Monopoly- is it possible and is it good?

[ja-va.livejournal.com]

Since after my last post a huge discussion ensued regarding the possibility of monopolies and their danger or lack thereof, I thought it necessary to post a few more words on the subject.
Here is a quote from Microeconomics, Fifth edition, Perloff, the book currently used for intermediate level university courses in Microeconomics:

"Starting in the late 1980th, Mexican president Carlos Salinas sold hundreds of state-owned companies intact, creating private monopolies. Today, Mexico has more monopolies than most countries, including beer brewing, television, cement, and phone services. As a consequence of monopolization, Mexican shell out more money than consumers in wealthier nations for services such as electricity, phones, and bank fees.
As of 2007, the world's richest man is Carlos Slim. His fortune of $68 billion equals 6% of Mexico's gross national product. Over the last couple of years, Mr. Slim earned about $27 million a day, while a fifth of Mexicans made less than $2 a day.
Slim bought Mexico's telephone monopoly in a 1991 privatization. Slim's Telefonos de Mexico SA controls 92% of Mexico's fixed phone lines, and his America Movil SA provides 73% of Mexico's cell phone service and operates in more than a dozen Latin American countries. He runs the firm efficiently and keeps phone rates much higher than in virtually any developed country in the world. As a consequence, in a country where the minimum wage is about 50 cents an hour, only half the homes have phones and only 4% have broadband Internet access.
Slim is not the only rich monopolist in Mexico; there are ten other billionaires who profited from the sales of monopolies in the 1980s. New President Felipe Calderon has promised to stop monopolistic practices. According to news reports, Mr. Calderon has tried to cut a backdoor deal with Mr. Slim, the nations largest employer, to accept more competition. Good luck."

(Microeconomics, 5th ed, Jeffery M Perloff, Pearson Education 2009)
Pages 371-372)

For those interested in mathematical explanation how exactly monopoly creates dead weight loss and reduces welfare of the society here is a diagram:


MR- marginal revenue
MC- marginal cost
Monopoly reduces production, in this case, from 8 units to 6 units in order to increase its profit. Loss to the welfare is areas C and E, totaling $6

It illustrates rather clearly that while monopoly does take market demand into consideration, it still is inefficient and creates loss for the society.

(Same source as above, page 364)

Comments

[fizzyland.livejournal.com]

Here and I thought you were going to discuss the relative merits of Star Trek Monopoly or Harry Potter Monopoly.

/used to allow double hotels

[blue-mangos.livejournal.com]

Do these Monopolys still have the top hat? I like being the top hat.

[underlankers.livejournal.com]

I'd prefer being the monocle except that it's too cyclopean a preference.

[gunslnger.livejournal.com]

I'm always the horse.

[underlankers.livejournal.com]

Yes, the issues of monopolies and inbuilt social stratification are the iceberg the HMS Titanic of libertarianism runs around on.

[mikeyxw.livejournal.com]

I always thought libertarianism had far more severe problems... like libertarians for example.

[pastorlenny.livejournal.com]

Monopolies can serve a certain purpose for a certain period of time. See AT&T.

[ja-va.livejournal.com]

You are speaking about natural monopolies, yes. Sometimes it is not efficient to have competition- for example digging to pipelines to provide to alternative gas suppliers to every household is a waste. However, this is exactly why when natural monopolies exist they should be under very strict government supervision - somebody should make sure they do not decrease production in order to raise the price, and if watch their revenues and profit margins to make sure they do not abuse monopoly power.

AT&T had a natural monopoly at the time when it was expensive to have two landlines providing the service in the same area. I remember the days, - international phone calls were starting at about 3 dollars a minute (equivalent of about $6 today's money) :)

[mikeyxw.livejournal.com]

Having two pipelines to deliver gas is as inefficient as having two gas stations on opposite corners. Funny thing is, some consumers will benefit from having gas stations on opposite corners.

Typically "natural" monopolies are created by the government to spread services to areas where it would otherwise be uneconomical to provide them. Without a monopoly on phone service, someone in New York City might have their choice of several cheaper phone companies but someone in rural New York wouldn't have any.

Free market monopoly is a contradiction in terms.

[montecristo.livejournal.com]

Monopolies are only monopolies when there is some political means for restricting trade or denying free entry. Yes, given that the industries in the OP were previously wholly owned by government it does not surprise me that there are, right after privatization there are very few competitors to the recently privatized firms. Of course it is still necessary to examine the regulatory envirionment to ascertain the "quality" of the "privatization" as well. A fascism which privatizes "profit" while socializing losses is not a free market. Given free entry and freedom to trade, there are very few enterprises that can maintain a high-percentage dominance of their markets over time. Those that do succeed do so by giving people what they want at a price they are willing to pay.

See:
100 Years of Myths about Standard Oil (http://mises.org/daily/5274/100-Years-of-Myths-about-Standard-Oil) by Gary Galles
The Myth of Natural Monopoly (http://mises.org/daily/5266/The-Myth-of-Natural-Monopoly) by Thomas J. DiLorenzo

Re: Free market monopoly is a contradiction in terms.

