We’ve been having some profitable discussion on the threat of monopoly in a recent post. In this post, I want to clarify a few things, and perhaps add some additional thoughts.
We have established that is impossible to distinguish “competitive prices” from “monopoly prices” because we only observe the market price. The “competitive price” is essentially the product of an economic model that exists on paper. The market price is what exists in the physical marketplace. In the specific case of predatory pricing, it is impossible to objectively determine the “motive” behind one entrepreneur lowering his prices. Is he liquidating? Has demand dropped off? Is he a start-up trying to gain some market-share?
With these things in mind, it is unwise to construct a set of policies which seeks to steer firms towards an ideal which cannot objectively exist—namely perfect competition with its model of the “competitive price.” Furthermore, these policies violate property rights by forcing entrepreneurs to configure their assets and factors of production in a particular way.
Additionally, the issue of a monopolist owner of a factor was raised. What if one company is the single owner of a factor of production? Will he be able to reap exorbitant, monopolist profits indefinitely? The only empirically verifiable example of this situation was ALCOA who owned all the known bauxite mines in the world. However, while prices for aluminum may indeed increase, so will the cost-structure for ALCOA. Outside investors will bid the price of ALCOA’s assets (the land from which bauxite is mined) higher and higher. They will do this because the future revenue stream from selling aluminum has increased. Even if this process does not appear on ALCOA’s “books,” the economic reality is true nonetheless. The foregone opportunity to ALCOA of not selling its valuable land is an (opportunity) cost to the firm. This process will continue until the uniform rate of return which prevails throughout the economy also prevails for ALCOA.
Lastly, the issue of our banking monopoly/cartel was discussed. This is a different issue altogether because this is a perfect example of a political monopoly, rather than a market monopoly. Specifically, the monopoly on fractional reserve was mentioned. Fractional reserve banking, should indeed be prohibited, but not because it is monopoly per se. Rather, fractional reserve is essentially contract fraud and theft because the system offers multiple titles to one piece of property. A law against fractional reserve would protect property rights, while modern-day antitrust laws actually violate them.
As always, it is important to distinguish “monopolies” that arise from satisfying consumer preferences more successfully than other competitors—perhaps through more efficient means of production—from monopolies which only exist because they are given a special, legal grant from the state. Only the latter kind is indisputably harmful.