone would be so successful. Some would even argue that the above firm, due to its widely successful product differentiation strategy, its ability to use scale economies to its competitive benefit, and the mere fact that such policy had thwarted virtually all competition created a "barrier to entry" into the market (a market, incidentally, that was created by the firm in the first place) and that this particular situation was reducing society’s “welfare.” Inexplicably, such Walt Disney ‘economists’ regard such behavior in the marketplace as a misallocation of scarce consumer resources simply by virtue of the fact that there are not enough choices of producers, given their time preferences - that because at some arbitrary time point there happens not to be perfect competition. Their view is strictly based on a relatively instantaneous measure of consumer options as a proxy for fairness and a definition of societal welfare. Consequently, they would characterize this firm guilty of monopoly and argue for state intervention.
Case Two
Imagine another industry that is also dominated by a single producer. In this industry all consumers are compelled by law to seek an outcome which this producer supplies – therefore, this producer faces a perfectly inelastic demand. Furthermore, the state specifies all the general parameters of both the mandated outcome and the means to achieving the outcome. Additionally, in order to satisfy this government-induced demand, this single producer is granted special rights (privileges) in both production and revenue generation. This special grant is such that, although other producers are allowed to participate in this market, the producer who was granted the special rights is rendered virtually immune from economic competition because its revenues are guaranteed by the state. If a competitor desires to enter the market he may do so, but he must do so fully aware that anyone who purchases his product (regardless of the quality or cost to the consumer) is forced by the state to also purchase the product of the special grantee – whether the special grantee's product is consumed or not, and regardless of the quality of the special grantee’s product. In short, a consumer in this scenario is prohibited by law from making an economic choice between 'competing' producers of similar products, while being compelled by law to make a “purchase”.
Thus, in this scenario, the notions of marginal revenue and marginal cost are rendered, particularly for the special grantee (but also for the general marketplace for the mandated outcome), virtually meaningless. There is no way to accurately calculate the marginal cost of a product when the state takes control of key factors of production, forces consumption, and purposefully restricts the inputs that would impel competing producers – it makes the whole idea of cost accounting and comparative financial analysis impossible. Consequently, there is no way to know how inefficient the special grantee is, or the degree to which resources are being misallocated in the marketplace.
Such a special grant of privilege to control a single market obviously reduces competition while causing serious misallocations of capital. Competition is reduced directly as the marginal costs of the consumers is coercively raised – which is the source of the total revenue received by the special grantee. This point is critical, because it is the marginal costs to the consumer in evaluating the idea of purchasing a competing product that becomes the issue, rather than the marginal cost of the producer in its attempts to capture market share - which, for the special grantee, is guaranteed. The higher the actual marginal cost to a consumer for purchasing a competing product, the less that product will be demanded and thus the higher the potential revenues will be for the special grantee.
Clearly, such an arrangement, or special grant, by any governmental entity would be viewed by individual consumers as destructive of consumer satisfaction relative to alternatives offered in the marketplace. Also, it clearly reduces (virtually eliminates) competition, and absolutely restricts consumer choice – therefore, such an arrangement clearly and unequivocally violates consumer (and producer) sovereignty as well as injuring the welfare of all consumers. Clearly, a misallocation of resources is self evident, pervasive and maximized by such government intervention into the marketplace. This then is clearly the most vicious and pure form of monopoly, and one would expect complete and total opposition from consumer advocates, concerned politicians and, especially, anti-monopoly crusaders such as former Presidential candidate Ralph Nader.
Conclusion
Believe it or not, these two scenarios are very real, and both occur here in the United States. The first case is, in fact, the experience of Microsoft Corporation. The second is the current state of affairs in public schooling in the State of Wisconsin (and elsewhere). The former resulted in direct benefits to society that are measurable, clear and tangible – and were characterized as agregious monopoly. In fact, the European Union recently sued Microsoft on such grounds. The results of the latter cannot be measured accurately, and may or may not be benefiting society (there really is no objective way to measure it due to the lack of proper accounting) because there is objectively nothing with which to compare – it becomes a leap of faith. It is without question, however, that if the special grant were removed from the public schooling, and the grantees monopoly status revoked, more producers would enter the market and thus measurement by comparison would be possible, misallocations of capital would be dramatically lessened, and consumer (and producer) sovereignty would be restored. It is ironic, to say the least, that the loudest anti-monopoly crusaders cry only about the former and are dead silent about the latter.
bildanielson @ www.ontheborderline.net
Imagine in your mind’s eye a firm that continuously pumps out ever improving products and or services. Imagine further that this firm is able systematically to improve its product line with differentiation (adding new features or services to current products making them even more attractive to consumers). Even more stunning, through efficiency, hard work, and sheer brilliance, this firm continuously provides its products and services at ever-lower prices to its consumers. Imagine also that no government agency is forcing anyone to purchase this product, and no license or special grant of privilege has been imposed by the government rendering consumers with no other economic options. Rather, the superiority of the products this firm creates is so widely recognized that almost every industry uses them – to the exclusion of virtually all other would-be competitors. Suppose lastly, that the use of the products produced by this firm has markedly and measurably raised living standards, improved productivity and created wealth beyond imagination all around the world – in short, the existence of this firm and the products it has produced has resulted in a net increase in wealth and standard of living.
