Are monopolies/cartels always a result of government interference in the free market?

Have philosophical discussions about politics, law, and government.
Featured Article: Definition of Freedom - What Freedom Means to Me
Steve3007
Posts: 5408
Joined: June 15th, 2011, 5:53 pm
Favorite Philosopher: Eratosthenes
Location: UK

Are monopolies/cartels always a result of government interference in the free market?

Post by Steve3007 » February 2nd, 2018, 1:10 pm

This is a spin-off from part of the conversation about economics that is (as I write) currently happening in the "Why we Cannot have the Right Not To Be Offended" topic.

Monopoly: "The exclusive possession or control of the supply of or trade in a commodity or service."

Cartel: "An association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition."

They are generally regarded as anti-competitive and therefore, at least for people who think competition is a good way to generate wealth and innovation, a bad thing. But can they arise "naturally" through freely-entered-into agreements between market participants or do they always involve, somewhere along the line, intervention by forces which are not subject to the rules of the market (or who make the rules), like governments?

In the other topic, as an example, I cited this article about the alleged monopoly held by Microsoft in certain markets (a bit old, but it does seem to reasonably succinctly discuss the arguments that were used against Microsoft at the time):

http://www.pff.org/issues-pubs/pops/pop ... facts.html

On a brief reading it seems like a reasonably good starting point for discussing whether a monopoly can arise "naturally". It judges Microsoft's actions against the Sherman Antitrust Act which, I gather, is the original anti-monopoly legislation in the US system. Other jurisdictions have analogous laws. The EU, for example, has article 101 of the Treaty on the Functioning of the European Union.

User avatar
Frost
Posts: 510
Joined: January 20th, 2018, 2:44 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Frost » February 2nd, 2018, 1:37 pm

A principled distinction between a "free market price" and a "monopoly price" does not appear possible. The Sherman Antitrust Act does not even define the concept of "monopolizing." Within economics, there is a lack of any solid definition. The definition you provided really does not make sense economically, since it assumes homogeneity of commodities and services exist.

I think part of the confusing results from a lack of understanding of the praxeological structure of economic interactions. There is no direct control over pricing since price is a mutual phenomenon. This is why it seems that there can be no distinction between a free market price and a monopoly price.

However, the concept of monopoly originated when it was imposed by the king:
A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise [...] to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.

~ Quoted in Richard T. Ely and others, Outlines of Economics, 3rd edition, New York: Macmillan & Co., (1917) pages 190-191
It is the restrictions by government which prohibit competition which creates monopolies.

Steve3007
Posts: 5408
Joined: June 15th, 2011, 5:53 pm
Favorite Philosopher: Eratosthenes
Location: UK

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Steve3007 » February 2nd, 2018, 1:44 pm

Frost. I don't have time for a detailed reply yet, but briefly:

I accept that the definition of monopoly in the OP may not be the best one. I just found it by googling "monopoly definition"! If we could come up with a better one, that would be good. But you then seem to argue that because the concept of monopoly originated with a monarch it must always come from governments. If that is your argument, then I don't see it as a valid one. Just because a king can impose a monopoly it doesn't follow that all monopolies originate from king-like figures.

User avatar
Frost
Posts: 510
Joined: January 20th, 2018, 2:44 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Frost » February 2nd, 2018, 2:29 pm

Steve3007 wrote:
February 2nd, 2018, 1:44 pm
Frost. I don't have time for a detailed reply yet, but briefly:

I accept that the definition of monopoly in the OP may not be the best one. I just found it by googling "monopoly definition"! If we could come up with a better one, that would be good. But you then seem to argue that because the concept of monopoly originated with a monarch it must always come from governments. If that is your argument, then I don't see it as a valid one. Just because a king can impose a monopoly it doesn't follow that all monopolies originate from king-like figures.
No, you're right. That is not the explanation, but it was just a point I was trying to make. But it does get at the truth that monopolies can only emerge when competition is forcefully prohibited. On a free market, even if competition does not emerge and only a single company provides a particular good, it is not clear to say that this is a monopoly. Since price is determined mutually, if people buy the product from that single producer, it is a market price. The company cannot forcibly control pricing (unless government gets involved) and people can choose not to purchase it or to reduce the amount they purchase (i.e. their demand curve is elastic). So my point is that a monopoly is only a coherent concept when it involves government or some sort of other coercion, such as gangs, that either prohibit competition or force particular prices.

