First off, realize that I’m going to be talking about economics here, and using economics jargon. Aside from just being dreadfully dull to many folks, it is also prone to having specific definitions (“terms of art”) that can be a bit different from the common usage. I’ll try to assure that definitions are clear, while also trying to stay clear of becoming an economics dictionary.
To give just one example at the start, generally speaking folks use the word Monopoly to mean Oligopoly or even Monopolistic Competition. What is the difference? Well, in monopoly there is only ONE provider of a given good or service. In Oligopoly there are a few providers that can easily coordinate. In monopolistic competition there are several (or more) providers who act in a way that has monopoly power expression, while still being in technical competition. Often this involves some kind of implicit or explicit coordination, i.e. collusion to abuse the customer. So calling AT&T a “monopoly” isn’t correct.
Even when they were the only telephone company in the USA, they were a monopoly in telephones, but not in communications in general. So use of the term “monopoly” can require stating “in what” as well as “when”. But common use is to blur the lines with “local monopoly” and similar specifics.
With that, some definitions.
From the dictionary link:
A market in which only one firm produces all the output. A monopolist is a single seller, protected by high entry barriers, producing a unique product with the ability to set the price and level of output based on its own profit-maximizing decisions.
Key points: Exactly and only ONE firm making 100% of the product (used here to mean product or service unless stated otherwise) AND protected by high “entry barriers”. A monopoly can set profit and price to maximize their own gain.
So, for a counter example, I am the only “Me” in the marketplace, so a unique provider of “me”; but am I a monopoly? I can try to raise my billing rate by touting my uniqueness, but the reality is that there are millions of computer literate service providers in my field. I am not the ONLY provider and produce only a tiny fraction of the global systems admin and project management product. My product is not unique. Further, there are very low barriers to entry. Anyone can learn the skills and enter the market. Finally, I cannot set prices nor level of output to maximize my profit. On every part of the definition, I am found to NOT be a Monopoly, even though I’m the only “me”.
Monopolistic Competition A market in which a relatively large number of firms competes with one another by differentiating their products from the competition. Economic profits can be earned in the short-run through successful product differentiation, but due to the low barriers to entry they are unlikely in the long-run. Monopolistic competition is the most common market structure, and included restaurants, automobiles, clothes, salons, etc…
So, one could claim that you can only buy a Tesla from Tesla, so they have a monopoly on their brand and on high performance electric cars; yet that would not be true. They are in fact in a monopolistic competition mode with lots of advertizing (and “virtue signaling”) trying to differentiate themselves from the other competitors in the transportation appliance business. To the extent they succeed, they can claim a little bit more of the profit and pricing advantage that flows to a real monopoly. Much marketing budget is spent on creating the belief in uniqueness of the product and “product differentiation”.
Typically governments grant various kinds of protection to things used in monopolistic competition; such as trademarks, copyrights, patents, and similar guarantees of uniqueness in product or reputation. The goal being to promote thriving businesses while giving consumers the information (and reliable branding) to make informed decisions.
A market in which a relatively small number of firms compete with one another in a strategic manner. Characterized by a strong interdependence between the small number of firms. Barriers to entry are high and firms are hesitant to change their prices due to the fact that price wars may result when prices are lowered, and significant market share can be lost if prices are raised. Such markets tend to be highly inefficient due to the lack of competition.
The typical end stage for mature industries is after a “roll up” of the minor competitors into a few survivors. These often try to work together to increase profits at the expense of the customers. This can be illegal (collusion) or legal (cartels / trusts) depending on various national laws.
For example, OPEC is the oil cartel. It would be illegal to form that cartel in the USA, but it is legal in the nation of origin. During the steel heyday in the USA, the form of “collusion” moved to what is called “price leadership”. U.S. Steel was known to be the big player, so they would raise prices a little. Then, one by one, the other players would raise prices. Nobody sent letters or had meetings where they agreed to collude, so prosecution for collusion was difficult. (This was later weakened when Brazilian, Japanese, and now Chinese steel started to enter the USA in volume. Then the US producers moved to lobby congress to prevent “dumping” … and protect their price leadership based profits…)
Thanks to US Anti-monopoly (anti-trust) laws, most industries here, now, end in an Oligopoly, not a true monopoly. You can see this game playing out as both the USA and EU have government bodies set up to regulate the degree to which one company can buy up all the competition. IMHO, it isn’t nearly as effective as it ought to be, but it is what we have. Today, media companies and drug companies (pharmacies) are in roll-up mode. Goldman Sachs has a large department for “Mergers and Acquisitions” as they make huge fees from it. There are $Billions spent to try to bypass restrictions and increase “concentration” first into an Oligopoly and then as close to Monopoly as the industry can reach without government intervention. The fewer the players, the greater the monopoly excess profits can be made by screwing over suppliers, the retail chain, and the end customer.
