ARE MONOPOLIES POSSIBLE?
by Keith Sketchley
This article will step through potential mechanisms, considering possible actions by a monopoly-oriented business, customers, potential competitors, and society. As well, I'll cover some questions that usually arise from the discussion, and provide some examples and references.
The fundamental element in dictionary definitions of monopoly is expressed as "control of the market".
Where a company has a very large proportion of a "market" I'll consider whether there is a mechanism by which the company could use that popularity to gain "control" of the market.
The inferences of "control" that people understandably fear is being forced to do something, or someone else getting unfair advantage.
Fundamental factors where money must be invested trying to
get control are:
- a rate of return is expected by the owner of the money (interest on a bank loan, dividends to investors, etc.).
- preservation of the value of the investment (the "principle").
CREATING A MONOPOLY
Suppose someone wanted to control a market. What would he do?
Perhaps he could purchase most of the companies providing a particular type of product or service.
Then he would raise prices enough to get a high rate of return on the funds used to purchase the companies. That is the scenario you fear.
So what would you do in the face of his high prices?
You'd reduce your consumption, to reduce costs, by conserving and being more efficient.
You'd use your ingenuity, working hard to find ways of running your business that used less of his product. (You'd start with the quick and easy ways - including substituting where his product does not provide substantial advantages - then with time and experience address the tougher cases.)
You would search for alternatives, turning over stones, looking in other countries, considering other methods & technologies.
You would encourage other people to produce the product or invent an alternative, to give you options. At his high prices, they would have a good margin to help them get established and undercut his prices. You say they could just charge the same high price? But perhaps too few people would buy from them, since they already know his product. So the new competitor would have to charge less or provide better product or service. (Although you'd tend to favor them because you feel he is wronging you.) They would get your business.
He would see his sales decline substantially, or he would have to lower his prices to maintain volume. Either way, his expected large profits would not be realized. He'd have a problem paying loans or satisfying his investors or keeping his own funds from draining away.
But wouldn't lowering his price drive the new company out of business so he could raise his prices again? If you think so, please go back a few paragraphs, read why that didn't work the first time, and answer the question "how will he ever recoup his losses, if people are free to enter the market or find alternatives?". (And if he drastically lowers his prices he will create even more opposition to high prices because people will be accustomed to even lower prices.)
Well, maybe he could insist that customers take other products in order to get the one they want. But that sounds like a price increase if they don't really want the other products or if his version of those products offers less value than competitive ones. Unless he discounts the bundle of products, in which case he won't get the extra profit.
Or, maybe he could demand an exclusive supplier relationship. But that is like bundling. Unless he gives a discount incentive - oops, see above.
Well, suppose he started out by reducing his prices so low that competitors went out of business? But if entry to the market is not restricted, and your use of products is not restricted, how can he ever recoup his losses?
Or he substantially reduces the price of one product, depending on profits from another product. Then he must keep the price of the other product higher than he otherwise would - creating more incentive for competition to or substitution of that product.
Whatever he tries, he will learn the hard way that statistical definitions of markets are misleadingly narrow. He'll be surprised at where the competition comes from. Some of his best employees will become the competition, as they will be fed up with his lack of integrity and progress. He'll be surprised at your ingenuity in conserving and substituting.
But suppose he gets so frustrated because his grand scheme isn't working that he finds some very shady types and pays them to threaten you with physical harm if you don't buy more of his product. Or he finds other very shady types and pays them to damage the new competitor's facilities or delivery trucks.
What? You called the police? You say there are laws and police and courts whose job is to protect you against attempts to physically force you to do something? Against damaging someone else's property, or body? That he would be taken into custody? That he could lose his business to pay damages to you? Amazing - we must be in a country that protects individual rights, not in an essentially lawless country like Russia or so many of the African countries.
But let us suppose the worst happened without violence from him. You were so unwisely dependent on his product, and so unable to find alternative products or actions, that you went out of business. Then he'd make no more sales to you, he'd receive no more money from you. So where is his large profit in that case? (In other words, he depends on having customers - so why would he want to force you out of business?)
So - clearly he cannot create a monopoly to get more money. Unless he finds a legal way to force people..........
Now let's deal with monopolies that are enabled by government force.
For example, suppose you wanted to start a business providing television programming to subscribers, using a central antenna system so they don't have to erect inadequate antennas. You work to produce the service, your customers are pleased, and you have income.
But you are doing something that government has said requires their permission. They will only give permission to one company in any geographic area, and have already given it to someone else. So you will be charged with an offense under the law, and when the court rules against you you will be ordered to stop. When you proceed anyway, you may be fined. When you refuse to pay, your bank account will be seized and/or you will be taken into custody by police and put in jail.
