Antitrust: Is there really a point?

[The Don]

I just wanted to quickly start up an antitrust debate since I have not seen one on these forums yet. In my opinion, the only way one can be in favor of antitrust regulation is if they are ignorant to or misinformed on several economic principles (and, to a smaller extent, the nature of government intervention).

Fallacies:

1) Firms can gain monopoly status without the aid of government

I am not one to claim that it is impossible for firms to attain a monopoly status which is detrimental to consumers. I will claim, however, that this is impossible without the aid of government. Take Microsoft for example; the prices of their software would be significantly lower if it were not for the state-imposed intellectual property laws. Simply put, these laws prevent other firms from entering the market -- not the efficiency of Microsoft’s production. It is ironic that the government went after Microsoft for their monopoly via antitrust, seeing how it is the entity which caused it.

2) Competition is based on the quantity of firms in the market.

This is based on popular ‘perfect competition’ models which seem to have dominated economic thought throughout the twentieth century. It is my assertion that a market can both competitive and efficient with but a single firm. How do we know this? Because the prices are low and the firm is profiting. Under these circumstances, one particular firm is able to produce and distribute their goods and services so efficiently that their competitors cannot enter the market. Prices are low, the firm is profiting, everyone is happy. The number of firms has nothing to do with the efficiency of the market.

3) Predatory pricing is profitable for businesses

I think it is clear to everyone that predatory pricing is unprofitable for the monopolist in the short-run. I contend, though, that there is no way for this to be profitable (or at least more profitable than standard pricing practices) in the long-run. For example, Wal-Mart has held a very dominant market position for well over a decade; putting many other firms out of business with their low prices. During this time, however, they have continued to offer the lowest prices in the market, failing to artificially raise them at the expense of the consumer. They are profiting, and the consumer is receiving goods at low prices. Why is this? Why wouldn’t they just sell below cost in an attempt to drive everyone else out of business, and then raise prices to artificially high levels?

The primary reason is the fact that Wal-Mart knows that it provides goods in a world of imperfect information, namely differing tastes and preferences. They realize that just because their prices are the lowest doesn’t necessarily mean that they will put all competing firms out of business. While prices are certainly important to consumer demand, there are other factors involved. This is the nature of imperfect information and differing tastes and preferences. Because they are uncertain about the future of the market, it is unsafe for them to lower prices to the level which is very likely to put other firms out of business. Why? Consumers will harbor a grudge (change in tastes and preferences) against the monopolist when they raise their prices to artificial levels. At the same time, other firms will see the opportunity to enter the market, given the high prices and the overall dissatisfaction with the monopolist. The monopolist may again try to lower prices to below cost, driving the other firms out, and the cycle will continue... Here’s the point; this predatory pricing scheme simply isn’t more profitable than offering products at a price which is reasonable in relation to their costs. It just doesn't make sense for the predatory firm to constantly manipulate prices in the face of competition, when, under normal circumstances, they would have a dominant market position regardless. This is the reason why predatory pricing is so uncommon, not antitrust legislation.

Feel free to debate.

[tylerdurden]

Some of my previous writings in this forum about antitrust:

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Antitrust laws invariably harm consumers.

They are not used against monopolies, because monopolies derrive their market dominance from government protection in the first place. Instead, they punish firms that achieve market dominance through successful competition. The elimination of competitors is not the same as the elimination of competition (only government itself can achieve that).

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The theory of natural monopolies was developed (by interventionist economists) well after such monopolies were granted (for political reasons). The theory was then used to retroactively justify the government intervention.

The theory's suggestions are not bourne out by historical fact, either. There is no evidence that any firm has ever achieved long-term efficiency gains by being the only player in a given market. To the contrary, deregulation consistently brings more efficiency and lower prices to consumers.

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Since monopolies only occur when government licenses them, there is no need for anti-monopoly legislation, as long as the government stops creating them.

Antitrust legislation has never, ever, ever been used against a company that "became" a monopoly on its own. They have been used as a club to bludgeon companies that competed successfully and ran a lot of competitors out of business - but a lack of competitors does not mean that competition is being hindered.