It is also a problem because goods are not homogenous. For example, say you want to buy a new car. You can shop around for prices, but the same exact car is not the same exact good, because you may value buying it from a local dealer more, or perhaps a dealer that you felt was very honest, etc. They are, when it comes down to the individual subjective valuation necessary to consummate an economic transaction, effectively different goods. In other words, each dealer, in effect, has a "monopoly" over its product, since each dealer is unique in its own way.

User avatar
Albert Tatlock
Posts: 183
Joined: October 15th, 2017, 3:23 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Albert Tatlock » February 2nd, 2018, 4:02 pm

Frost wrote:
February 2nd, 2018, 1:37 pm
A principled distinction between a "free market price" and a "monopoly price" does not appear possible. The Sherman Antitrust Act does not even define the concept of "monopolizing." Within economics, there is a lack of any solid definition. The definition you provided really does not make sense economically, since it assumes homogeneity of commodities and services exist.

I think part of the confusing results from a lack of understanding of the praxeological structure of economic interactions. There is no direct control over pricing since price is a mutual phenomenon. This is why it seems that there can be no distinction between a free market price and a monopoly price.
It's funny, I know almost nothing about economics yet I still somehow know this is a load of tosh. I suppose I could be mistaken due to my lack of understanding of the praxeological structure of economic interactions.

Londoner
Posts: 1783
Joined: March 8th, 2013, 12:46 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Londoner » February 3rd, 2018, 9:53 am

It is surely a matter of the particular economics of the business. For example, if I own a quarry then I am likely to hold a local monopoly because the cost of transporting the product is so significant. Of course that could change, perhaps some new form of transportation comes in that erodes that advantage. Unless I am the only producer in the world, and my product is an absolute necessity, then of course there are limits on how much I can exploit my monopoly position. Monopolies of this type are arising all the time without any intervention from government.

A monopoly by law is something different. In the case of the monopoly granted by the King, the monopoly is not in the product being traded, the monopoly is the King's power to prevent or allow trade. When the King sells me a monopoly, he is effectively imposing a tax on that product. What I pay up-front to the King will be extracted from my customers. It is no different from a sales tax; every time I buy some goods in the UK I have to pay a percentage tax. I have to pay, I cannot choose to not pay, because the state has a monopoly power over trade.

User avatar
Albert Tatlock
Posts: 183
Joined: October 15th, 2017, 3:23 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Albert Tatlock » February 3rd, 2018, 10:19 am

Londoner wrote:
February 3rd, 2018, 9:53 am
For example, if I own a quarry then I am likely to hold a local monopoly because the cost of transporting the product is so significant.
How is the cost of transport more significant for a product that comes from a quarry rather than one made in a factory? And how does the cost of transport have any bearing on the likelihood of a monopoly?

Londoner
Posts: 1783
Joined: March 8th, 2013, 12:46 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Londoner » February 3rd, 2018, 1:27 pm

Albert Tatlock wrote:
February 3rd, 2018, 10:19 am
Londoner wrote:
February 3rd, 2018, 9:53 am
For example, if I own a quarry then I am likely to hold a local monopoly because the cost of transporting the product is so significant.
How is the cost of transport more significant for a product that comes from a quarry rather than one made in a factory? And how does the cost of transport have any bearing on the likelihood of a monopoly?
Just because it is heavy and low value, so distance transported to the customer is a major cost. That means the quarry can always undercut its competitors when selling to customers nearby. It is a real example; it is why it was worth buying shares in a local cement maker or aggregate provider. If one of the big firms want the business they will usually buy it out at a premium, rather than compete with it, because although they have some advantages from economies of scale they aren't usually enough to overcome the local firm's cost advantage on transport.

Steve3007
Posts: 5408
Joined: June 15th, 2011, 5:53 pm
Favorite Philosopher: Eratosthenes
Location: UK

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Steve3007 » February 5th, 2018, 9:27 am