The one company with government permission has a monopoly. It has control of the market, by virtue of its access to government force to exclude competitors. It used that force against you.
Government power. Hmm - perhaps your monopoly minded supplier could lobby government to pass some law that would limit the competition. He could spin a story of how important it is to stick to established ways of doing things to protect public safety. He could sing a song of jobs lost if he went broke - thus getting a subsidy or loans (so he could lower his price without reducing his profit), or restrictions on imports. (Though the traditional North American auto companies learned the hard way that doesn't work in the long term.)
If a new competitor is a large company, he can invoke anti-trust ideas of monopoly. He could prey on fears of exploitation and get the courts to limit the service content his competitor could offer at a price - as German merchants tried to do to American mail order firms once they became successful in Germany.
If he can convince the politicians to undertake anti-trust action against his competitors, they'll be harassed for years - maybe split up, limited in what they can offer to customers or having their product configuration frozen, forced to reveal their knowledge of how to do business in better ways, forced to not allow employees to transfer between divisions, forced to reveal their design details, or forced to distribute his product at no charge. Wow!
Once the bureaucrats are after his competitors, almost anything they do can be called anti-competitive. Doesn't matter whether a competitor raises prices or lowers them - either can be claimed to be wrong. The justice maxim "innocent until proven guilty" no longer applies, only the "potential" to "monopolize". (Doesn't that sound like racism, sexism, or class discrimination?)
In other words, he could get government to do the dirty work for him, using their force to restrain you and people who might help you by competing against him. Perversely, he is using the anti-trust laws to reduce competition. He hopes that government will create an exclusionary monopoly - using force to keep a single company out of a market.
(He knows that outright bribing of government people is probably too risky, unlike in the days of attacks on J. J. Hill's Great Northern railway when competitors bribed legislators to pass laws hampering the GN. But he might create "good feelings" toward him by contributing generously to campaign funds or favorite causes of legislators.)
Is it even possible for one company to benignly have most of a market?
There have been a number of companies who appeared to be gaining a major share of the market, but subsequently failed. They failed for typical reasons including complacency, a belief that they did not have to try hard to provide value to customers, and an ignorant outlook that blinded them to the many ways that new competition can arise and succeed (including niche needs and new technology). One business professor claims that no US companies have had most of a market for more than 15 years.
But suppose someone did benignly have most of a market. Would it matter? If they aren't getting it by controlling other people, which we have shown cannot occur without physical force, how do they get it? By producing better for less, of course. By providing value for customers. Is that wrong? (So typical anti-trust action assumes guilt in advance.)
Still, some people will say "what about those poor businesses that weren't as good?"
I must dispense with the idea that unsuccessful competitors are owed something.
The market is between suppliers and customers, trading values. The customers first produced something of value to trade for the offered product. In other words, the money to purchase a company's product comes from customers - not from competitors.
(Normally in our society money is used as an efficient medium of exchange, but gold or food or lumber can be traded. The customer earned that money somehow, perhaps in wages or perhaps in business income, in any case by producing a product or service.)
So what happens when a competitor is not successful? Basically, that competitor has not offered the value to the customer that someone else has. The customer has chosen to deal with another company.
Shouldn't society "foster" competition? Sure, by leaving people alone to try, to produce - unless they initiate use of physical force.
To support the unsuccessful by force is to attack the good and pick the pockets of customers.
A "RIGHT" TO A PRODUCT
Often the idea that people have a right to be able to purchase a product is implicit in the argument for government intervention in the market place. This article will take for granted that no one has a right to anyone else's productive effort or inventions. In addition to noting the moral right to one's own life, I ask "what was the situation before someone worked to produce the invention or product?". In other words, things don't just already exist in the marketplace - someone had to create them. A "right" to those things would be a right to someone else's effort - which is akin to slavery.
But don't we need a "level playing field"? Sure, for soccer.
Sports games are played to a rigid set of rules, which allow only refinement of technique not innovation. Those rules define the format of the sport, distinguishing soccer from baseball from basketball. But note that sports games do not define the talent or physical size of the opposing teams. They simply prohibit improper behavior such as holding or deliberately injuring another player - as a justice system in the real world prohibits use of physical force. Despite the rigid rules on format of the game, there is no prohibition against watching all bases, being very quick to run and throw, or subtly signaling your team mates. Note that in the real world, there is no restriction to just two established teams, no rigid limit on the activities as there is in sports games (e.g. throwing the ball is allowed in football but not in soccer). People are free to devise better combinations of products, actions, and ideas - free to partner with whom they want - to achieve the goal. (Which in sports games is getting the ball to the far end of the field - each type of game rigidly defines how to move the ball and even the design of ball, but in reality it is the goal that counts). The real world is not a game. It is life.