Which leads us to Monopsony.
That intro to econ dictionary oddly ommits this one, so we’re going to:
for a definition:
A monopsony, sometimes referred to as a buyer’s monopoly, is a market condition similar to a monopoly except that a large buyer, not a seller, controls a large proportion of the market and drives prices down.
A monopsony occurs when a single firm has market power in employing its factors of production. It acts as a sole purchaser for multiple sellers, driving down the price of seller inputs through the amount of quantity that it demands.
Very large monopoly producers often try to also act as monopsony buyers of their inputs. This will sometimes lead to “vertical integration” as they drive a supply to poverty then buy up the assets. Sometimes it simply results in the destruction of suppliers or the reduction of their profits to “survival level”.
A decade or three back, the “Big Three” auto makers went the other way. They spun out their parts making subsidiaries. Why do that? So that they could avoid the union costs in those parts makers, and since they would have a monopsony relationship to them (who but GM will be buying GM alternators in bulk?) could assure the profits were concentrated in the parent company. Watching for monopoly and monopsony strategies explains much of the M&A business.
Sears was, at one time, notorious for this. They would pick someone to supply, say, washing machines. They would make ever larger buys until the company had 50% or even more of their production dedicated to Sears. Sears would threaten to cut orders if the company could not supply the whole amount ( i.e. make sure they were bound only to Sears and had dropped other customers in favor of Sears) then, when the supplier production was essentially captured, they would demand a very very low price. The supplier now faced bankruptcy due to a sudden loss of the majority of their sales, or survival, but at very low profitability (or potentially no profit). I don’t know their present status.
Similarly, a large coal mine in a “one mine town” is the monopsony buyer of miners in that region. Thus all the history of “company stores” and related abuses of miners. Oddly, the “fix” was to form labor unions for miners so that they had some local monopoly power to offset that monopsony abuse.
For some reason, the general populace don’t pay much attention to Monopsony, but it is joined at the hip with Monopoly and Oligopoly power and policies.
There are certain things Monopolies, Oligopolies and even Monopolistic Competition try to do that are in fact very bad for the customer and the market structure in general. These are called “Monopoly Practices”. The exact set of things that can be stuffed into that definition can vary by nation, and as folks are creative, more get dreamed up from time to time. I’m going to point the set in the USA (bolding done by me):
Antitrust Laws And You
Many consumers have never heard of antitrust laws, but enforcement of these laws saves consumers millions and even billions of dollars a year. The Federal Government enforces three major Federal antitrust laws, and most states also have their own. Essentially, these laws prohibit business practices that unreasonably deprive consumers of the benefits of competition, resulting in higher prices for products and services.
The three major Federal antitrust laws are:
The Sherman Antitrust Act
The Clayton Act
The Federal Trade Commission Act.
The following information on these laws comes from the Antitrust Enforcement and the Consumer guide.
The Sherman Antitrust Act
This Act outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. This includes agreements among competitors to fix prices, rig bids, and allocate customers, which are punishable as criminal felonies.
The Sherman Act also makes it a crime to monopolize any part of interstate commerce. An unlawful monopoly exists when one firm controls the market for a product or service, and it has obtained that market power, not because its product or service is superior to others, but by suppressing competition with anticompetitive conduct.
The Act, however, is not violated simply when one firm’s vigorous competition and lower prices take sales from its less efficient competitors; in that case, competition is working properly.
The Clayton Act
This Act is a civil statute (carrying no criminal penalties) that prohibits mergers or acquisitions that are likely to lessen competition. Under this Act, the Government challenges those mergers that are likely to increase prices to consumers. All persons considering a merger or acquisition above a certain size must notify both the Antitrust Division and the Federal Trade Commission. The Act also prohibits other business practices that may harm competition under certain circumstances.
The Federal Trade Commission Act
This Act prohibits unfair methods of competition in interstate commerce, but carries no criminal penalties. It also created the Federal Trade Commission to police violations of the Act.
The Antitrust Division also often uses other laws to fight illegal activities that arise from conduct accompanying antitrust violations or that otherwise impact the competitive process, as well as offenses that involve the integrity of an antitrust or related investigation, including laws that prohibit false statements to Federal agencies, perjury, obstruction of justice, conspiracies to defraud the United States and mail and wire fraud. Each of these crimes carries its own fine and imprisonment term, which may be added to the fines and imprisonment terms for antitrust law violations.