Frost wrote:No, you're right. That is not the explanation, but it was just a point I was trying to make. But it does get at the truth that monopolies can only emerge when competition is forcefully prohibited. On a free market, even if competition does not emerge and only a single company provides a particular good, it is not clear to say that this is a monopoly. Since price is determined mutually, if people buy the product from that single producer, it is a market price. The company cannot forcibly control pricing (unless government gets involved) and people can choose not to purchase it or to reduce the amount they purchase (i.e. their demand curve is elastic). So my point is that a monopoly is only a coherent concept when it involves government or some sort of other coercion, such as gangs, that either prohibit competition or force particular prices.
In your example where there is only one supplier in the market, I can appreciate your argument as to why the price is still theoretically a fair market price, because the consumer is free to reduce or refrain from buying. The only forces acting in that market are market forces, so the price is, by definition, a fair market price. But if we say that this is therefore not a monopoly then it seems almost as if you're claiming that monopolies can't exist in free markets by defining a monopoly as something that can't exist in a free market - i.e. a begging the question fallacy. If we were to take a simple etymological approach to defining "monopoly" ("single seller") then surely your single-seller scenario is, by definition, a monopoly? This is true even if we have trouble working out how that differs from a polypoly/oligopoly (or whatever the correct word is) in terms of the prices that are theoretically reached. So I suppose the task is to try to make the monopoly concept coherent in a free market by seeing if it's possible to do the thing that you've said is difficult - calculating fair price variations between the two scenarios.

In practice, the most obvious objection to this scenario is that the customer may not have the option to stop or reduce purchasing, because the product might be a necessity, like food.

Even if it's not something that is regarded as a necessity, the fact that there is only one seller surely does mean that prices will tend to be higher than they would have been with more than one seller. Your argument would presumably be that in the single-seller scenario the seller is still not free to charge as much as he wishes because if nobody buys he goes bust. So he has to try to set his prices at a level which balances the number of buyers against the profit on each sale which maximises overall profit. Whether that means a small or large number of buyers will presumably depend on details of that specific market and product.

But what about hidden variables? For any product there will generally be processes that go into the manufacture of which the customer is not aware in detail. In fact, that is often one of the reasons why he is a buyer and not a producer - because he can't make the product himself. That is in fact why at the company for which I personally work we are careful not to share all of our design documents with our customers! In a free market, the way that a customer can be sure that these hidden processes are running at high efficiency is because if they weren't doing so then competing suppliers would jump in and undercut us. But if there is only one supplier then there is no selective pressure for this to happen.

Isn't this one example of how we can demonstrate that a single seller will, ceteris paribus, charge higher prices?

User avatar
Count Lucanor
Posts: 363
Joined: May 6th, 2017, 5:08 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Count Lucanor » February 6th, 2018, 10:32 am

Monopolies can arise "naturally", of course. The general tendency among capitalist competitors is to kill each other until one controls the market. Sometimes just a few are left and since it becomes easier to negotiate, instead of fighting each other they decide to collude to control demand, supply and prices, for bigger and quicker profits than if they just kept competing. Then you have a cartel. The OPEC is a cartel.

User avatar
Frost
Posts: 510
Joined: January 20th, 2018, 2:44 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Frost » February 6th, 2018, 10:01 pm

Steve3007 wrote:
February 5th, 2018, 9:27 am
In your example where there is only one supplier in the market, I can appreciate your argument as to why the price is still theoretically a fair market price, because the consumer is free to reduce or refrain from buying. The only forces acting in that market are market forces, so the price is, by definition, a fair market price. But if we say that this is therefore not a monopoly then it seems almost as if you're claiming that monopolies can't exist in free markets by defining a monopoly as something that can't exist in a free market - i.e. a begging the question fallacy. If we were to take a simple etymological approach to defining "monopoly" ("single seller") then surely your single-seller scenario is, by definition, a monopoly? This is true even if we have trouble working out how that differs from a polypoly/oligopoly (or whatever the correct word is) in terms of the prices that are theoretically reached. So I suppose the task is to try to make the monopoly concept coherent in a free market by seeing if it's possible to do the thing that you've said is difficult - calculating fair price variations between the two scenarios.

In practice, the most obvious objection to this scenario is that the customer may not have the option to stop or reduce purchasing, because the product might be a necessity, like food.

Even if it's not something that is regarded as a necessity, the fact that there is only one seller surely does mean that prices will tend to be higher than they would have been with more than one seller. Your argument would presumably be that in the single-seller scenario the seller is still not free to charge as much as he wishes because if nobody buys he goes bust. So he has to try to set his prices at a level which balances the number of buyers against the profit on each sale which maximises overall profit. Whether that means a small or large number of buyers will presumably depend on details of that specific market and product.