(It seems the "level playing field" idea that people apply to business comes from misunderstanding the purpose of the term in sports. If the game format is defined as a tilted field that one team must always play uphill on, or the rules do not permit one team to do what another team is allowed to, that would be bias enforced by the format of the game. Bias applied on a collective basis - to the members of one team. But even then there is no prohibition against one team winning all games by out- performing the other team. And keep in mind this is a game of narrow scope, a fixed-pie outcome, not the broad real world of alternatives and creating more for people. (Note that people urging anti-trust action want to discriminate between companies by forbidding one company to do what its competitors are allowed to do. So if we go with their game analogy to business, we can say that they want to tilt the playing field.)
"Share" is a widely used term, benign if it simply means "proportion of the sales in a market", to the extent that a "market" actually exists (note my points on new entrants and substitution at the margins).
But there is no "share" of points in sports leagues - the team that wins the most games gets the trophy (such as the "Stanley Cup").
Similarly in business, a company might have a huge proportion of a market, maintaining that success by continueing to improve performance for customers, or losing it when new entrants are fostered by the complacency of the established company. The small computer and software industry has that history.
And let's dispense with "war talk". War proceeds by destroying values using physical force, whereas business succeeds by providing more value to customers who freely trade their values for the company's product. War intends to have only one "winner" whereas a free market place has many - both suppliers and customers.
Let's also eliminate the animal behavior analogies. Humans are neither killer animals or helpless kittens. Humans create values - including products such as food, machines, and art. Humans trade those values, using "money" as a convenient medium of exchange. Humans can act in their own interests without violating the legitimate rights of others.
BUT WON'T EVIL WIN?
Why should that be so?
Are the majority of people inherently evil sinners itching to cheat, to harm other people? Are they driven by animal urges, wronged ancestors, capricious gods and manipulative devils, or "historical necessity"? Are they short-sighted, spineless fools? Are they animals who can be deceived, frightened or coerced into compliance?
Or are they positive, thinking, productive beings who will avoid those who try to cheat or steal? Are they people who believe in justice, who will act to support the good and thwart evil? (Don't people strongly prefer to deal with honest business people?)
Is there some vague "economic power" that will allow evil to overcome good people, regardless of honest hard work? If you think so please walk me through how it actually works, considering people's actions at each step.
And note in the earlier scenarios herein there is an insidious factor working against the schemer. His mind is on manipulating not on producing. He is training himself to look at artificial factors instead of customer values, blinding himself to reality. He is reducing his ability to see changes in markets or technologies, and react to them. Meanwhile you and his competitors are honing your minds, becoming even more capable of avoiding dealing with him and of outproducing him.
PS: While we're at it, lets demolish the "bigness wins" argument by making one simple point: tell me about the beginning of Amana, Honda, Toyota, Wal-Mart, Southwest Airlines, WordPerfect and Microsoft. (They all started small, in industries with large established competitors, sometimes in the face of government discouragement or worse.)
1. Note the tremendous effort put forth by aluminum companies to develop an economical quality beverage can. Their product is a marvel of technology, of economical quality, down to the smooth external finish being achieved in the drawing process without further polishing - the "label" is printed right on the can. They won the beverage can business previously supplied by steel producers, by providing a better less costly product.
Several years ago a steel company-beverage company partnership successfully produced a competitive steel can. However the effort failed because the beverage company tried to give people less product by making the can somewhat smaller, and the government disallowed the steel can to keep recycling simple. In other words, the venture failed because of an attempt to give the customer less value and because of government interference.
2. Recall the formative days of airlines in the US, when aircraft capability was improving to meet functional needs. An established manufacturer committed the first few years of production of his attractive new model to one airline, refusing to provide any to another airline until all of the first airline's orders were filled. So the second airline went to a new small company, who produced the DC-1 which evolved into the airplane everyone remembers - the Douglas DC-3, followed by a long line of successful airliners from the same Douglas Aircraft Company. How many people remember the other one - the Boeing 247 (whose maker had limited success with airliners until it pioneered jet airliners)?
3. The case of Conagra
The company was charged with monopolistic practices when they raised prices after a period of over-supply in the market (caused in part by their building a new plant) had severely reduced prices. Prices rose but not nearly to previous levels. So this is a case of a company's actions leading to lower long term prices, yet their reward was to be attacked by anti-trust advocates.
