How does the free market prevent monopolies?

[Ehden]

I'm a newbie to economics, but, I've started to develop a side interest for it. As I've been reading up on economic theories, I have slowly become a proponent for the free market, with minimalist bureaucratic intervention.

However, I have a few questions, how does the free market prevent monopolies?

Without government intervention, how does the free market prevent large corporations from practicing predatory pricing?

Should the government place restrictions on certain industries, to promote "green" energy?

Are natural monopolies inevitable? Even without government coercion, entering the electrical business seems extremely costly.

Are some monopolies "good"?

I would love any detailed responses, also what are people's thought on Reagan's policies? Does anyone think, Bill Clinton's boom was a result of him doing anything?

 

[andrewkirk]

how does the free market prevent monopolies?

It doesn't. Microsoft is the classic example of a monopoly arising in a free market. But there are many others.

Naive economic theory says monopolies cannot arise in a free market because competitors will always enter a lucrative market and first dilute, then dissolve, the monopoly. But that assumes there are no barriers to entry, and many markets have barriers to entry. The market for desktop office software has gigantic barriers to entry.

 

[SW VandeCarr]

I'm a newbie to economics, but, I've started to develop a side interest for it. As I've been reading up on economic theories, I have slowly become a proponent for the free market, with minimalist bureaucratic intervention.

However, I have a few questions, how does the free market prevent monopolies?

Without government intervention, how does the free market prevent large corporations from practicing predatory pricing?

Are natural monopolies inevitable? Even without government coercion, entering the electrical business seems extremely costly.

I would love any detailed responses, also what are people's thought on Reagan's policies? Does anyone think, Bill Clinton's boom was a result of him doing anything?

No, the free market does not prevent monopolies. Government regulation aims to prevent outright monopolies when possible, but some industries such as electric utilities are natural monopolies. In these cases, the government regulates prices. Generally electric utilities in the US got into the business a long time ago and are practically institutions. It's hard to see how a direct competitor could enter an area that's already served. However, local solar power generation has the potential to disrupt the industry.

There are more subtle dynamics within certain industries that work to the benefit of one or a few companies. Google's position as an internet search engine probably isn't all that subtle but I think the only reason it hasn't demolished Yahoo! is that it needs at least some competition to avoid being labeled a monopoly. There are other small more specialized search engines out there as well. Most of Google's services are free (now), so there's no major public outcry (yet) . The petroleum industry and the cable companies draw greater public ire. However, the government has to show clear evidence of collusion on prices or market share to make a case under anti-trust laws in order to take action.

Reagan's major economic initiative was federal tax reduction. Clinton managed to balance the federal budget in his second term, but the 1990's economy was driven by the technology sector boom.

 

[Ehden]

It doesn't. Microsoft is the classic example of a monopoly arising in a free market. But there are many others.

Naive economic theory says monopolies cannot arise in a free market because competitors will always enter a lucrative market and first dilute, then dissolve, the monopoly. But that assumes there are no barriers to entry, and many markets have barriers to entry. The market for desktop office software has gigantic barriers to entry.

I've heard and read that majority of the monopolies were formed from government interventions, and are able to stay in power due to the coercive nature. However, there are rare occasions where private monopolies arise without government intervention that seemed to stumble a certain economist, Milton Friedman (De Beers Diamonds).

No, the free market does not prevent monopolies. Government regulation aimes to prevent outright monopolies when possible, but some industries such as electric utilities are natural monopolies. In these cases, the government reguates prices. Generally electric utilities in the US got into the business a long time ago and are practically institutions. It's hard to see how a direct competitor could enter an area that' already served. However, local solar power generation has the potential to disrupt the industry.

There are more subtle dynamics within certain industries that work to the benefit of one or a few companies. Google's position as an internet search engine probably isn't all that subtle but I think the only reasons it hasn't demolished Yahoo! is that it needs at least some competition to avoid being labeled a monopoly. There are other small more specialized search engines out there as well. Most of Google's services are free (now), so there's no major public outcry (yet) . The petroleum industry and the cable companies draw greater public ire. However, the government has to show clear evidence of collusion on prices or market share to make a case under anti-trust laws in order to take action.

Reagan's major economic initiative was federal tax reduction. Clinton managed to balance the federal budget in his second term, but the 1990's economy was driven by the technology sector boom.