But what about hidden variables? For any product there will generally be processes that go into the manufacture of which the customer is not aware in detail. In fact, that is often one of the reasons why he is a buyer and not a producer - because he can't make the product himself. That is in fact why at the company for which I personally work we are careful not to share all of our design documents with our customers! In a free market, the way that a customer can be sure that these hidden processes are running at high efficiency is because if they weren't doing so then competing suppliers would jump in and undercut us. But if there is only one supplier then there is no selective pressure for this to happen.

Isn't this one example of how we can demonstrate that a single seller will, ceteris paribus, charge higher prices?

Monopolies cannot be considered being a single seller of a good, or else practically every business is a monopoly. I'm not even sure if it's quite possible for there to be truly homogenous goods. Each business is unique in some sense and therefore offers different goods. For example, buying a car from a car dealership is not a matter of selecting from homogenous goods, but rather each dealership offers a unique good due to the difference in so many factors involved in providing that good.

That a single seller charges higher prices does not make it a monopoly due to the dynamics of exchange. In a free market, exchanges are voluntary, and the seller cannot force the buyer to buy at a particular price. If I have a unique item I am selling on e-bay, does that mean I am a monopoly? Should the government come in and determine what the fair price should be? Based upon what if I am offering a unique product? Furthermore, I cannot force the buyer to buy at any particular price.

I suppose we could use the classic well example where there is one person that owns the only water source anywhere around and he sells to the town, and he one day decides to charge exorbitant amounts. In clear examples, this seems to be an appropriate area for government intervention to avoid coercion of procurement of basic necessities for life. However, in instances of natural disaster, for instance, the mere rising of prices is not monopolistic since it is allocating scarce resources. People want it so that poor people can buy the product as well, but if it sells out, poor people cannot buy it anyway. The problem is, without economic understanding, people are all too quick to label something as "predatory" or "monopolistic." While there are some rare instances which justify legal intervention, that is quite rare on a free market and such violations must be approached with economic understanding and seen as gross violations of the rights of others (such as the well example).

User avatar
Greta
Site Admin
Posts: 7242
Joined: December 16th, 2013, 9:05 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Greta » February 7th, 2018, 12:32 am

Cartels and monopolies naturally emerge without government competition regulation via economies of scale, at least up to now. It's hard to say how things will pan out with rapid technological change - whether the "old lions" of industry use technology to cement their position or if the "young lions" of AI, post-blockchain technologies and quantum computing will break into the "pride".

User avatar
Frost
Posts: 510
Joined: January 20th, 2018, 2:44 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Frost » February 7th, 2018, 12:54 am

Greta wrote:
February 7th, 2018, 12:32 am
Cartels and monopolies naturally emerge without government competition regulation via economies of scale, at least up to now. It's hard to say how things will pan out with rapid technological change - whether the "old lions" of industry use technology to cement their position or if the "young lions" of AI, post-blockchain technologies and quantum computing will break into the "pride".
Except that is not backed up historically or by economic theory. Please name a company that has ever become a monopoly without government intervention. I hope you realize that with larger and larger companies it is not as simple as increasing economies of scale, since there can be a lack of ability for economic calculation if the company attempts too much vertical integration.

User avatar
Frost
Posts: 510
Joined: January 20th, 2018, 2:44 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Frost » February 7th, 2018, 12:55 am

Count Lucanor wrote:
February 6th, 2018, 10:32 am
Monopolies can arise "naturally", of course. The general tendency among capitalist competitors is to kill each other until one controls the market.
Based on what? This has never happened. What evidence do you have to support this claim?

User avatar
Greta
Site Admin
Posts: 7242
Joined: December 16th, 2013, 9:05 pm

Re: Are monopolies/cartels always a result of government interference in the free market?

Post by Greta » February 7th, 2018, 1:11 am

https://opentextbc.ca/principlesofecono ... -to-entry/
Economies of scale
Economies of scale can combine with the size of the market to limit competition ...

Control of a Physical Resource
Another type of natural monopoly occurs when a company has control of a scarce physical resource. In the U.S. economy, one historical example of this pattern occurred when ALCOA—the Aluminum Company of America—controlled most of the supply of bauxite, a key mineral used in making aluminum ...

Legal Monopoly
... A natural monopoly can also arise in smaller local markets for products that are difficult to transport. For example, cement production exhibits economies of scale, and the quantity of cement demanded in a local area may not be much larger than what a single plant can produce. Moreover, the costs of transporting cement over land are high, and so a cement plant in an area without access to water transportation may be a natural monopoly.
The table under the heading, Summing Up Barriers to Entry, shows that some factors are natural and some governmental.

Post Reply