We are repeatedly told that without the protective eye of the government in a free market, monstrous coercive monopolies would develop in each sector of the economy and that the devastating impact of these monopolies would give a few corporations the ability to raise prices with no competing firm to challenge their dominance. This argument is interesting but usually one-sided, and rarely are counter arguments discussed.
When one talks about "the evils of monopolies" the phrase does not imply the difficultly of competition, but its impossibility.
It would be difficult to create a competing search engine against Google but it is not impossible, thus Google does not have a coercive monopoly over the search engine industry.
Imagine if Google decided to charge 10 cents per search. The resulting defection to other search engines would illustrate Google’s lack of monopoly status. This example shows the difference between a firm having market power and being a coercive monopoly.
When looking through history, the only coercive monopolies that existed were not the result of price wars or strategic business decisions, but the result of governmental actions.
The most pressing example cited in history classes is the example of the Big Four railroads. The Central Pacific had a coercive monopoly on the railroads of California that allowed them to increase prices to squeeze every dime from farmers and shippers who did not have an alternative railroad. And this was made possible by the federal and California governments.
The federal government subsidized the creation of a large majority of Central Pacific’s tracks. This allowed the Central Pacific to get ahead of the competition as the cost of startup was passed on to taxpayers. Potential competitors against the Central Pacific, bearing the full weight of the costs, would have had an unnaturally difficult time competing against the Central Pacific.
California’s legislature kept the state closed to competitors. The Big Four was granted exclusive access to the ports of California, making potential railroad businesses impossible. During the 30-year reign of the Big Four, many attempts were made to open new railroads but governmental action and not the free market defeated these attempts.
The argument most heard in an economics classroom goes something like this: If a company decreased prices, taking on losses to corner a market, squeezing out other firms, therein free from competing businesses, the company will increase prices radically. Could not this strategy be used to establish a coercive monopoly?
In his article "The Question of Monopolies," Nathaniel Branden argues the answer must be no. When prices would rise, the incentive for new firms and investors would enter the lucrative field with increase proportionately.
These new businesses would be in better health as they could take advantage of the high prices without taking on any of the losses. The competing firms would drive down prices to the equilibrium price.
If a non-coercive monopoly, or a market monopoly, were able to beat out other firms by producing goods or services at a lower cost and higher productivity, thus winning the support of the public, the negative consequences of being a monopoly would be non-existent. This firm would not warrant disciplinary action but reward and praise.
"In a free society… any monopoly which raised its prices above market level… would be virtually creating its own competition – competition too strong for it to drive out," Morris and Linda Tannehill point out in The Market for Liberty. "Not only are market monopolies no threat to anyone, the whole concept of monopoly, as commonly held, is in error. A market monopoly cannot prevent competition from entering its field because it cannot use coercion against would-be competitors, and thus it can never have that exclusive control that makes possible the fixing of prices…. The fear of ruthless, uncontrolled monopolies is a valid one, but it applies only to coercive monopolies. Coercive monopolies are an extension of government, not a product of the free market. Without governmental grants of special privilege, there could be no coercive monopolies."
If monopolies’ prices are an economic problem that warrants our concern, government intervention in the economy must be resisted, because the free market, not the government, would be the best defense against monopoly prices in today’s society.
Gilson, a business sophomore, can be reached via [email protected].