Some economists argue that it's government intervention that allows for monopolies to emerge, others even argue that almost all monopolies are a creation of government intervention. Such as protectionism, licenses and etc. However, in the case of Google and Microsoft, those corporations already have a hold on a large portion of the world market share, seems rather hard for the world to become a competitor, as it's usually the world that threatens domestic monopolies.

However, as you mentioned, local solar power firms may disrupt the electric utilities industry. Along the lines wouldn't also be reasonable to think technological advances would result in the fall of other monopolies? Maybe some innovation in the near future will threaten Google's position as a prominent search engine.

But, I don't see how waiting for a new innovation is relevant with the fact that a certain industry will stay as a monopoly without government intervention.

 

[mheslep]

Barriers to entry come primarily from government (though not always), often at the behest of the business community.



Wiki summary of Friedman's Monopoly chapter in Capitalism and Freedom:

Monopoly and the Social Responsibility of Business and Labor
Friedman states, there are three alternatives for a monopoly: public monopoly, private monopoly, or public regulation. None of these is desirable or universally preferable. Monopolies come from many sources, but direct and indirect government intervention is the most common, and it should be stopped wherever possible. The doctrine of "social responsibility", that corporations should care about the community and not just profit, is highly subversive to the capitalist system and can only lead towards totalitarianism

 

[Ehden]

Barriers to entry come primarily from government (though not always), often the behest of the business community.



Wiki summary of Friedman's Monopoly chapter in Capitalism and Freedom:

Neat, I love Friedman. However, what would he say against monopolies like Microsoft and Google (technically isn't a monopoly)? Those two corporations hold a large share of the world market, and as he said in the video, it's the world that enters as the competitor, but, how can the world enter as a competitor, when these corporations are already a large part of it, where the barriers of entry are already substantial?

 

[mheslep]

Re Microsoft, for all device shipments in 2015 (phones, tablets, laptops, PCs): Android 54%, iOs 12%, Windows 12%.

Friedman's principle point was to start from an observation of the alternatives (public monopoly, private monopoly, regulation) and then to compare them, and not to search out only private monopolies and then to replace them under the (flawed) assumption that the alternatives are automatically better.

 

[Ehden]

So what stops dominant corporations from undercutting competitors? What prevents dominant corporations from collusion?

Are there any other explanations besides, innovations and technological progression that will eventually phase out existing monopolies?

I currently support a lot of Friedman's ideas, but, I'm trying to see this issue from the other side.

 

[andrewkirk]

Microsoft's monopoly is in the desktop software market, and to a lesser extent in the business desktop operating system market, not in the market for operating systems of all devices with chips.

 

[SW VandeCarr]

So what stops dominant corporations from undercutting competitors? What prevents dominant corporations from collusion?

Are there any other explanations besides, innovations and technological progression that will eventually phase out existing monopolies?

I currently support a lot of Friedman's ideas, but, I'm trying to see this issue from the other side.

I'm not sure what you're looking for. Are you ignoring government policy (including trade policy) as one solution? There is no country where government policy does not play a role. The following site, sponsored by the pro-business Hertiage Foundation, lists the world's nations according to their rating of economic freedom. On a scale of 100, the highest rated economy is Hong Kong at 88.6.

http://www.heritage.org/index/ranking

The US ranks 11th behind Singapore, Australia, NewZealand, Canada and the UK among others. China is 144th, but Baidu, not Google, is the main internet search engine there.

 

[Ehden]

I'm not sure what you're looking for. Are you ignoring government policy (including trade policy) as one solution? There is no country where government policy does not play a role. The following site, sponsored by the pro-business Hertiage Foundation, lists the world's nations according to their rating of economic freedom. On a scale of 100, the highest rated economy is Hong Kong at 88.6.

http://www.heritage.org/index/ranking

The US ranks 11th behind Singapore, Australia, NewZealand, and the UK among others. China is around 150. But Baidu, not Google, is the main internet search engine there.

I'm trying to ask, how does a free market prevent or disincentive dominant corporations from predatory pricing, and oligopolies from collusion?

In other words, what does the free market specifically do to prevent such actions from occurring?

Also for natural monopolies, do those exist in a free market? If not, how is it prevented?

 

[SW VandeCarr]

I'm trying to ask, how does a free market prevent or disincentive dominant corporations from predatory pricing, and oligopolies from collusion?

In other words, what does the free market specifically do to prevent such actions from occurring?

Also for natural monopolies, do those exist in a free market? If not, how is it prevented?

