The Good, the Bad and the Monopoly - Coursework Example

The Good, The Bad, and the Monopoly Microsoft CEO Steve Ballmer once quipped, "We don't have a monopoly. We have market share" (ThinkExist). Ballmer's comment illustrates the difficulty economists have when defining what constitutes a monopoly. The word has been used to mean market dominance, collusion, and unfair trade practices. Generally viewed as having a negative impact on consumers, there are cases when a monopoly can be more efficient. Everyday we deal with monopolies that we may not recognize. Building a monopoly takes years and the effects of predatory practices may not be apparent for a considerable length of time. Economists have debated the value and the cost of monopolies for centuries and still have come to no clear consensus. Even our laws that protect the market from monopolistic practices have been viewed as incapable of defining the words 'market' and 'monopoly'. When does market share become a monopoly In the United States, the foul line is crossed when the Federal Trade Commission (FTC) interprets the anti-trust laws and rules that the actions are injurious to competition. The technical definition of a monopoly is a business that is the sole provider of a good or service that has no suitable substitute. Consumers are restricted to buying from the monopolist. Geographic limitations can also create a monopoly such as being the only doctor within a hundred miles. Monopolies can also exist where a firm manufactures a specialized product to a limited market. New innovations may become monopolistic due to patent restrictions or until the innovation becomes more widely available. Another characteristic of a monopoly is that there needs to be a barrier to entry into the market. This is usually due to high sunk-costs that prevent competitors from reaching an economy of scale. Though all these traits are seen in monopolies, many practices are labeled monopolistic because they restrict competition and are prohibited by law. Most of these practices serve to limit competition or drive competition out of business. Product dumping, price fixing, predatory pricing, and bid rigging are all considered monopolistic practices. In the United States corporations are occasionally allowed to engage in a monopoly or monopolistic practices. Professional sports, utilities, government institutions, and markets with a single producer are sometimes exempted or protected. These protected monopolies do not always benefit from their monopoly status, as they may still need to be competitive to keep new entrants from competing. Major League Baseball is sometimes seen as a monopoly. However, there are substitute products in the form of other sports and entertainment activities. Though they prevent any new entries into the market, they can't be called a true monopoly. Even the US Post Office, a protected monopoly, has come under increased competition with the advent of new technology and services. Though they were once the only provider for their services, failure to innovate left them vulnerable to alternate suppliers. A criticism often leveled at monopolies is that they are complacent and slow to innovate. . Monopolies can be destructive to the economy because they give the firm the opportunity to be a price maker rather than a price taker. The monopoly will reduce the supply, which increases the price to the point that it maximizes profits (Parkin 110). This point is almost always at a point above the price that would be available in a competitive market. According to Stigler, "the purely "economic" case against monopoly is that it reduces aggregate economic welfare". For example: If a firm can sell 100 units when the price is $5 it will generate $500 revenue. If they price them at $7 they can only sell 80 units, but will have generated $560 revenue. However, the loss to the economy is 20 unsold units at $5 each, or $100. Though the firm has gained $60, the market has lost $100. This aggregate loss is known as deadweight loss and is what the anti-trust laws are designed to prevent. The firm will continue to reduce the supply until they reach maximum revenue without regard for the aggregate loss. If the product is a necessity such as utilities or fuel, monopoly pricing could theoretically go quite high. However, the fuel market is unlikely to become a monopoly and utilities are regulated to prevent abuse of their monopoly position. Regulators are the first line of defense to prevent a monopoly situation. Mergers, price increases, and vertical integration have all come under the watchful eye of regulatory boards. They prevent the consumer from being exploited in the marketplace when conditions exist that could create a monopolistic situation. There are times when a monopoly may be more efficient than competition and these are allowed to operate with heavy oversight. Public utilities are often the biggest examples of a protected monopoly. They have a large investment in their infrastructure and means of delivery. It is a universally used product with a constant demand. Segmenting the customer base and duplicating the infrastructure may actually raise prices. For example: If the fixed costs of producing are extremely high, it is better to have one producer spreading the fixed cost over all the units sold. If a competitor enters the market and takes a 50% market share, the fixed cost is spread over half the units and the price would need to be doubled by both producers to recover the average total cost. The government regulates many industries and regulates competition. Industries that include airlines, communications, cable TV, and banking all have come under government regulation. This is done to assure that producers in these industries set the production quantity at the social optimum and regulate price at an acceptable level. A notable example of the effects of a heavily regulated monopoly is the airline industry. Prior to 1978, the Civil Aeronautics Board (CAB) regulated the airlines as a public utility. They set fares, schedules, and routes in the hopes of providing the optimum consumer service at an affordable price. In 1978, the airlines were deregulated and allowed to compete. New entrants introduced no-frills flying and opened up previously unserviced