4. In the ALCOA case prior to World War II the judge criticized ALCOA for anticipating demand for its products and increasing production capabity to ensure its customers could be supplied. In other words, ALCOA was criticized for trying to serve its customers promptly. But if a company were trying to monopolize, wouldn't they avoid such heavy investment because they could depend on monopoly power to charge higher prices?
(Some people claim ALCOA benefitted by getting cheap power from government-funded power generation projects. Otherwise, ALCOA just kept producing better materials for lower prices, and helped people learn to use the material - until the government forced ALCOA to sell its best plants to its competitors for one dollar each. Then the price of aluminum rose substantially.)
5. There are many examples of small retail stores thriving in the shadow of huge stores, from hardware to video rental. Typically they provide something the large store cannot - from unique products to advice - and sometimes are members of purchasing groups. (The big store may refer people to the small store - I know at least some WalMart stores do. Small mail order stores survive in markets with very large operations - for such reasons as specialization or great products. Likewise, small magazines are thriving in America, despite dire predictions - yet where are Life and Look, supposedly "dominant" magazines of their era?
6. An example of government restricting purchase comes from British Columbia. Years ago members of a union were feeling the economic pinch of a long strike against a pulp mill. Enterprising members obtained a truck, made a significant journey to a prime farm area, and bought a load of potatos from a farmer. Police pursued the truck for hours, because it was not legal to sell potatos directly (producers were required to go through a government-enabled marketing board). So people trying novel ways to feed their families were prevented from acting - by government force.
7. An example of geographic breadth of a market is the dairy in Smithers B.C. that shipped milk several hundred miles over mountainous roads to Dawson Creek B.C., in the face of an established dairy cooperative with much easier transportation from Alberta. Apparently some customers - such as a large gasoline retailer's convenience stores - chose the distant supplier. (They do need to manage ordering and delivery frequency more closely, to avoid having stale-dated inventory, and transportation cost may be higher - but that case illustrates possibilities in the face of a monopolist wannabe.)
8. One fiefdom wrote it's law granting a monopoly for TV programming distribution in a way that it only applied if the cables crossed a public road. (Presumably to allow large apartment complexes to keep their rooftop system, that once was common.) An enterprising outfit used emerging infrared signal transmission technology to cross the road to a large multi-building complex thus sell the service to residents there.
9. The story of Amana appliance company is instructive, as an example of starting small in the face of established compeition. A person in the small Iowa town of that name helped a friend fix the refrigeration equipment in his store.
He decided that he could do a better job of making refrigeration equipment than established companies.
Amana became a large manufacturer, pioneering microwave ovens along the way (licensing technology from Raytheon, the name Radarange became well known).
Up against Gates, IEEE Spectrum magazine May 2000
Discusses a number of strategic and attitude errors made by Netscape principles.
Ten Thousand Commandments - A story of the Antitrust Law, Harold Fleming, Ayer Co Pub, August 1972.
The Antitrust Laws of the U.S.A., A. D. Neale, Cambridge
University Press, 1960.
The author comments that "No board definition can really unlock the meaning of the statute." and " There is an element of pure underdoggery in the law....which has little to do with the economic control of monopoly."
The Doomsday Myth, Charles Maurice and Charles Smithson,
Hoover Institution Press, Stanford University.
Case histories of forecast shortages and attempts to monopolize supply. All overcome, even when government force was behind the attempts.
The Capitalist Manifesto, and Capitalism Unbound.
Books by Andrew Bernstein, a clear writer.
Capitalism, George Reisman, Ottawa, Illinois: Jameson Books, 1996. A broad and deep examination of economics and related political and moral issues.
Platonic Competition, George Reisman, The Jefferson School. A pamphlet criticizing the philosophical and theoretical foundations of anti-trust policy, especially the doctrine of "pure and perfect competition", digging deep in to the economic philosophy behind views of competition.
Dog Eat Dog Competition, Professor M. N. Buechner, Toronto
A speech covering the nature of competition and origins of the idea that free competition leads to monopolies. Mentions Alcoa.
The Ultimate Resource 2, Julian Simon
Includes a discussion of how free humans can surmount short term economic scarcity.
Capitalism The Unknown Ideal, Ayn Rand et al,
- chapter "America's Persecuted Minority: Big Business". Discusses economic versus political power (pages 46 & 47), and factors required for the existence of free competition.
- chapter "Antitrust" discusses the nature of a coercive monopoly and the definition of competition.