There are no free markets! States have been involved in trade and commerce since there were states. I just provided a list of the freest markets, but even Hong Kong is well short of 100. You're asking a totally theoretical question. There is no correct answer because the theory behind it assumes a fair market. But how do you get a fair market? If you can't enforce fairness, you get the economy of the robber barons as in the US from 1865-1901 where nothing stopped those things.

 

[Ehden]

There are no free markets! States have been involved in trade and commerce since there were states. I just provided a list of the freest markets, but even Hong Kong is well short of 100. You're asking a totally theoretical question. There is no correct answer because the theory behind it assumes a fair market. But how do you get a fair market? If you can't enforce fairness, you get the economy of the robber barons as in the US from 1865-1901 where nothing stopped those things.

Yes, there is no true free market, but, like you said, my questions are theoretical. In the real world, I do believe that there should be minimal government involvement, such as preventing fraud, force and coercion. Just like how murder is an underlying crime.

But, some economists say that in a free market, monopolies cannot exist for an extended period of time. I was wondering how this theory works. Especially since most of these economists also laugh at the idea of a fair market. So in a truly free market, how does it prevent monopolies, if these monopolies are able to conduct "unethical" tactics without any state intervention? And as you mentioned before, there is a no correct answer, I'm just looking for a response to this "contradiction".

 

[Ehden]

I thought I wrote this in my previous comment, also during the "robber baron" period, there was a large government involvement. It wasn't necessarily an unregulated economy. Such as the subsidies provided to the railroad industry.

 

[PeroK]

I'm a newbie to economics, but, I've started to develop a side interest for it. As I've been reading up on economic theories, I have slowly become a proponent for the free market, with minimalist bureaucratic intervention.

However, I have a few questions, how does the free market prevent monopolies?

Without government intervention, how does the free market prevent large corporations from practicing predatory pricing?

Should the government place restrictions on certain industries, to promote "green" energy?

Are natural monopolies inevitable? Even without government coercion, entering the electrical business seems extremely costly.

Are some monopolies "good"?

I would love any detailed responses, also what are people's thought on Reagan's policies? Does anyone think, Bill Clinton's boom was a result of him doing anything?

It seems to me that if one business bombed the premises of its rival, then only through government intervention can this be investigated and prosecutions take place. So, what is meant by a "free" market? You might say "yes, but bombing and murdering your competitors isn't about economics, it's about the rule of basic law." So, where do we draw the line? Is "bribery" covered by the rule of law or by economic intervention? Insider trading? Conspiring to fix exchange rates? Trading standards (lying about the safety of a car?) Flouting fire regulations leading to the deaths of many workers locked inside a building? Slavery? (What but government intervention through the passing of a law would ever have ended slavery?) Child labor?

Here's a good one:

https://en.wikipedia.org/wiki/Hammer_v._Dagenhart

Would you have children working 60-70 hour weeks in hazardous conditions because the free-market demands it? Or prefer government intervention to outlaw child labor?

 

[Battlemage!]

Yes, there is no true free market, but, like you said, my questions are theoretical. In the real world, I do believe that there should be minimal government involvement, such as preventing fraud, force and coercion. Just like how murder is an underlying crime.

But, some economists say that in a free market, monopolies cannot exist for an extended period of time. I was wondering how this theory works. Especially since most of these economists also laugh at the idea of a fair market. So in a truly free market, how does it prevent monopolies, if these monopolies are able to conduct "unethical" tactics without any state intervention? And as you mentioned before, there is a no correct answer, I'm just looking for a response to this "contradiction".

Here's a (completely off the wall and ridiculous) thought.

What happens when a company completely owns the market on a good with zero competition? Suddenly the elasticity of that product has to go down, because who are the people going to turn to to buy a similar competing product? Now what if, let's just say theoretically, the price elasticity of demand for the good goes to zero. Suddenly the company can charge whatever they want, because the people have no other choice. Now, continuing the ridiculous example, what if the same thing happens for every good. Now, for all intents and purposes, there suddenly no longer is a market for each good. The price is determined entirely by what the producer wants, but with this, inflation is bound to happen, and now we have a big problem: how much is something really worth? Ultimately the economy has to crumble, because money will become worthless for all intents and purposes. You'd basically have a slave state.

But at this point, why would the people continue the charade? This is where the people riot and rebel against the newly instituted oligarchy. Viva la revolución!

So basically, the monopoly (or in the most ridiculous example, each of them) is destroyed and equilibrium is reestablished.Of course, disregard this clearly absurd post.

 

[256bits]

, I have slowly become a proponent for the free market, with minimalist bureaucratic intervention.