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[sam h]

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1) Firms can gain monopoly status without the aid of government

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It is rare for firms to gain effective monopoly status without government, but it has happened at some points. The more important point to make, however, is that much anti-trust legislation is not really supposed to prevent monopolyso much as oligopoly, which has historically been quite common (though often aided by the state too).

I don't really undertand your Microsoft example. How have anti-trust laws affected the price of their software? And if the price would be lower without them, as you say, then aren't the laws actually helping other competitors because the microsoft product isn't as competitive as it could be?

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It is my assertion that a market can both competitive and efficient with but a single firm. How do we know this? Because the prices are low and the firm is profiting. Under these circumstances, one particular firm is able to produce and distribute their goods and services so efficiently that their competitors cannot enter the market.

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How can it be competitive with one firm? There is no competition by definition. Even if prices seem "low," how would you determine whether or not there were monopoly rents without a benchmark to compare with? I don't see what the firm profiting has to do with it. That's just to be expected in a monopoly situation.

Honestly, I think you are too hung up on this efficiency thing. When most markets aren't competitive, its usually because something other than the efficiency of the major player is keeping others out. There are plenty of markets in which barriers to entry are very high for a variety of reasons.

Gotta run, more later if you want to debate these things.

[Borodog]

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1) Firms can gain monopoly status without the aid of government

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It is rare for firms to gain effective monopoly status without government, but it has happened at some points.

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Name two.

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The more important point to make, however, is that much anti-trust legislation is not really supposed to prevent monopoly so much as oligopoly . . .

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Why? Under what justification?

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I don't really undertand your Microsoft example. How have anti-trust laws affected the price of their software? And if the price would be lower without them, as you say, then aren't the laws actually helping other competitors because the microsoft product isn't as competitive as it could be?

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Is that supposed to be a good thing?

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It is my assertion that a market can both competitive and efficient with but a single firm. How do we know this? Because the prices are low and the firm is profiting. Under these circumstances, one particular firm is able to produce and distribute their goods and services so efficiently that their competitors cannot enter the market.

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How can it be competitive with one firm? There is no competition by definition.

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Actually, that is not true at all. This is non-competitive only under the bizarre definition of "perfect competition," one of the most useless pieces of doublethink I have ever run across. Until the early 20th century, "competition" was a behaviorial concept involving product differentiation, price advantage, etc. In the early 20th century the mathematical economists developed a mathematical model of "perfect competition," which relies on an absurd suite of assumptions such as:

a) Products are homogenoeous. This of course is absurd, as competitors in the real world will seek to differentiate their products from their competition. There are probably of order 5000 different brands of beer alone available in the "beer market," for example

b) Prices are homogeneous. Again absurd. Even given that inhomogeneous products may be expected to produce inhomogeneous prices, identical products will have inhomogeneous prices. For example, different markets may have different demands for the same products, leading to different prices. New entrants into the market may offer products at substantially lower prices (even at a loss) to enter the market (a phenomenon I call "market attack").

c) Perfect information. For perfect competition you need perfect information, which is of course absurd. All consumers cannot possibly know the details of all competitors. The whole concept of perfect information is moot in the model anyway, since the products and prices are all homogeneous!

d) Many firms. This is foolish. If by definition you are a monopoly when you provide a product that no competitor produces, every inventor or newly differentiated product would make one a monopolist. The only long running market "monopoly" that I know of was Standard Oil, who only maintained their market dominance by providing such an excellent product at such a low cost that no would-be competitors could profitably enter the market.

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Even if prices seem "low," how would you determine whether or not there were monopoly rents without a benchmark to compare with?

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You're suggesting that we should compare the "monopoly" price with some nebulous market price that would be obtained from a thousand non-existent competitors, when the actual comparison should be with no price at all--because the product would not be being produced if the "monopolist" were not providing it.

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I don't see what the firm profiting has to do with it. That's just to be expected in a monopoly situation.

