Against pvn, Part 1

[bobman0330]

As I've mentioned before, I believe that pvn's opinions on various and sundry topics to be incorrect. If he chose to write them down on paper, they would not be worth the paper they were written on. Therefore:
1. He would be wise not to waste paper writing them down.
2. I will use the internet (no marginal costs for writing more stuff: perfect for debating sub-paper-value ideas) to rebut his wacky anarchist theories.

WACKY ANARCHIST THEORY #1: The government should not prohibit anti-competitive practices (monopolies, cartels, price-fixing, etc.). Market forces will defeat any monopolist who attempts to take advantage of his position by raising prices.

SANE NON-ANARCHIST COUNTEREXAMPLE:
Imagine an industry which requires substantial capital (physical or intellectual) to start a business. A good example is computer processor manufacturing. As a result of the high initial costs and the large fixed costs (e.g., R&D. Once you develop a microchip, you can build as many as you can sell for a small marginal cost. Therefore, there are substantial economies of scale.), the market is dominated by 2-3 major manufacturers. Call them Imtel and AMD' (anyone remember the name of that third company that use to make CPUs? Started with a C, i think). Furthermore, imagine that Imtel has a 75% market share, and AMD' 25%. Both companies spend about the same fraction of their budget on R&D. Since Imtel is spending 3 times as much, they quickly develop better chips and production methods and drive AMD' out of business with their superior, cheaper chips. Awesome.

Eventually the patents on Imtel's innovations run out, and Imtel gets tired of providing cheap excellent products when there is no competition. They double their prices, leading to groans of anguish from consumers. An enterprising young market-anarchist decides that the market is ripe for a new firm, PVN Corp., to take on the aging giant. Its unnamed founder goes to banks, VC firms, etc., and eventually scrapes up the $10 billion necessary to start a processor company, buy the equipment, duplicate Imtel's still-patented research, and build customer lists. PVN Corp. rolls out its identical line of microprocessors at half the price of Imtel. Profits are thin, because PVN Corp. is working just above cost to build a following.

Satisfied with his work, the CEO goes on vacation for a month. He returns, expecting his subordinates to have many glowing tales of success. Instead, he finds out that Imtel cut prices 75% the day he left, and has been selling at huge losses for the past month, relying on their capital reserves to pull them through (this does not have to be the case. Imtel could undercut PVN Corp. just by economies of scale, but I want to broaden the example). Having lots of debt and selling 0 products is bad, so PVN goes bankrupt. Creditors receive hardly anything, and Imtel quadruples prices the next day.

Not to be deterred, another aspiring entrepreneur decides that he too will challenge the giant. After all, they can't keep selling at a loss forever. He goes around to banks, VC firms, etc. But, surprise, he is unable to find any backers. Everyone is cowed by Imtel's willingness to smother competition. The monopoly remains, and high prices prevail...

[SheetWise]

Your hypothetical sounds similar to what happened in reality to Freddy Laker at the hands of PanAm. Interestingly, it was government regulations which both created and exacerbated the problems. The cure was airline deregulation. Sometimes the fix is worse than the problem. Freddy Laker Link.

[FishHooks]

I've also been wondering about his stance on this as well, but he told me natural monoplies can't happen when there is no govt regulation. While I wont attack him because I feel he knows more about economics than most people here I get your point and would like to know what he thinks about it.

I think a good example of no govt regulation would go back to the Industrial revioultion in america in the early 1900's with the railroad companies and with Rockafeller. There was hardly govt regulation at that time. He basically baught out every company he could, made deals with the railraod companies that if they wanted his business they had to charge his competitors more money than they were charging him. They agreed because his business was much more valuable because his company was much bigger. He became so powerful, and the railraod had to hike rates to individuals because of the rebates they were giving to rockafeller. At one point he made the railroad companies pay him like 20% of the profits when they shipped his competitors products. When you have such a huge market share like he did the railraods almost had to accept if they wanted to stay in business since most railroad companies were in debt from the large start up costs to build the railroads.

The reason why monoplies can occur in a non regulated govt is that that there are usually two costs associated with running a business. Fixed costs and varriable costs. Fix costs include the start up, like factories etc. When a company becomes so large their price per unit drops because the fix cost becomes so small. While a small company has high fixed cost because they cant produce/sell as much their big company competitor and the cost per unit is higher and they have to sell for more to make any profit.

Then once a monopoly occurs they can set the price above the equliberium which is usually an elasticity over 1, and make people pay more money because they dominate the market.