... predatory pricing?

.. government ... to promote "green" energy?

Are some monopolies "good"?

Monopolies are NOT, just by virtue of their size and captive market, EVIL.
How you came to that conclusion I have no idea, but it is wrong.

Some monopolies are necessary, due to the large capital investment necessary, and for the venture to commence, and continue, a "protected" number of years prohibiting other entries into the market, may be granted so that the investors can be guaranteed a suitable.return on investment.

The phrases, "being a proponent of free market, with minimalist bureaucratic intervention", and "
.. government ... to promote "green" energy?" are at odds with one another. Picking a favourite industry, or technological method within an industry, seems to be not very much free market.
Yet that is what governments do all the time to achieve an outcome that they consider in the best interests of players in the economy, be that either the consumer or sellers, ot the state itself.

Predatory picing - maybe you should explain what you think that term means.
In a free market there is no such thing as predatory pricing, but only what the market will bear. Who says that cost of manufacture should dictate the selling price as a certain prescribed percentage markup?
Oh. We are back to govermnment bueacracy setting prices again. Who icould be the evil one there - the monopoly or the bureacracy?

It is a small part of the equation for the simple reason that a corporation wants to stay in business, acquire the most amount of revenue for the least amount of expenditure, and attempt to keep others from taking market share. Scupulous activity does not have to be part of that equation. Convincing the buying population that their product is the best can be done through, say, convincing advertising, with the population believing rightly or wrongly that anything else is second rate, and will pay a premium willingly.

 

[jtbell]

Microsoft is the classic example of a monopoly arising in a free market. But there are many others.

Going back to the late 1800s and early 1900s, consider John D. Rockefeller's Standard Oil.

 

[mheslep]

So what stops dominant corporations from undercutting competitors? What prevents dominant corporations from collusion?

Goal post change. There is always a dominant competitor, and there should be. The thread was about monopolies, i.e an absence of competitors. In the case where the dominant firm has a higher cost to produce, then undercutting the more efficient competitor means the dominant firm will lose money. If the dominant firm has the lower cost, then goodbye competitor, consumer wins. Or, competitor innovates and differentiates product.

Are there any other explanations besides, innovations and technological progression that will eventually phase out existing monopolies?

I currently support a lot of Friedman's ideas, but, I'm trying to see this issue from the other side.

I don't think you see Friedman's point, which is not that monopolies are good, but that there is no other valid or better side. Phase out private monopolies and replace them with *what*? There is no universally better replacement. Not regulation, not public monopolies like public education-property taxes or broadcast communications under the FCC. You mention the Microsoft example. Prior to that anti-trust suit from the US government, MS spent almost no money on lobbying and the political process. Now, unsurprisingly, MS spends large amounts on lobbying. The US attorneys in effect opened up MS's wallet for politcians.

 

[Hippo friend]

It doesn't. Microsoft is the classic example of a monopoly arising in a free market. But there are many others.

Naive economic theory says monopolies cannot arise in a free market because competitors will always enter a lucrative market and first dilute, then dissolve, the monopoly. But that assumes there are no barriers to entry, and many markets have barriers to entry. The market for desktop office software has gigantic barriers to entry.

Going back to the late 1800js and early 1900s, consider John D. Rockefeller's Standard Oil.

If there are barriers to entry it is not a free market

 

[Rive]

So what stops dominant corporations from undercutting competitors? What prevents dominant corporations from collusion?

I think you should just learn a bit about the history of patent wars and patent trolling.

Also, this picture:

I would say, the answer is 'only lawyer fees'. And that also puts a real strong barrier of entry right away.

Also, I wonder whether patents count as 'government intervention'?

 

[Tom.G]

Consider:

Say you are in a rural area with no effective government.

You decide you want to make an income by supplying transportation to others.

Well, primarily, you first need to obtain some means of transporting them. BARRIER You must obtain a horse and/or a vehicle.

Now you must inform your prospective customers that transport is available. BARRIER You have to communicate with them individually.

Ahh, someone needs transporttation! A customer at last. BARRIER They have to communicate their need to you.

But you have to harvest your grain before that rain storm arrives. CONFLICT Do you supply the transportation and lose most of the winter feed for the horse, or the other way around.

If there are barriers to entry it is not a free market

Agreed, it is called a commune.

 

[russ_watters]

If there are barriers to entry it is not a free market

[Old thread]
I don't see it that way. Barriers to entry are often naturally occurring feature* of the type of business you try to create(startup capital for a car company, for example).