- chapter 4 "Common Fallacies About Capitalism", first section "Monopolies". Discusses the source of the idea that a free market leads to monopolies, and market entry factors.
The Myth of the Robber Barons, Burton Fulsom Jr.
History of some alleged monopolists from about 100 years ago.
Voice of Reason, Ayn Rand
The section "Antitrust: The Rule of Unreason" includes information on the Alcoa case, and on violation of intellectual property rights by giving unsuccessful competitors free use of patents.
Folksy articles by broadcaster Doc Searls, last seen at http://www.cluetrain.com/doc.html, addressing the use of "war" terminology and the Microsoft-Netscape matter. Look especially for Messing With Bill (Over-drive), Microsoft +Netscape, Make Money Not War (Metaphor), and The New Character of Positioning (toward the end).
The Antitrust Paradox, Robert Bork, 1978
Critiques theories of predatory pricing, concluding that it probably does not exist and if it did would be extremely difficult for courts to recognize.
John S. McGee, University of Washington, 1958 article in Journal of Law and Economics, which concludes there was no evidence Standard Oil was guilty of predatory pricing.
Fortune magazine, September 28, 1998, interview with Peter Drucker in which he comments on the feasibility of monopolies.
Cardiac Comeback, Forbes magazine, April 30, 2001
Describes how a company that introduced a revolutionary product lost most of the market in just two years. Johnson & Johnson angered doctors with high prices, ignored demands for improvement, and incorrectly assumed its patents would stall rivals. (The product is a "coronary stent" which prevents collapse of coronary arteries. One competitor introduced a better design which won 75% of the market in just 45 days.)
Why Businessmen Should be Honest, the Argument from
Rational Egoism, Edwin Locke and Jaana Woiceshyn, in
September 1995 Journal of Organizational Behavior, John
Wiley & Sons Ltd. Reprinted in book Why Businessmen Need
To be followed by Jaana's book How to be Profitable and Moral, due out in February 2012.
Father, Son & Co: My Life at IBM and Beyond, Thomas Watson
Includes comment on the extreme difficulty of running the business under the thumb of the government regulators, and the very high cost of paperwork to satisfy the government. At IBM, employees were restricted by anti-trust considerations from transferring between divisions. So if someone's spouse wanted to move to another city, the IBM employee could not get a job with another IBM division in the new location unless they gave up their longevity credit.
The Seven Habits of Highly Effective People, Steven Covey
Sections on the effectiveness of win-win dealing, and the failure of manipulation in the long-term.
Boeing in Peace & War, E.E.Bauer, 2nd Edition 1991, TABA
Publishing Enumclaw WA (ISBN 1-879242-06-0).
1. Indicates that Boeing was part of a vertically integrated company with high market share at the time of the 247 airplane. United Airlines, Pratt&Whitney, Hamilton Standard, Boeing, and others were part of United Aircraft and Transport Corporation. Despite that, Douglas beat Boeing then and later, becoming the dominant supplier of airliners until Boeing's bold introduction of swept wing jets led to the 707. However, in 1934 the government forced breakup of the company, and the visionary hard-working pioneer founder Bill Boeing sold out of the business in disgust.
2. Indicates that Martin and Sikorsky expected favorable terms from PanAm due to past business, so Boeing won their order for a larger flying boat.
3. Quotes customers regarding the trustworthiness of Boeing people, at the end of a decade that was tough for Boeing though it continued as the predominant supplier of large commercial airplanes. (My experience in a customer airline in the 1970s and 80s supports that. In contrast, my experience with Douglas sales people was negative - which company is still in business?)
UnderDog Marketing, Edmund Lawler, 1995 MasterMedia Lt.,
Chronicles many cases of startups and established businesses succeeding in the face of established competition or new competition from large businesses.
Ludwig von Mises makes the point that in using force to prevent monopolies government is itself the monopolist. (In his book Planned Chaos.)
Calumet K, Samuel Merwin & Henry Kitchell Webster
1901 (re-printed with an introduction by Ayn Rand).
An inspiring novel about building a large grain elevator, against attempts to monopolize trade by limiting farmers' access to market. It illustrates how competent people might succeed in the face of large opposition.
Viable Values, by Tara Smith,
Discusses various theories on why one should be moral.
Some Fundamental Insights Into the Benevolent Nature of
Capitalism by George Reisman,
available at http://www.capitalism.net or on the web site or publication lists of the Ludwig von Mises Institute (to whom it was presented on October 19, 2002).
Section 11 covers monopoly, and some other sections provide relevant information.
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