[tylerdurden]

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SANE NON-ANARCHIST COUNTEREXAMPLE:

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This isn't a counterexample. It's a hypothetical. If what you propose were actual inevitable reality, you would have no trouble finding an actual counterexample instead of having to make one up.

To address your points specifically, when PVN corp goes under, there are assets - both knowlege and tangible assets - that can be snapped up by other competitors which make their startup costs much less than PVN corp's costs were.

Furthermore, your characterization of "Imtel" as a monopoly is false. In your hypothetical, Imtel has no government-granted protection from competition, nor do they have complete control of the supply of the commodity (as evidenced by PVN corp's attempt to compete).

Your explanation of Imtel's behavior doesn't particularly impress me. So they drive out all competition, then raise prices. Apparently, while there is no competition, people are still buying Imtel's product. Where is the problem? The consumers are voluntarily buying, they must not find the prices too high, else they would not purchase Imtel's product. They are voting with their wallets, and their votes say that they feel that they are benefiting from the transactions.

Obviously, consumers would prefer that prices be lower - but they prefer lower prices even when there is *active* competition.

An individual will always try to find a job that pays more money for less work. Does that make him evil? What's different for Imtel?

[sam h]

Actual monopolies that fit the strict definition are few and far between, mainly arising in local markets. But situations often termed monopolistic competition are much more frequent, and really the pertinent issue. The obvious contemporary example is Microsoft's domination of the market for PC operating systems. They reap monopoly rents from a more or less shoddy product. Consumers voluntarily buy, but only because they have no real choice. To just say they are voting with their wallets misconstrues the situation. To make an analogy, lots of people vote in elections in one-party political regimes, but that is not really a situation of choice. In both instances, the stakeholders in the de facto monopolist benefit from the rent structure of the market to the detriment of the common good. However, in the economic examples, there are considerations of national industrial policy that may make the case stronger for supporting monopolistic competition for other reasons for some governments.

[mrgold]

[ QUOTE ]
[ QUOTE ]
SANE NON-ANARCHIST COUNTEREXAMPLE:

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This isn't a counterexample. It's a hypothetical. If what you propose were actual inevitable reality, you would have no trouble finding an actual counterexample instead of having to make one up.

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Microsoft, AT&T (although I don't know any specifics of that case), but other than that we have been breaking up monopolies since Standard Oil


[ QUOTE ]
Furthermore, your characterization of "Imtel" as a monopoly is false. In your hypothetical, Imtel has no government-granted protection from competition, nor do they have complete control of the supply of the commodity (as evidenced by PVN corp's attempt to compete).

[/ QUOTE ]

All that is nessecary for a company to sucessfuly engage in uncompetitive tactics is a significant barrier to entry to make it hard enough for another firm to enter the market that the origonaly company could ride out the storm (as described by the previous poster) each time a firm does.

[ QUOTE ]
Your explanation of Imtel's behavior doesn't particularly impress me. So they drive out all competition, then raise prices. Apparently, while there is no competition, people are still buying Imtel's product. Where is the problem? The consumers are voluntarily buying, they must not find the prices too high, else they would not purchase Imtel's product. They are voting with their wallets, and their votes say that they feel that they are benefiting from the transactions.

Obviously, consumers would prefer that prices be lower - but they prefer lower prices even when there is *active* competition.

An individual will always try to find a job that pays more money for less work. Does that make him evil? What's different for Imtel?

[/ QUOTE ]

No it does not make Imtel evil. In a free market system you have to expect each player to maximize his own personaly utility/profit/welfare. However, the state is in a position (and I would argue has a responsibility) to take each economic actors likely actions into account and set up rules that will maximize the general welfare. In this situation maximizing general welfare means insuring competitive markets. A profit-motivated monopoly will set prices above the social optimum/competitive market equilibrium point and produce an associated lower quantity. Enough consumers will still find these prices acceptable so that the monopoly can make a huge profit, but there will still be a large dead weight loss do to the consumers that would have been willing to pay a cost that is greater than the production of the good but less than the price that a monopoly would set(this is similar to a laborer who decides not to get a job because the tax on his income makes him decide he is better off unemployed). It is therefore in no ones interest (other than the monopolistic firm itself) that a monopoly be allowed to engage in uncompetitive tactics.

