The Question of Monopolies - Essay Example

Client's 5 November 2009 Monopolies - A General Overview Introduction A Monopoly or Monopolies have been determined as one of the main types or causes of market failure, the term not suggesting death or cessation of the market but rather aligned with the definition of a monopoly. A monopoly is defined as: "exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices." (Dictionary.com Unabrdiged v 1.1) In dealing with microeconomics, we must be cognizant of the real world nature of this subject area as well as the simplicity of its underlying structure, whilst the monopoly, and different types of competitive behaviors, form part of the industrial organization of the broader microeconomic field. (Harberger, AC) In an attempt to completely understand and describe the monopoly, causes, types and relevant issues, it becomes necessary to approach the subject from as a simplistic nature as possible, to stay aligned with the underlying microeconomic structure. Based on the fact that within the market place the root of everything litereally comes down to supply and demand, this is altered by monopolistic practices and therefore society tends to disfavor monopolies as practicing on an unfair basis, and creating barriers of entry to firms wishing to enter the market for profit generation, as well as from the perspective of the consumer, being that the monopoly is unfairly regulating prices, by restricting output and therefore is extracting a price without allowing market forces to determine the correct supply and demand balance of the given commodity. Essentially when dealing with a monopoly consumers are at the mercy of the price determination of that monopoly, which they control via total output restriction and subsequent economic welfare reduction. The Existence of the Monopoly The monopoly comes about when there is little or no competition, normally the latter. The monopoly will always persist based on the barriers to entry for any rival company or concern attempting to enter the market place. Barriers to entry protect a monopoly and at times can even be state sponsored, via legal framework or even finance. The barriers to entry for rival firms include: Legal Barriers - these take the form of legal framework where a government will only allow a producer to supply a product, for example if one considers the first class mail deliver in the United States which USPS is the only allowed deliverer. Patents - similar to legal barriers due to the legal framework that will support a holder of a patent, although this issue is debatable around the cost of research and development in the patent creation process. A certain school of thought agreeing with the patent barrier, claims government encouraged innovation incentive, whilst others will claim consumer deprivation due to excessive price fixing. Examples would be the pharmaceutical companies that hold patents on medical drugs, Pfizer who manufactures Viagra - they are the patent holders and are therefore the only company entitled to produce and sell the drug. Control of strategic resources - this would entail a holder of mineral rights or mining rights of a commodity that must be present in order to produce the end product. An example is De Beers controlling 90% of the world's diamond production (Wessels, W.J). Natural Barriers - also called economies of scale. This is related to the mere cost of establishment within a given industry. It is too expensive and capital intensive to enter the market on a profitable basis. An example of this would be the various utility companies in any given economy. One can safely deduce that monopolies will continue to exist, as long as there are governments who sponsor such activity, as well as when companies are in the position to be able to create a barrier to entry, via market power or anti competitive behavior, this in turn can be negated by anti trust regulation or competition law. The Economists vs. The Monopolists The classic economic period (circa 1776 - 1850) believed that monopolies, excluding government protected or sponsored, would be eroded by competition. The thoughts still hold true today, if one looks at the US in respect of agricultural prices, cable television and the above mentioned USPS examples. The point is that most economists will object to a monopoly, but on what basis. Monopolists will charge more, or reduce production to maximize their profits, and thereby distribute wealth to their stakeholders, both internal and external. One would construe this as good business practice in terms of wealth distribution. However, a valid point on behalf of the economists against the monopolistic practices is that when a monopoly reduces output, after raising prices, they are effectively depriving the market place, and ultimately the consumer of their product, as stated by the late Stigler, G.J. "In short, monopoly reduces society's income." One therefore deduces that an economists view of a monopoly would be that of anti social as well as anti competitive. "They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers." - Frederic Bastiat. Even consider the natural monopoly, the economists believe that government regulation should indeed take place to ensure that the monopoly remains competitive and efficient and has an incentive to cut costs through competition on a smaller scale. The Monopoly's Efficiency Based on what we have touched on above we can see that a monopoly is a price maker, and does not suffer any price pressures from competitors, provided the price is not set too high that a potential competitor may enter the market to undercut the monopoly. There is no threat of this in the case of the natural barrier. Although it remains in the monopoly's interest retain as high an economic rent on their product as possible, to ensure maximum profit. Within this process the monopoly is said to be in danger of becoming less efficient as a result of complacency due to lack of competition, thereby reducing the need for innovation and progress because of no direct need to compete in their marketplace. Based on the potential of this occurring to the monopoly, one finds that if a monopoly becomes complacent a threat will materialize on a basis of what is known as 'contestable markets' - this in turn forces the monopoly to react or act on a proactive basis of 'as if' or 'what if' assumption of market entry by a competitor. This challenges the complacent mindset and encourages greater productivity and efficiency, within the boundaries of the monopoly's market place. This will also enable the monopoly to remain in the market pending any potential technological or other major advancement threatening their position. The school of thought that supports the development of a monopoly, believe that the regulation of the monopolistic entity, example of the utility companies by