If you have a world view that is success oriented and grounded in reality, private property rights, intellectual property rights, free markets, individual freedom and liberty you would perceive such a capitalistic success story as something to be heartily applauded and regaled – it would be self-evident, no question about it, that this is an unadulterated success of capitalism. As a consumer, I would desire to buy more of what this firm produced unless someone else could do it better, for a price I was willing to pay. Or, if a competitor actually produced a functionally equivalent product (without violation of patent or copyright, of course) at a lower price, one might purchase the work of that competitor. Lastly, I could altogether concluded that I did not need these products anymore. Time actually would be working against this marvelous firm, as more time passed and they attracted economic profits competitors would find ways to chip away at their market share – it is axiomatic. However, it might take longer than some would expect but the forces of unfettered competition would clearly work in the favor of the competition.
Notwithstanding the a priori of success above, there are others who would not view such a firm as necessarily ‘good’, that to them such widespread success, regardless the obvious benefits and low cost to consumers, was problematic in and of itself - that it was "unfair" that anyone would be so successful. Some would even argue that the above firm, due to its widely successful product differentiation strategy, its ability to use scale economies to its competitive benefit, and the mere fact that such policy had thwarted virtually all competition created a "barrier to entry" into the market (a market, incidentally, that was created by the firm in the first place) and that this particular situation was reducing society’s “welfare.” Inexplicably, such Walt Disney ‘economists’ regard such behavior in the marketplace as a misallocation of scarce consumer resources simply by virtue of the fact that there are not enough choices of producers, given their time preferences - that because at some arbitrary time point there happens not to be perfect competition. Their view is strictly based on a relatively instantaneous measure of consumer options as a proxy for fairness and a definition of societal welfare. Consequently, they would characterize this firm guilty of monopoly and argue for state intervention.
Case Two
Imagine another industry that is also dominated by a single producer. In this industry all consumers are compelled by law to seek an outcome which this producer supplies – therefore, this producer faces a perfectly inelastic demand. Furthermore, the state specifies all the general parameters of both the mandated outcome and the means to achieving the outcome. Additionally, in order to satisfy this government-induced demand, this single producer is granted special rights (privileges) in both production and revenue generation. This special grant is such that, although other producers are allowed to participate in this market, the producer who was granted the special rights is rendered virtually immune from economic competition because its revenues are guaranteed by the state. If a competitor desires to enter the market he may do so, but he must do so fully aware that anyone who purchases his product (regardless of the quality or cost to the consumer) is forced by the state to also purchase the product of the special grantee – whether the special grantee's product is consumed or not, and regardless of the quality of the special grantee’s product. In short, a consumer in this scenario is prohibited by law from making an economic choice between 'competing' producers of similar products, while being compelled by law to make a “purchase”.
Thus, in this scenario, the notions of marginal revenue and marginal cost are rendered, particularly for the special grantee (but also for the general marketplace for the mandated outcome), virtually meaningless. There is no way to accurately calculate the marginal cost of a product when the state takes control of key factors of production, forces consumption, and purposefully restricts the inputs that would impel competing producers – it makes the whole idea of cost accounting and comparative financial analysis impossible. Consequently, there is no way to know how inefficient the special grantee is, or the degree to which resources are being misallocated in the marketplace.
Such a special grant of privilege to control a single market obviously reduces competition while causing serious misallocations of capital. Competition is reduced directly as the marginal costs of the consumers is coercively raised – which is the source of the total revenue received by the special grantee. This point is critical, because it is the marginal costs to the consumer in evaluating the idea of purchasing a competing product that becomes the issue, rather than the marginal cost of the producer in its attempts to capture market share - which, for the special grantee, is guaranteed. The higher the actual marginal cost to a consumer for purchasing a competing product, the less that product will be demanded and thus the higher the potential revenues will be for the special grantee.
Clearly, such an arrangement, or special grant, by any governmental entity would be viewed by individual consumers as destructive of consumer satisfaction relative to alternatives offered in the marketplace. Also, it clearly reduces (virtually eliminates) competition, and absolutely restricts consumer choice – therefore, such an arrangement clearly and unequivocally violates consumer (and producer) sovereignty as well as injuring the welfare of all consumers. Clearly, a misallocation of resources is self evident, pervasive and maximized by such government intervention into the marketplace. This then is clearly the most vicious and pure form of monopoly, and one would expect complete and total opposition from consumer advocates, concerned politicians and, especially, anti-monopoly crusaders such as former Presidential candidate Ralph Nader.
Conclusion
Believe it or not, these two scenarios are very real, and both occur here in the United States. The first case is, in fact, the experience of Microsoft Corporation. The second is the current state of affairs in public schooling in the State of Wisconsin (and elsewhere). The former resulted in direct benefits to society that are measurable, clear and tangible – and were characterized as agregious monopoly. In fact, the European Union recently sued Microsoft on such grounds. The results of the latter cannot be measured accurately, and may or may not be benefiting society (there really is no objective way to measure it due to the lack of proper accounting) because there is objectively nothing with which to compare – it becomes a leap of faith. It is without question, however, that if the special grant were removed from the public schooling, and the grantees monopoly status revoked, more producers would enter the market and thus measurement by comparison would be possible, misallocations of capital would be dramatically lessened, and consumer (and producer) sovereignty would be restored. It is ironic, to say the least, that the loudest anti-monopoly crusaders cry only about the former and are dead silent about the latter.
bildanielson @ www.ontheborderline.net
posted by Anonymous @ 9:59 PM
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