These notes are from the lecture Monopoly and Competition, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. DiLorenzo.
Neoclassical Competitive Model
- Assumptions of Neoclassical model of perfect competition:
- Homogeneous product.
- Homogeneous prices.
- Price equality.
- Perfect information.
- Costless entry / exist.
- Many firms.
- Homogeneous product.
- Difference between Neoclassical and Austrian theory:
- Neoclassical theory assumes many things, which the Austrian theory explains how they may or may not come about: competition is a dynamic ongoing process, of which mergers are a natural consequences.
- Hence, anti-trust interferes with that natural market process.
- Nirvana fallacy — “aha, the real world doesn’t match the neoclassical model of perfect competition; thus, we need anti-trust laws.
- Competition is essentially a dynamic process, the fundamental features of which are assumed away by neoclassicals.
- Neoclassical theory assumes many things, which the Austrian theory explains how they may or may not come about: competition is a dynamic ongoing process, of which mergers are a natural consequences.
Homogenous Product (Neoclassical Assumptions)
- Cereal companies started experimenting with all kinds of different cereals.
- Three companies obtained 90% of the market, and were sued by the State for having a “shared monopoly”:
- “Shared monopoly”.
- Obtained by “brand proliferation”.
- Judge ruled for the company, arguing that there are substitutes.
- “Shared monopoly”.
- Companies that engaged in product differentiation were accused of being monopolies, because they owned their own line.
- Confusion is based on a static analysis:
- Dead weight loss.
- Nirvana fallacy — comparing what exists to what would in never-never and.
- Should be comparing to zero (0), which is what you’d get without the ompany.
- Dead weight loss.
Homogeneous Pricing (Neoclassical Assumption)
- If companies price ioo low, they are accused of “predatory pricing”, and of being a monopoly:
- Charge very low rate.
- Drive competitors out of business.
- Subsidize losses.
- Then, when no-one’s left, can charge “monopoly rates” and magically no-one will enter into business to compete with you.
It is pretty clear that no company has ever tried this, and any company foolish enough to try this would go bankrupt.
- Charge very low rate.
- If companies price to high, they are charged of “price gouging” or “price-fixing”.
- Vanderbilt gave Rockefellar lower railroad rates because he provided such enormous business, and made a standing offer to anyone else who provided the same volume.
Many Firms (Neoclassical Assumption)
- Concentration ratios witch-hunting.
- Retreated from this in the 50s and 60s, and Austrians and even Chicagoeans used arguments against it.
- But lawyers still use “concentration ratios”.
- Red-Food case study:
- Red-Food bought 7 stores that were closing down, re-hiring 400 employees.
- The FCC sued, but the Federal judge over-ruled them, saying that Red- Food was just better.
- But the State threatened to hold Red-Food up in court forever.
- Thus, Red-Food agreed to sell the stores.
- Red-Food bought 7 stores that were closing down, re-hiring 400 employees.
- Concentration is natural in the real world and always changes — there are usually 2 or 3 companies that are just better in most industries.
- Domino Theory:
- Firms emerge and can produce products cheaper and underprice.
- Other firms see this, and merge too.
- Then you have a wave of mergers.
- Prices go down, and quantity goes up.
Neoclassicals see this as bad, because there are fewer firms; Austrians consider it good, because it means that there is strong competition and lower prices. - Firms emerge and can produce products cheaper and underprice.
“Output Restriction” from a “Cartel / Monopoly”
- First of all, what’s the “market level”?
- Secondly, how do we determine what the “market level” of production is?
Perfect Information (Neoclassical Assumption)
- The market reveals to us what that proper structure of the market ought to be — can’t know beforehand.
- If consumers know everything about products, it would rule out advertising, which facilitates competition, comparison-shopping, and lower prices.
{ 4 comments }
I study antitrust for a living, and I’m always amazed (and disgusted) at the lengths regulators will go to invent a “homogenous” product market. One of the more telling examples was an FTC case from about two years ago against a firm called MSC.Software. This was a fairly small company that made specialty simulation software for large industrial customers (such as Boeing). One of MSC’s product lines was a proprietary version of Nastran, a public domain code used for simulators. Two competitors produced knock-off versions of MSC’s Nastran product, but when the market for the software dried up, the two companies became insolvent, and MSC bought them both, essentially to acquire the engineering talent.
About two years after this took place, the FTC sued to retroactively undo the mergers (yes, they can do that.) The Commission said MSC’s Nastran was a unique product market under monopolization. This ignored the fact that (1) There were plenty of other Nastran-based programs on the market aside from the MSC version, (2) the two competitors failed because they had lost virtually all of their customers due to lack of demand, (3) all of MSC’s customers–the alleged “victims”–were large businesses that could easily afford to switch suppliers or develop their own programs, and (4) three of MSC’s competitors told the FTC that MSC’s actions had done nothing to harm competition.
Nevertheless, the FTC succeeded in forcing MSC to recreate one of its long-deceased competitors to ensure competition was restored for a software market with virtually no growth potential.
“Nevertheless, the FTC succeeded in forcing MSC to recreate one of its long-deceased competitors to ensure competition was restored for a software market with virtually no growth potential.”
Breathtaking. I don’t think this is what the Founding Fathers had in mind.
Scrap the federal government: it’s beyond reform.
What’s absolutely stupid about “anti-trust” regulation is that every single good or service is sold by a monopoly supplier if you define the market in question narrowly enough. Similarly, there are substitutes for every good and service if you define the market not so narrowly.
Just some random thoughts on ‘market monopolies’ (kinda oxymoronic, but here goes):
1) How can someone get a monopoly on the free market? One can’t cite anything today, because we don’t live in a free market. Also, even when a company has a large share of the market (say, MS, or Sony, with it’s PlayStation 2), there are always competitors, unless outlawed by the State.
2) One thing people keep forgetting is that their is just as much of an incentive to cartelize as their is to break free from a cartel and do business at a price that is more attractive to the consumer. If a monopoly is ‘holding out’ a good at a high price, there is a very large incentive for someone in the cartel (even if he is breaking the law) to undersell the cartel.
3) Although political monopolies are somewhat different in structure to market ones, even in these monopolies there are disagreements and in-fighting. In our current government, there has been a huge war going on for ages against liberals and conservatives. One will make something, the other will try to destroy it. It’s a little naive to think that any large producer (politically or market wise) can hold off infighting.
Lastly, the only way a market can sustain an ‘monopoly’ would be for some bands of companies to form together to sell a product cheaper and better than their competitors (sans a ‘freezing out’ of using legislation and protectionism from outing competitors)
But I thought this was a good thing…
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