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That's just the point though. The implication is that somehow, magically, a single provider will reap "monopoly profits." But of course no one is holding a gun to the heads of consumers. The monopolist does not "make" the price. The price is freely negotiated by both sides. And if the price that consumers are willing to pay is so high that the level of profit made by the provider is higher than the general level of profit in the economy, entrepeneurs and capital will be enticed to enter this new market. Only by acting competitively, even in the absence of competition, can the "monopolist" prevent others from entering the market. Unless, of course, he can use the police power of the state to simply legislate and regulate his competition away.

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Honestly, I think you are too hung up on this efficiency thing. When most markets aren't competitive, its usually because something other than the efficiency of the major player is keeping others out. There are plenty of markets in which barriers to entry are very high for a variety of reasons.

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Name two (that aren't governmental).

[tylerdurden]

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d) Many firms. This is foolish. If by definition you are a monopoly when you provide a product that no competitor produces, every inventor or newly differentiated product would make one a monopolist. The only long running market "monopoly" that I know of was Standard Oil, who only maintained their market dominance by providing such an excellent product at such a low cost that no would-be competitors could profitably enter the market.

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Actually, you'll be pleased to discover that standard oil actually did use government to establish their monopoly.

Once it became clear that Standard was buying up refineries, every joe schmoe decided to build one, in the hopes of getting bought out. Rockefeller quickly got tired of spending money buying up all these rinky-dink guys, so he convinced the government to enact "safety standards" which created a high barrier to entry.

[Borodog]

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d) Many firms. This is foolish. If by definition you are a monopoly when you provide a product that no competitor produces, every inventor or newly differentiated product would make one a monopolist. The only long running market "monopoly" that I know of was Standard Oil, who only maintained their market dominance by providing such an excellent product at such a low cost that no would-be competitors could profitably enter the market.

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Actually, you'll be pleased to discover that standard oil actually did use government to establish their monopoly.

Once it became clear that Standard was buying up refineries, every joe schmoe decided to build one, in the hopes of getting bought out. Rockefeller quickly got tired of spending money buying up all these rinky-dink guys, so he convinced the government to enact "safety standards" which created a high barrier to entry.

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Damn. You learn something new every day. Thanks!

[sam h]

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1) Firms can gain monopoly status without the aid of government



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It is rare for firms to gain effective monopoly status without government, but it has happened at some points.



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Name two.

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I should add a bit of nuance to my statement. A pure free market capitalism has never existed, and so it is unthinkable that a major firm, would be monopoly or not, would ever exist that was unregulated in its sector. The question is whether any firms that ever achieved effective monopolies (and I said there were few) did so largely for reasons unrelated to government regulation. I would submit that Standard Oil and Microsoft both fall into this category, but again, may point was that there are very few of these examples historically.

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The more important point to make, however, is that much anti-trust legislation is not really supposed to prevent monopoly so much as oligopoly . . .



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Why? Under what justification?

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I was simply responding to the original poster, correcting him on the intent of anti-trust laws. What is your issue with that response? The justification usually raised by those supporting these laws is obviously that cartels are bad for consumers.

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I don't really undertand your Microsoft example. How have anti-trust laws affected the price of their software? And if the price would be lower without them, as you say, then aren't the laws actually helping other competitors because the microsoft product isn't as competitive as it could be?



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Is that supposed to be a good thing?


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What is your problem? I was asking the OP a question. When did I say this was a good thing?

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It is my assertion that a market can both competitive and efficient with but a single firm. How do we know this? Because the prices are low and the firm is profiting. Under these circumstances, one particular firm is able to produce and distribute their goods and services so efficiently that their competitors cannot enter the market.


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How can it be competitive with one firm? There is no competition by definition.

[/ QUOTE ]

Actually, that is not true at all. This is non-competitive only under the bizarre definition of "perfect competition," one of the most useless pieces of doublethink I have ever run across. Until the early 20th century, "competition" was a behaviorial concept involving product differentiation, price advantage, etc. In the early 20th century the mathematical economists developed a mathematical model of "perfect competition," which relies on an absurd suite of assumptions such as...

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Empirical reality never meets the standards of perfect competition. That's not a big secret. It is just a set of modeling assumptions.

But in the ordinary language of the business world nobody cares about modeling assumptions. When people talk about competition, they are talking about actual firms in the sector. Of course there is always potential competition if others move in. But if you are the only player, nobody is going to say that you face stiff competition. And if you are the only player, generally you will not continually innovate, improve, and fight for market share with the same vigor just because of potential competition.