routes. Over the next decades, prices continued to drop. Alfred Kahn, noted economist, states, "The benefits to consumers have been estimated at in excess of $20 billion a year, mainly in the form of lower fares and huge increases in the availability of fast one-stop services between hundreds of cities". (qtd. in The Economist 70). Customers had been given a choice and opted for the increased service, low frills flying, and lower fares. This is often used as an example to illustrate the negative effects of a monopoly. The threat that a monopoly poses to the economy inspired the Sherman Anti-Trust Act of 1890. One of the biggest cases in history involved John D. Rockefeller's Standard Oil Company. In the late 1800s Rockefeller used threats to competitors and secret deals with the railroads to acquire near total control of the oil business. He had made an arrangement to get rebates on his transportation costs. He installed pipelines to replace the horse drawn wagons and began buying out his strongest competitors ("People and Events"). His ruthless tactics and vertical integration gave him control from well head to kerosene lantern. Standard Oil was one of the prime motivations for the Sherman Act and other anti-trust legislation. In 1911 the US Supreme ruled that Standard Oil had violated the Sherman Anti-Trust Act of 1890. They demanded that Standard Oil be broken into 36 separate companies that could compete with one another. These smaller companies became Exxon, Mobile, Standard Oil of New Jersey, Amoco, and Chevron among others. Rockefeller had been successful at providing a product and keeping the price low. Yet, anti-trust action was based on the restriction of competition, and not the harm or benefit to the consumer. A modern version of Standard Oil was the break up of the phone companies. In 1984 AT&T was ordered to divest of seven regional baby bell companies and open the long distance market to competition. These regionals known as the baby bells were supposed to invite competition. However, new entries were slow to develop. The telecommunications act of 1996, designed to deregulate the industry and stimulate competition was met with resistance. US West's President Sol Trujillo said his company fought the Telecommunications Act because they felt that they were given a bad deal because potential competitors did not have to invest in building local-service systems (Martin). Recently, these wireline companies have come under increased competition from substitute products, mainly wireless. There are times when a monopoly will exist only until a substitute is developed. The railroads had control of the transportation system until the advent of the automobile and the trucking industry. Before the railroads, the canals moved the freight. Apple and Linux are slowly eroding Microsoft's dominance with or without a court order. Whenever there is a monopoly, the free market will develop a substitute when it becomes economically viable. The staunch anti-trust feelings that existed in the early 1900s have somewhat subsided. Modern economists often feel that a free market will find a competitor or a competing product. Most recent anti-trust activity has been aimed at assuring firms are following fair trade practices. When a company floods the market with low cost goods, competitors are unable to compete on price. Known as dumping, or predatory pricing, setting a price below the cost in an effort to run out the competition is forbidden. Collusion and certain communications between firms is also not allowed if it is seen as injurious to the competitors. A modern anti-trust suit was brought against Microsoft for unfair trading practices. The fear wasn't that Microsoft was too big, it was that they were engaging in behavior that was anti-competition and had not made any effort to comply with the law. Joe Klein, head of the Justice Department's anti-trust division, noted, "... in America today, many serious companies, big companies have very sophisticated anti-trust compliance programs. It's routine. Microsoft, despite all the troubles that it's been through, doesn't have such a program". The complicated laws and regulations can discourage firms from ever reaching the point of becoming a monopoly. Mergers, acquisitions, and joint ventures come under the scrutiny of the FTC. This is done to prevent barriers to entry from being created. It is also done to minimize the possibility of collusion among the parties. In the case of joint ventures, it is done to assure the venture remains competitive. In a case involving the Brunswick Corporation, they partnered with Yamaha to sell outboard motors. The agreement was that the joint venture could sell products in the US and Yamaha would be limited to sales in Japan. The venture was ordered dissolved as being detrimental to Yamaha's entry into North America (Day and Reibstein 315). The US has a rich tradition of the spirit of competition and keeping the marketplace open to new entrants. The Sherman Anti-Trust act, and similar legislation, has been supported based on that principal. Its purpose is neither the harm nor the benefit that the consumer will bear; it is to stimulate competition in the belief that it will lead to its own rewards. Our economic history is full of monopolistic actions by people and corporations. Some are government enterprises or protected by the government. Some are heavily regulated industries. Some are ruthless tycoons attempting to corner the market. Others are well meaning businessmen who have stepped outside what the FTC feels is the monopoly foul line. Works Cited "Competition is All." The Economist 368.8353 (2003): 70. EBSCO. 23 Feb. 2007. Day, George, and David Reibstein. Wharton on Dynamic Competitive Strategy. New York: John Wiley I& Sons, 1997. Klein, Joel J. Interview. Newsmakers. Online Newshour. PBS. 8 June 2000. 23 Feb. 2007 . Martin, Mitchell. "Baby Bells Line Up for U.S. Battle." International Herald Tribune 13 Mar. 1997. 23 Feb. 2007 . Parkin, Michael. Microeconomics. 7th ed. Boston: Allyn and Bacon, 2005. "People & Events: John D. Rockefeller Senior, 1839-1937." American Experience. 2000. PBS. 23 Feb. 2007 . Stigler, George J. "Monopoly." The Concise Encyclopedia of Economics. 2002. 23 Feb. 2007 . ThinkExist. 2006. 24 Feb. 2007 . Read More