governments, play an important role in the market place for potential future break up into parastatal or smaller components - which in time will allow for qualified competitors to compete more effectively, than attempting to compete at large scale prior to the monopoly being so called broken up. There are numerous criticisms of the Natural Monopoly and each with its own merits, and make for interesting reading and analysis. Hotellings Law: Monopoly's providing advantages for the Consumer The concept of this law concerns maximization of market share by drawing the maximum amount of customers as he can, this is done by strategic placement of the shop. Assuming the scene is a street with an equal amount of customers spread the length of the street, by placement of the shop precisely on the halfway mark of the street will ensure optimal attraction of customers. The law predicts that in the event of two shops co-existing, the shops will be situated next to each other, and each one drawing half of the market. It would make sense to separate and still draw half of the customers, but each one would not in the fear of the competitor relocating to capture majority exposure and share. This is present in many markets today, and specifically pertaining to the commodity markets. The opposite of Hotelling's Law is product differentiation, and in today's market one will find business following both rules. As each tries to differ what they offer the consumer, they do so via their corporate branding, but essentially offer the same or a similar end product. The above therefore shows how a customer has benefited from the monopoly of a product, which is now offered by competing firms under different labels - normally the costing is more or less the same but the bells and whistles differ and benefit the end user. The Monopoly and Monopoly Law There are anti trust regulations to billion dollar fines paid by huge corporations. Examples and the existence of monopolies are evident from the Salt Commission, legalized and formed in China in 758, to Microsoft and De Beers who settled anti-trust legislation in the US in 2001 and settled charges of price fixing in the diamond trade in the 2000s respectively. There are once again differing schools of thought around government intervention and allowance, the fact is that legal framework does exist to detract from the monopolistic practices. The branch of Monopoly law is part of competition law, it is an attempt to discourage these practices of Monopolization via coercive monopoly practices which involves the monopoly creating the barriers of entry and preventing the entry of qualified competitors. "A coercive monopoly will tend to perform his service badly and inefficiently" - Murray Rothbard. A coercive monopoly is believed, by free market advocates to be a government back initiative and find it impossible to justify private sector involvement an continuance of such an enterprise on a free market basis. On private coercion the well known and prime example is Microsoft, as mentioned above, the anti trust nature of this action is believed to be via Microsoft 'coercing' Apple Computers to enter into contracts which prohibited competition. It was noted by a founder of the Open source Project that everyone tended to miss the courts finding that Microsoft is fact a coercive monopoly. If we have to look at it from Microsoft's side an quote by Steve Ballmer, "We [Microsoft] don't have a monopoly. We have market share. There's a difference." (thinkexist.com) Case Study The United States Postal Service is the classic example of Monopoly, it is an independent unit and it functions all on its own. This company is responsible for providing postal service in the US and there is no other company that comes anywhere closer to providing competition in the US, this also makes this a monopoly. It is authorized by the constitution of the United States and hence it also has the backing of the US, when the government backs up a company, the company gets a lot of privileges. The Postal reorganization act was instrumental in establishing this monopoly; Benjamin Franklin is another name who worked towards establishing this unit. He established the first Postal department in Philadelphia. It approximately employs as many as 656,000 people and it is only the second largest employer civilian employer coming behind Wal-Mart. The Postal department receives good competition from the email and package delivery services and this also threatens the Monopoly at times. The US congress has got the authority to establish Postal roads and Post offices and this is why this particular sector is monopolized. This service aims at providing good service to the people of the US at a very reasonable price. This monopoly is unlike most other monopolies that exploit the people; it is consistently working towards providing better service to the people of the US. Conclusion We will be faced with issues concerning monopolies, the laws surrounding them as well as the continual existence and criticism or promotion the monopoly. The monopoly was borne from the perfect competition model, and in some instances has outperformed due to the allocation of funds into their marketing and growth strategies, without having to continue mush research and development. The fact that there is a likeness in the perfect competition and monopoly model, will ensure that we will have the monopoly antagonists as well as protagonists, this is what makes for a healthy market. Although price fixing needs to be kept in check, we have authorities to guide and protect us if we consider the efforts of the European Union, which seem to tackle the issue correctly and informatively. We will have to continue educating ourselves into the negatives as well as the positives of any monopolistic endeavors from a private and government back initiative basis. The only way we will be able to accomplish this is by ensuring that the market place developments as well as potential alternatives are kept available and alive, with critical thinking and opinion development. Easier said than done is keeping an open mind and attempting to establish what is for the greater good for society as a whole. References Branden, N. 'The Question of Monopolies'. The Objectivist Newsletter June 1962. Accessed from on 5 November 2009. Harberger, AC. "The Concise Encyclopedia of Economics: Microeconomics" Library of Economics and Liberty. www.econlib.org. Accessed 5 November 2009 Karier, Thomas Mark. Beyond Competition: The Economics of Mergers and Monopoly Power. Armonk, N.Y.: M.E. Sharpe, 1993. "Monopoly." Dictionary.com Unabridged (v 1.1). Random House, Inc. 5 Nov. 2009. . Stigler, GJ. "The Concise Encyclopedia of Economics: Monopoly" Library of Economics and Liberty. www.econlib.org. Accessed 5 November 2009 Quotations. http://thinkexist.com Accessed and downloaded 5 November 2009. Read More