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Even if prices seem "low," how would you determine whether or not there were monopoly rents without a benchmark to compare with?



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You're suggesting that we should compare the "monopoly" price with some nebulous market price that would be obtained from a thousand non-existent competitors, when the actual comparison should be with no price at all--because the product would not be being produced if the "monopolist" were not providing it.

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The comparison I suggested, in which you compare the world as is with a hypothetical model in which other conditions hold, is the basic intuition behind a lot of economic models that approach these subject. That is the whole idea behind the concept of a rent, whether it is a monopoly rent or a rent from government intervention. Say what one will about the discipline of economics, but that is the approach. My point to the original poster was simply that you cannot tell whether the absence of other firms is hurting the efficiency of the sector without some counterfactual, which is logically obvious. In the absence of an empirical counterfactual, economics supplies a hyothetical one for better or for worse. Your counterfactual of the product not being produced at all makes no sense to me given the questions that are being debated.

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I don't see what the firm profiting has to do with it. That's just to be expected in a monopoly situation.



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That's just the point though. The implication is that somehow, magically, a single provider will reap "monopoly profits." But of course no one is holding a gun to the heads of consumers. The monopolist does not "make" the price. The price is freely negotiated by both sides. And if the price that consumers are willing to pay is so high that the level of profit made by the provider is higher than the general level of profit in the economy, entrepeneurs and capital will be enticed to enter this new market. Only by acting competitively, even in the absence of competition, can the "monopolist" prevent others from entering the market. Unless, of course, he can use the police power of the state to simply legislate and regulate his competition away.

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As I said in my original post, I don't think these kind of effective monopolies occur very often at all. When they do occur, however, then it is silly to say that nobody is forcing the consumer to enter the transaction. That's technically true, but if you want to buy a PC, then you don't have much of a choice but to pay the price for Windows. Most people will never actually even know how much it costs, since the price is just built-in to whatever they happen to be buying from Dell or whoever. Do you really think the price of Windows is determined in the market, the result of some equilibrium between supply and demand? Of course Microsoft "makes" the price to a significant degree.

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Honestly, I think you are too hung up on this efficiency thing. When most markets aren't competitive, its usually because something other than the efficiency of the major player is keeping others out. There are plenty of markets in which barriers to entry are very high for a variety of reasons.


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Name two (that aren't governmental).


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Name two sectors with high barriers to entry for non-regulatory reasons? Historically, this has been the case in most countries for almost any sector that is capital intensive. Right now some obvious ones are utilities like gas and electricity. Others might have high barriers to entry because of the nature of the sector. Maybe it is conducive to network effects, like on-line auctioning, or maybe it depends upon ownership of resources that are scarce, like diamond production.

[Borodog]

Sam,

My apologies if my questions came off as terse or combative. I was just looking for clarification.

[bobman0330]

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1) Firms can gain monopoly status without the aid of government

I am not one to claim that it is impossible for firms to attain a monopoly status which is detrimental to consumers. I will claim, however, that this is impossible without the aid of government. Take Microsoft for example; the prices of their software would be significantly lower if it were not for the state-imposed intellectual property laws. Simply put, these laws prevent other firms from entering the market -- not the efficiency of Microsoft’s production. It is ironic that the government went after Microsoft for their monopoly via antitrust, seeing how it is the entity which caused it.

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Assuming this is true, do you think that we should repeal IP laws so we can get rid of antitrust laws too?

[coffeecrazy1]

I'm really not well-versed enough in economic theory to debate this one at a sufficient level.

But...I would like to make a point of contention regarding your IP assertions. Are you contending that the ideas people have are free domain...ergo...nobody creates anything or makes anything they can call their own? Isn't that the point of competition? Doing things differently than the competitor, and drawing a client base who prefers your style over another?

Look...I'm most likely in agreement with you, given my libertarianism, and I don't usually like laws, but...intellectual property is indeed property, with all the same rights and privileges as a TV or a car. Otherwise, why bother creating anything, if you can't profit from your creation?