Monopoly
From Free Talk Live
A monopoly supplier is one which can unilaterally restrict supply and thus charge higher prices to consumers. They can appropriate some of the consumer surplus because of natural or artificial barriers to entry of competition. Firms which are said to have monopoly control either supply goods or services with no suitable or well-known substitutes, enjoy physical protection from competition due to terrain or environment, or have government-granted protection from other market entrants.
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Pure Monopoly
In contrast to a competitive firm, which is a price-taker, a theoretical pure monopoly would control the entire supply of a universally-required good or service and have the ability to arbitrarily set the resale price of the good or service. Such a monopoly could maximize profits by minimizing the cost and quality of the goods or services provided.
In practice, however, any attempt on the part of the monopolist to restrict supply or set prices higher than equilibrium increases incentives for would-be competitors to develop suitable substitutes or otherwise overcome the barriers to entry. The widely-held "evils" of complacency, price gouging, and deadweight loss actually directly hasten the demise of the monopoly power by increasing the value of competitive market entrants. The temporary market dislocation, however, often leads to calls for regulation of the monopoly thereby strengthening and prolonging the period of monopoly influence.
Because the necessary conditions which characterize a pure monopoly are unsustainable, there are few, if any, examples of a pure monopoly.
Natural Monopoly
A natural monopoly is defined by its size relative to the market for its goods or services. A firm of sufficient size compared to its market can wield de facto monopoly power due to a natural cost advantage. Such a firm can hold monopsony purchasing power of inputs and capital, particularly if the resources used in production are relatively scarce, and crowd out competitors. Natural monopolies may also enjoy a technological advantage by absorbing the human capital with the skills to produce the good or service. Lastly, a natural monopoly may be able to erect artificial legal barriers to entry by engaging smaller competitors in costly litigation.
As with pure monopolies, a natural monopoly that engages in monopolistic behavior increases the value of potential competitors and increases the likelihood of a natural breakup of its monopoly power. Because of this, many economists feel that natural monopolies are more advantageous to consumers than many small companies competing for limited customers.
Predatory pricing is often cited as an anti-competitive scheme that a natural monopolist may engage in. Historically, though, firms which have engaged in predatory pricing schemes have been greatly damaged by them; beyond the lost revenue from selling below the market price, consumers tend to horde the low-priced goods and competitors merely suspend production until the predatory scheme is discontinued. Most economists agree that there have been no examples of successful predatory pricing schemes, nor is there any danger of a successful scheme in the future.
Examples of natural monopolies include Standard Oil, Carnegie Steel, Microsoft, Wal*Mart, and the National Football League.
Coercive Monopolies
When governments protect a firm from competition by law, that firm becomes a coercive monopoly. Coercive monopolies may be operated by a government, government contractors, public-private partnerships, or purely private firms.
One reason for formation of a coercive monopoly is a recognition that, while desirable, production of a particular good or service is economically unfeasible due to capital, labor, or input costs, physical barriers, or a dearth of consumers. In this case, the producer is granted monopoly power using the rationale that poor quality and high price is preferable to no supply at all. Local phone companies, cable television service, and utility companies are all examples of this type of coercive monopoly.
Another reason coercive monopolies are formed is for the production of so-called public goods. Statists are convinced that production of these goods and services naturally fall to government because private entities cannot equitably charge all benefactors for the costs of production and would, therefore, not provide them, or that any profits earned by private firms which did produce them would represent an additional cost that a coercive monopoly can somehow avoid. Examples of these types of monopolies are law enforcement officers, fire protection, the United States Postal Service, and Government schools.
De facto coercive monopolies are also formed when politically-connected firms and organizations convince bureaucrats and legislators to enact laws and regulations which protect them from competition. These laws and regulations can take many forms. Some benefit specific firms such as tax breaks or development grants for locating factories in a certain area. Others, like Trade Licensing, broadly grant the power to regulate competitors to existing firms. Regardless of the intent, all such laws and regulations directly harm consumers by restricting competition and using tax revenues to fund and enforce them.
Free Talk Live Episodes About Monopolies
- FTL 2007-03-05
- Hour 2 - Postal Monopoly
- Hour 3 - Monopolies and computers, Apple and Microsoft
- FTL 2007-01-27
- Hour 2 - Monopolies, government, and the marketplace
- FTL 2006-03-27
- Hour 2 - Microsoft and Monopoly
- FTL 2006-02-16
- Hour 3 - State Lottery Monopoly