Read more about the activities of the Antitrust Division:
Antitrust Enforcement and the Consumer
Price Fixing, Bid Rigging and Market Allocation Schemes: What They Are and What to Look For
Antitrust Division Manual, Chapter 2: Statutory Provisions and Guidelines of the Antitrust Division.
The general idea being that it’s important not to allow companies to screw over the customer too badly. Enough to become filthy rich is OK, but not so much you drive everyone else into poverty… Also various kinds of lying, destruction of competitors and similar actions are also frowned on. It is OK to BE a monopoly, provided you get there by superior product and pricing, but NOT via abusive practices toward the competition or the customer.
Also note the emphasis in the law is on prices. In reality, cheapening the product, reducing choice, and having lousy service are just as bad, but rarely a legal consideration.
So why are Monopoly Practices bad?
Well, first off, we have a long history of what results. “Fattest Wallet Wins”. Then prices rise to astounding levels, Evil Bastard Policies are put in place to vindictively crush others. It turns into an economic war that is far more destructive than good. We have lots of colorful history around this that I won’t go into here. Standard Oil was one such. In one case had a railroad refuse to carry competitor products and even refused to let a pipeline cross under their tracks. (The competitor had to unload oil from the pipeline, load trucks, cross the tracks, unload oil into the pipeline, repeat… that does not help the customer nor the general economy).
Since ONE of the ways a very large company gains advantage is just by being large (since they get “financial economies of scale” – i.e. the banker loans money at a cheaper rate – ask BofA to give you a loan at prime… ) and another is purchasing power (think YOU will get the same prices on toys as a small retailer in Germany as Amazon gets?) the eventual end game is that ONE company will survive and they will own everything. If that’s what you want, go ahead and abolish anti-trust laws… We see this happening now with Amazon and “big box retail”. (They have already crushed a lot of small retail). Amazon gets financing and purchase price breaks nobody else can match. They have now moved into data centers (AWS) and entertainment (Amazon Prime) from retail. Eventually the anti-trust folks may wake up…
More personally: About 25 years? ago Home Depot came to San Jose. At the time we had a few local hardware stores, a great lumber company (Southern Lumber) and Home Base. Home Depot offered LOTS of very low prices on things and positioned their new stores conveniently on major streets (often not too far from Home Base or Osh…) Now, years later, Home Base is gone, OSH was bought by Sears and turned into a remote Sears Tool Department, and several of the smaller players are out of business. Southern Lumber is gone. Now, Home Depot does NOT have those wonderfully low prices, they have moved to “new locations” harder to get too (but cheaper for them) and product selection is reduced. (Southern Lumber had a great section of exotic and hard to find woods, for example, along with better selection of plywood grades). What had been “great low prices and service” is now not so great prices or service, less choice, and far fewer options on where to shop. THAT is why “monopoly practices” are bad. That “predatory pricing” to drive out the competition (knowing they could fund it from higher prices in their out of area locations) is specifically called out as illegal, but rarely enforced. Though there is hope. In the last couple of years Lowe’s has started to move into the area, so we may see some competition again; or maybe just price-leadership collusion.
Essentially, there are two major problems with leaving monopoly practices in play.
1) Prices can be driven low to kill off every other provider, then jacked high to soak the customers.
2) Eventually only one “Fattest Wallet” will own everything and you will be bowing to the monarch.
In fact, monopoly practices and monarchy have a long history together.
“The history of patents does not begin with inventions, but rather with royal grants by Queen Elizabeth I (1558-1603) for monopoly privileges … Approximately 200 years after the end of Elizabeth’s reign, however, a patent represents a legal [right] obtained by an inventor providing for exclusive control over the production and sale of his mechanical or scientific invention … [demonstrating] the evolution of patents from royal prerogative to common-law doctrine.”
It was the major reason the European Monarchies didn’t like America. We ignored their dictates about who could own toll bridges, coal stations and tax posts, and other monopoly revenue generators for the crown. No “royal license” needed here… The Europeans have generally been more accepting of rank, privilege, monopoly / cartel practices, and the crushing of the poor by the aristocracy; than have the Americans. In the last century that’s tended to change, but it still is not equal. (Both the USA and EU have moved closer to a central position, as the USA has had ‘regulatory capture’ and enforced anti-trust less and the EU has started to realize the benefits of competitive markets).