[fluxrad]

[ QUOTE ]
Your explanation of Imtel's behavior doesn't particularly impress me. So they drive out all competition, then raise prices. Apparently, while there is no competition, people are still buying Imtel's product. Where is the problem? The consumers are voluntarily buying, they must not find the prices too high, else they would not purchase Imtel's product. They are voting with their wallets, and their votes say that they feel that they are benefiting from the transactions.


[/ QUOTE ]

This is false. The very definition of a monopoly is that you cannot buy widgets from any other company than company X, even if you need widgets. For example, replace Imtel with "FoodCorp" and you'll see what I mean. Recognize that monopolies are created where goods have no economic substitute, such as in oil and computer components, so this "consumer choice" you speak of is bogus. It's the very lack of consumer choice that creates the monopoly.

What's the harm?

Monopolies lead to less competition.

Less competition leads to an inefficient market.

An inefficient market leads to an inefficient allocation of resources.

An inefficient allocation of resources leads to a smaller economy.

A smaller economy == teh bad.

You can be an anarchist. That's fine. But you can't sit there and say a complete laissez-faire market is the most efficient way to run an economy. Unless, of course, you'd like to elaborate on the idiocy of Keynesian economics.

[FishHooks]

I was wondering if you could address my examples. Again not trying to put you on the stand, because as I've said I respect your opinion and think you know more about economics that most if not all people in this forum.

[FishHooks]

[ QUOTE ]
Recognize that monopolies are created where goods have no economic substitute, such as in oil and computer components, so this "consumer choice" you speak of is bogus. It's the very lack of consumer choice that creates the monopoly.

[/ QUOTE ]
Oil does have a substitue at the margin, OPEC knows this as well, thats why they dont charge more than they have. OPEC wants to keep the price high enough to make more money but low enough so people dont pursure or make it non cost efficient to use alternative energy sources. There are substitues for oil. In terms of cars, you have electric, hydro. in terms of energy you have nuclear energy. They even have a new type of gas that has a large percentage of corn in it now. Not sure how good it is for your car but its much cheaper.

[tylerdurden]

[ QUOTE ]
Microsoft, AT&T (although I don't know any specifics of that case), but other than that we have been breaking up monopolies since Standard Oil

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AT&T and Standard Oil both benefitted from government protection (AT&T in outright monopolies granted by the state, Standard Oil in huge artificial barriers to entry erected by the state).

Microsoft is quite a different case, which I will address later.

[ QUOTE ]
All that is nessecary for a company to sucessfuly engage in uncompetitive tactics is a significant barrier to entry to make it hard enough for another firm to enter the market that the origonaly company could ride out the storm (as described by the previous poster) each time a firm does.

[/ QUOTE ]

And what is that barrier here? PVN corp was able to enter the market.

[ QUOTE ]
No it does not make Imtel evil. In a free market system you have to expect each player to maximize his own personaly utility/profit/welfare. However, the state is in a position (and I would argue has a responsibility) to take each economic actors likely actions into account and set up rules that will maximize the general welfare. In this situation maximizing general welfare means insuring competitive markets.

[/ QUOTE ]

The example given was still a competitive market.

[ QUOTE ]
A profit-motivated monopoly will set prices above the social optimum/competitive market equilibrium point and produce an associated lower quantity. Enough consumers will still find these prices acceptable so that the monopoly can make a huge profit, but there will still be a large dead weight loss do to the consumers that would have been willing to pay a cost that is greater than the production of the good but less than the price that a monopoly would set(this is similar to a laborer who decides not to get a job because the tax on his income makes him decide he is better off unemployed). It is therefore in no ones interest (other than the monopolistic firm itself) that a monopoly be allowed to engage in uncompetitive tactics.

[/ QUOTE ]

But where's the monopoly? The charges of "high barriers to entry" in this hypothetical don't hold water. Manufacturing (which is widely held as a insurmountable fixed cost in this field) can easily be outsourced to existing chip fabricators (this is routinely done even today).



Going back to Microsoft, if you examine the facts of the case you will find that the suit was not a result of government desire to protect consumers. It was directly a result of microsoft's competitors (mainly Sun and Netscape) attempt to unfairly cripple their more successful competitor, along with bureaucrats out to make a name for themselves.

There's nearly zero barrier to entry in software. There's no manufacturing costs, there are minimal liability concerns (ever read those EULAs?), and with the internet, there are near-zero distribution costs. It's arguably easier to compete in the software field than in any other field. A single guy in a basement can write successfull software, and microsoft can't stop him.