I think sometimes people confuse "free"[market] with "easy".

And I don't like the example provided. It implies that maybe Microsoft is the barrier to entry but it doesn't say so. Barrier to entry for the software market is exceptionally low in many cases, but depends on the type of software. If you want to sell a fully developed office suite that takes a lot of development. Facebook? Practically nothing.

*caveat: government regulation.

 

[bobdavis]

I'm not exactly a market fundamentalist but the question as phrased seems a bit odd to me. "free market" is maybe too vague of a concept in general but I think the primary feature that I'd assume everyone could generally agree on is that "what it does" is largely determined by the free (albeit partially constrained) choices of its participants. To assert that it would or wouldn't do any particular thing consistent with the principle of free exercise of personal/private property rights seems tantamount to negating this fundamental aspect of the "freedom" of the market and the free agency of its participants.

All of that is just to say that maybe "how the market addresses a monopoly" should be regarded as a *choice* that the market (rather, it's participants) gets to make, rather than as some kind predetermined mechanism, especially since it doesn't really seem that there actually is any such mechanism intrinsic to the free market (though I'd also note anecdotally that the only cases I've ever personally encountered that I'm aware of of effectively 100% monopolies are strictly the result of government intervention).

The question then for me is not one of "How does the free market prevent monopolies" but rather "What is a rational/ethical way to exercise my own rights/freedoms in the context of a given monopoly?". (Assuming for simplicity that they're just winning in the market and not actually violating rights or crushing competitors by force/violence...) Is it worth it to me to invest what it would take (time, energy, labor, resources, creativity, promotion, blood/sweat/tears...) to create an alternative? Or alternatively, to reform the operation of the monopoly in-place? It seems in nearly every case there's always somebody or somebodies for whom this answer is yes. Just as a small example since Microsoft seems to be a recurring case study in this thread, I'm personally not really so bound to the major OS brands because I spent a bit of time learning how to install and use Ubuntu and other linux distros, which others took the time & effort to create because they weren't satisfied with the available options either.

"Where there's a will there's a way" -- Goku

 

[Office_Shredder]

I think a key point being missed here is that the real claim is something like a firm should not be able to claim outsized profits for work someone else would do for less. As one example, if a firm literally just wants to be a monopoly by selling their product for 0 profit, then they can and no economic theory worth anything should claim that this firm will not be able to capture substantial market share.

Of course that's not what's really happening in the real world (maybe to some extent with Google, but I don't think they actually have pricing power to charge for their services). Most real world examples are actually in the other direction - to break a monopoly, someone else needs to be able to actually do the same work.

The main barrier to entry in competing with Google is that you are literally incapable of producing a search engine as good as Google's. Google is better than the rest of the world combined at making a search engine, so they have a monopoly on search, and are compensated for the differentiated product they provide. Nobody else is offering to do the same work for less money because nobody can even offer to do the same work

 

[jack action]

Also, I wonder whether patents count as 'government intervention'?

Patents are enforced by laws created by governments, so I would say yes, they are.

The main barrier to entry in competing with Google is that you are literally incapable of producing a search engine as good as Google's. Google is better than the rest of the world combined at making a search engine, so they have a monopoly on search, and are compensated for the differentiated product they provide. Nobody else is offering to do the same work for less money because nobody can even offer to do the same work

Coke had a monopoly where a lot of companies tried to imitate the original secret recipe. Pepsi was still able to gain a major share of the market and many others still have a small share because the product is cheaper. You don't have to always have the best product to be part of a market, price vs quality matters. The same goes with other markets: Cars, jewelry, electronics, etc. considered inferior can still have a place in their respective market if they are cheap enough.

 

[Office_Shredder]

Coke had a monopoly where a lot of companies tried to imitate the original secret recipe. Pepsi was still able to gain a major share of the market and many others still have a small share because the product is cheaper. You don't have to always have the best product to be part of a market, price vs quality matters. The same goes with other markets: Cars, jewelry, electronics, etc. considered inferior can still have a place in their respective market if they are cheap enough.

Yes, everything is just a question of whether a competitor can make a good enough product at a good enough price. In Google's case, the answer is no. In Coke's case, the answer is yes.

I'm not claiming that every product possible will result in a monopoly, just that for anything that requires unusual skill to do, normal economic models should admit a monopoly can form.

 

[jack action]

In Google's case, the answer is no.

I use DuckDuckGo by default.

 

[Bystander]

In Coke's case, the answer is yes.

NOT even close.