[ja-va.livejournal.com]

Costs can prevent free entry, no need for "political means".
If a firm controls essential facility (scarce resource needed to survive), has superior technology or better organization of production (stemming from scale) its costs are lower and, as a result, it will drive competition off the market unless government intervenes.
Of course it is impossible to imagine government playing no part in creation of the monopoly whatsoever simply because there is always some kind of government and it always has some kind of knowledge of pending monopolization, hence it has no choice but either allow it or break it up.

Re: Free market monopoly is a contradiction in terms.

[rasilio.livejournal.com]

"Costs can prevent free entry, no need for "political means".
If a firm controls essential facility (scarce resource needed to survive), has superior technology or better organization of production (stemming from scale) its costs are lower and, as a result, it will drive competition off the market unless government intervenes."

Who cares if it drives competition off, that merely sets up the environment that might allow them to some day consider raising prices.

Still, I challenge you to find an instance of this exact scenario occurring in the real world and not some textbook

Re: Free market monopoly is a contradiction in terms.

[underlankers.livejournal.com]

Yes, I understand that in your view of the world the Gilded Age was not a free market despite it being very much one enforced by the bayonets of the US Army, if needs be.

Re: Free market monopoly is a contradiction in terms.

[rasilio.livejournal.com]

"free market

and

enforced by the bayonets of the US Army"

An oxymoron statement if ever there was one.

See a Free Market is defined as...

"an economic system that allows supply and demand to regulate prices, wages, etc, rather than government policy"

Meaning that the instant GOVERNMENT troops are called in it ceases being a free market so you have just proven what you claim Monte believes for him.

Re: Free market monopoly is a contradiction in terms.

[anfalicious.livejournal.com]

Given free entry and freedom to trade

How does an AnCap guarantee this without the violence of the state?

[policraticus.livejournal.com]

I will like to point out that Mexico's problem started by having state run monopolies in the first place. No state run monopolies, no cronies to sell the state run monopolies to.

[ja-va.livejournal.com]

It is inefficient not to have some kind of monopolies in some markets. State run monopolies are one choice, government controlled private monopolies - another. Leave it to the "market" and you will have what they have in Mexico.

[rasilio.livejournal.com]

Of course monopolies are possible no one questioned that.

What was said was that monopolies can only exist when granted monopoly status by government (either explicit or defacto).

In a free market monopolies might just barely be able to form however they can exist only so long as they do not try to use their monopoly status to restrict production and drive up price beyond the free market equilibrium level.

My challenge still stands. Name one instance in the real world where a monopoly has formed without government imposed protections from competition and has actually been able to take advantage of their monopoly position to charge prices higher than the equilibrium point.

[underlankers.livejournal.com]

The East India Company's conquest of India.

[ja-va.livejournal.com]

What was said was that monopolies can only exist when granted monopoly status by government (either explicit or defacto).
Since there are not countries without governments this statement makes no sense. You may as well say that monopolies can only exist if allowed by God :)

[politikitty.livejournal.com]

Please read Coase's Theory of the Firm (http://www.ea.ufrgs.br/pos/home/turmas/esp2007/MBA2007/Download/ArquivoProfessor/Coase_%20The_Nature_of_the_%20Firm.pdf). If you can find the time to read his retrospective on the origins of such (http://old.ccer.edu.cn/download/7880-2.pdf), even better.

It might help you realize the organizational problems that come with trying to become a monopoly, so that you stop seeing them at every turn.

Your historical examples of the 'free market monopoly menace' have all been created in part with government. And sure, I fully support state monopolies given by patents and copyrights. And I fully support government intrusion when the need to foster the budding telecommunications business is no longer necessary.

But your chicken little routine shows you don't quite understand what you're preaching. Your thesis argument is a bit bold for your tenuous evidence you provide.

Yes, a monopoly creates dead weight loss. As Adam Smith said "there's a lot of ruin in a state". Which is to say that dead-weight loss exists en masse. Is that deadweight loss better than the lost opportunity cost of a new lifesaving drug? Or the productivity gains of introducing a telecommunications industry to the people a few years sooner?

They're all very big questions. And the answers probably favor government intervention as much as against. But the fact that you aren't engaging in any real debate is rather confusing. What exactly am I supposed to take away from this lesson?

[ja-va.livejournal.com]

I do not see monopolies "at every turn", you are delirious. And I do feel for them having "organizational problems", just like I do feel for gangsters who want to rob my house having "organizational problems" trying to put together a good plan and avoid the police :)

Patents and copyrights only exists thanks to government. It is a temporary creates monopoly POWER, not actual monopoly. It prevents dissemination, but is necessary FOR THE PERIOD and within a scope. Again, thank God we have government to guard them, otherwise there'd be no research.

And talking about "new life saving drugs" - ever heard of Orphan drugs? They are not profitable to develop because few people have these diseases. If not for "government intervention" they would never be developed in the free market.

My "chicken little routine" is not a dissertation on the subject, just a very brief overview. It is intended to prove a point that monopolies are bad UNLESS CLOSELY SUPERVISED BY THE GOVERNMENT, in response to some people who suggested that they are a myth.
However, if you want a full discussion of the subject- be my guest, make your own post defending monopolies.

[abomvubuso.livejournal.com]

That is one very good book.