Sidebar on Socialism:
In general, Classical Socialism (International Socialism, i.e. USSR and similar) has only one provider of all things, and that is The State. It is both Monopoly and Monopsony for production and labor. Needless to say, it has not worked out all that well for The Little Guy in those systems. It tends to end up acting like a Dictatorial Bureaucracy, or a “Monarchy” with a politburo “electing” the monarch… Product quality drops, prices rise, and availability is restricted. Pretty much like all monopolies over time.
But the individual firm has a great interest in finding ways to get some kind of monopoly practices and pricing power in place. There’s an entire body of micro-economics devoted to pricing theory and ways to manipulate the customer such that you get closer to monopoly price optimization but without getting in trouble with the Feds. Here’s one:
Think “Senior Discounts” are because the company loves old folks? Um, nope. See, it’s illegal for me to look at you and say “You look like a 30 something with a good suit and lots of money, I’m going to charge you double”. BUT, it’s accepted to “give a discount”. So you price the basic product for as close to the high end of the market as you can get, then offer “discounts” to cream off the rest of the market segments. Student Discount. Senior Discount. etc. etc. Just ways to get price discrimination in place without the US Government and lawsuits…
In considering the monopolist’s response to the “unimaginative” monopoly solution, we analyzed the more sophisticated strategies of price discrimination that are based on the monopolist’s ability to segment its market. Two types of such market segmentation are common: direct identification (as in various discounts for senior citizens and students) and self-selection (as in different fares for airline tickets).
We considered three types of price discrimination: perfect price discrimination, ordinary price discrimination, and multipart pricing. Perfect price discrimination, in which the monopolist successfully extracts the maximum possible profit from each customer, is not something we expect to see in the real world very often; however, this ideal case does let us see just how strong a monopolist’s incentive to devise clever pricing strategies can be. Ordinary price discrimination, in which the monopolist identifies potential customers by groups and charges each group a separate price, is something we encounter almost every day of our lives, and it can take very subtle forms. Multipart pricing, in which the monopolist charges different rates for different amounts, or “blocks,” of a good or service, is more profitable than ordinary price discrimination, but, because it requires the monopolist to monitor the customer’s consumption, it is not as common as ordinary price discrimination.
In addition to these forms of price discrimination, monopolist firms can extract consumer’s surplus in a number of other ways. Two-part tariffs, where the firm charges an entry fee for the privilege of purchasing its product is one example. As was shown, the optimal strategy is for the firm to set the price of its good at the marginal cost and then charge the entire surplus as an entry fee. The problem with this type of pricing is that as consumer’s tastes for the product start to vary, the low-demand types become unwilling to purchase the entry fee.
Another type of pricing mechanism is the tie-in sale. Here a firm requires the purchasers of its product to also purchase another product at a price above marginal costs. The problem with this form of pricing is that it creates a deadweight loss, as the revenue captured from the tie-in sale does not match the full loss of surplus to the consumer. We argued that the tie-in sales model explained why popcorn was so expensive at the movies. Finally, we looked at the case of all-or-nothing pricing, in which the firm again tries to extract the full surplus. This form of pricing seems to explain a number of observations of individual behaviour.
These pricing strategies are not the only ones that monopolists can and do use to avoid the trap of charging only one price. We present these only to provide you with a sample, and to whet your appetite for further study in the field of industrial organization.
Yes, it is a constant war between the Fat Wallets trying to get as much price discrimination and monopoly pricing as possible, and the consumer / government trying to prevent the abuses of the customer. Now consider that the roll back of “Net Neutrality” rules (be it real net neutrality or whatever Obama pushed) has a specific intent of allowing differential price discrimination based on packet origin, content, and related. Think that is because AT&T is soooo suffering from the competition, or because they want price discrimination to drive Netflix out of the competition and jack up your rates? (Hint: It is NOT because the internet stopped working due to net neutrality rules…)
Sadly, lately the failures have been greater than the successes. Where we used to have a dozen different car sellers on the local “Auto Row”, they are now mostly DGDG owned. A “local monopoly”. Think I can play off the VW dealer vs the next door Ford dealer when they both report to the same guy? Similarly theatre popcorn at $5 a box and hotdogs (that are so bad I can’t stand to eat them anymore) at $5 at the movie. Yes, this has “priced me out of the movies” as I just don’t see the value proposition anymore, yet if they are working as a good monopolist, they have figured the ideal price to soak their remaining customers enough to make up for losing me. Besides, next year I get a “senior discount”… but that won’t make the hotdog edible… In short, the Feds have been ignoring local / State level monopoly practices for a few decades now.
The inevitable end game is worse products, less selection, higher prices, and a “if you don’t like it you can go buy from my other store” attitude… Everybody loses but the one Big Fattest Wallet. IF that is the world in which you wish to live, then by all means allow monopoly practices. Again, this is NOT a hypothetical argument. The anti-trust laws were created after living that particular experience a few too many times.
