Monopoly is a terrible thing

Monopoly is a terrible thing, till you have it. Rupert Murdoch

 

I think it’s wrong that only one company makes the game Monopoly. Steven Wright

 

We [Microsoft] don’t have a monopoly. We have market share. There’s a difference. Steve Ballmer

 

They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers. Frederic Bastiat

 

 

The Economist’s A to Z glossary of economic terms defines monopoly thus:

When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. Contrast with perfect competition, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.

 

When we think of monopoly we are worried about the monopolists’ ability to charge higher prices. From an economic point of view if some Monet is transferred from one group to another. This may be deemed socially unacceptable but it is an equal transfer of wealth from one group to another and doesn’t reduce aggregate welfare. What economists object to is that as the monopolist raises prices above the competitive level in order to make extra profits, customers buy less of the product, therefore less is produced, and society as a whole is worse off.

 

Monopolies go back a long way. Traditionally it has been state power, which has been used to restrict access to particular sectors and industries. In the past kings would grant or sell monopoly rights. More recently it has been governments who have played this role. One way to keep out potential competitors is to have the government make it illegal for others to operate in particular industries. An extreme example was India at the end of the last century which would licence companies and decide what and how much these companies could produce. There are always political justifications for these interventions.

 

As monopoly has come to be seen as harmful to economic growth, over the last century or so we have seen a rise in the number of antitrust cases. They are called like this because cartels used to be known as trusts. There is more to these cases than meets the eye. There are often underlying political motivations and it would be unwise to assume that protection of consumers is the rationale. We often think of the robber barons of late nineteenth century USA, companies such as Standard Oil. They were growing but they were in fact reducing prices. That is hardly typical behaviour for a monopolist Often pressure comes not from consumers but competitors who resent losing their market share. The Microsoft case is a prime example. I don’t think that consumers were clamouring for the prosecution. Microsoft would quickly discover what would happen if they tried to abuse their customers.  There are alternatives to the Windows – Linux, Apple, unauthorised copying and more alternatives would undoubtedly spring up. The latest panic is about Google but who knows how they will be doing in 2030?

 

We also lack an historical perspective. Just because a company is dominant now doesn’t mean that it will hold that position in twenty years time. History is littered with the cases of megaliths that have seen their position eroded by more agile competitors. Bigger is not always better. Natural history teaches us that – Where are the dinosaurs now?

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