This is just the start of the topic of Monopolies and related. A single broad brush exposure. I hope to post more on it shortly, but we’ll see what time allows.
Monopoly Power eventually leads to ONE single dominant Evil Bastard willing to crush any competition. This can manifest as a Monarchy as it did in much of Europe (though generally not classed as economic monopoly overall) or it can end in International Socialism (as has been attempted several times, though generally considered a political topic not economic monopoly). The kinds and ways of trying to fight that off to gain freedom and economic independence have been many, and some of them worked well enough to get free market republics. But the urge to monopoly never ends.
In the USA we had the Robber Barron era (as opposed to the real peerage Barons who robbed in different ways, by law) that eventually resulted in the various anti-trust laws. Now, much of the battle has moved to Congress and Courts as the various Evil Bastards try to regain more of that Monopoly Power and Pricing Power and do roll-ups and crush any competition and screw over the customer at the optimal rate. D.C. is awash in Lobbyists and they bring big buckets of Fat Wallet $$$ to the “problem”. In theory, the vote of “the little guy” is supposed to keep the political animals in check, but the Parties have assured that it is no longer a functioning lever (most of the time…) and any attempt to slow the flow of money from consumer pockets to lobbyist “donations” will not be tolerated.
Have I mentioned lately that Economics is called “The Dismal Science” for a reason?
It gets more dismal as you enter the area of Political Economy…
The simple fact is that the Very Rich can invest 90%+ of their money as it is impossible for them to spend it all on personal consumption. The average folks must spend nearly (or sometimes over…) 100%, so can never enter the Fattest Wallet game. The only thing preventing a runaway Fattest Wallet winner, even if from nothing more than starting with the biggest wallet, is the anti-trust laws and prevention of Monopoly Power Abuses. The large firms can easily destroy the small firms in an area. A “price war” with the independent gas station on one corner and the Standard Oil station on the other inevitably ends with only one Standard Oil station and much higher prices. (That was a standard Standard Oil tactic, BTW, to drive out competition and jack up prices).
Pure capitalism, completely unfettered, ends in disaster for everyone but the extremely rich aristocracy who can buy the government. This is historical fact (and still seen in various histories of Banana Republics around the world). That is the reason we created anti-trust laws, competitive industry standards, price fixing bans, etc. etc. That is why the USA moved to a “mixed economy” with some degree of economic regulation. Regulation must exist to prevent the abusive practices or we will all be slaves to the winner.
Oddly, the proposed “fix” of International Socialism / Communism claims to work by making the State the Fattest Wallet Monopolist / Monopsonist. Yet it is obvious that isn’t going to change the nature of the Evil Bastards who rise to the top of major political organizations (be they Corporations or Nations). It has tended to the same problems (product quality drops, scarcity increases, choice reduces, and prices rise) in some cases to even greater degrees.
The real answer is to promote COMPETITIVE market capitalism, but as capitalism is unstable “to the large size” (due to fundamental “propensity to invest” with being rich, financial economies of scale, and purchasing economies of scale; even in the absence of any particular product production economies of scale such as giant steel blast furnaces) it takes positive external corrective pressures to prevent a runaway Fattest Wallet Wins condition. Finding that ideal balance point of reasonable regulation vs market freedom vs buying government power & excesses; has not been easy nor particularly well done. It tends to run in multi-decade cycles. Too little regulation in the early 1800s to about 1920, too much until about 1950 (though complicated by war issues), then back to too little somewhere between then and now as the regulatory agencies were “captured” by lobbyist pressures and politician buying. (Monsanto basically owns the ag regulators and Goldman Sachs the dept of Finance…IMHO)
Do I have a solution?
Not really. I can admire the problem… but the basic problem is the fundamental nature of aggressive ambitious greedy people who are best at rising to power in hierarchical organizations. They tend to a socio/psycho-pathic nature and they really don’t give a damn about hurting others. So it doesn’t matter if control is given to corporations, The State via socialism, Monarchs, or to the Republic. Corruption will happen as they rise to the top of any of the systems, and pervert them for personal gain.
So far it seems the best we can do is to give them free run in Corporations, in competition with each other as that keeps the worst in check, and using Government as the referee to keep the competition clean and fair (via things like anti-trust laws, FCC, FTC, etc.) When one Fattest Wallet Without Conscience comes to dominate a sector, assure some competition survives to keep the game in play and prices fair. The problem is when the players start to buy the League and the Referees…