According to much popular thinking, “monopolies” are seen as undermining individuals’ economic well-being. For instance, monopolies are often blamed for increases in the prices of goods and services, often called inflation. Also, monopolies undermine the efficient functioning of the market economy by their ability to influence the prices and the quantity of goods and services.
According to this thinking, monopolies cause deviations in the market conditions from the ideal state as depicted by the “perfect competition” model. It is held that, to bring the market conditions in line with the “perfect competition” model, the enforcement of the government regulation against monopolies are necessary.
The “Perfect Competition” Model
In the world of perfect competition, the following features characterize a market:
There are many buyers and sellers in the market;Homogeneous products are traded;Buyers and sellers are perfectly informed; No obstacles or barriers to enter the market
In the world of the “perfect competition” model, buyers and sellers have no control over the price of the product; they are price takers. The assumption of perfect information, and thus absolute certainty, implies that there is no room left for entrepreneurial activity. For in the world of certainty there are no risks and therefore no need for entrepreneurs. If this is so, who then introduces new products and how?
According to the proponents of the “perfect competition” model, any real situation in a market that deviates from this model is regarded as sub-optimal. It is recommended that the government should intervene whenever such deviation occurs.
Competition in Products, Not Firms
Contrary to such thinking, competition emerges not because of a large number of participants as such, but because of a large variety of products. The greater the variety, the greater the competition and, therefore, more benefits for the consumer. Once an entrepreneur introduces a product—the outcome of his intellectual effort and arrangement of factors of production—he acquires 100 percent of the newly-established market (if consumers demand the product).
A product that makes a profit attracts competition. What gives rise to competition is that consumers have endorsed the new product. The producers of older products must come with new ideas and new products to catch the attention of consumers.
The common view that a producer that dominates the market can exploit his position by raising the price above the competitive level is erroneous. The goal of every business is to make profit. This, however, cannot be achieved without offering consumers a suitable price. It is in the interest of every businessman to secure a price where the quantity that is produced can be sold at a profit. According to Henry Hazlitt,
In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities – and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.
In setting a price, the producer-entrepreneur will have to consider how much money consumers are likely to spend on the product. He will have to consider the prices of various competitive products. He will also have to consider his production costs.
Ultimately, it is the evaluation of the buyer that dictates whether the price set by the supplier will be realized. Every buyer decides in his own subjective context whether the goods offered by the supplier at the price set are acceptable.
Any attempt by the alleged “dominant producer” to disregard these facts will cause him to suffer losses. Further, how can one establish whether the price of a product charged by a dominant producer is above the so-called competitive price level? This is sometimes called a monopolistic price. How could one establish what the competitive price is supposed to be absent market forces? According to Murray Rothbard,
In the market, there is no discernible, identifiable competitive price, and therefore there is no way of distinguishing, even conceptually, any given price as a “monopoly price.” The alleged “competitive price” can be identified neither by the producer himself nor by the disinterested observer. (emphasis added)
Furthermore,
There is no way to define “monopoly price” because there is also no way of defining the “competitive price” to which the former must refer.
Also,
On the free market there is no way of distinguishing a “monopoly price” from a “competitive price” or a “sub competitive price” or of establishing any changes as movements from one to the other. No criteria can be found for making such distinctions. The concept of monopoly price as distinguished from competitive price is therefore untenable.
By popular thinking, it is the monopolist—by charging prices above the competitive level—who is responsible for general increases in prices, often called inflation. The so-called monopoly price can’t cause a general increase in prices without the increases in money supply, that is, without monetary inflation. A price is when a trade will take place between two individuals, but often the amount of money paid per unit of a good. Hence, if the price of some goods goes up, then the prices of other goods will decline for a given quantity of money. Consequently, the average price of goods is going to be unchanged.
Definition of Monopoly
According to Rothbard,
Let us turn to its classic expression by the great seventeenth-century jurist, Lord Coke:
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, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade. . . .
In other words, by this definition, monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group. Entry into the field is prohibited to others and this prohibition is enforced by the gendarmes of the State. (emphasis added)
Rothbard concluded,
Hence, monopoly can never arise on a free market, unhampered by State interference. In the free economy, then, according to this definition, there can be no “monopoly problem.”
It is obvious that a monopoly can never arise in the free market, unhampered by state interference. If government officials attempt to enforce a lower price this price could wipe out the incentive to produce the product. So, rather than improving consumers’ well-being, government policies will only make things much worse and create monopolies.
Erroneous Idea of Homogeneous Products
Government policies, in the spirit of the “perfect competition” model, are destroying product differentiation and therefore competition. The whole idea that various suppliers should offer a homogeneous product is questionable. In a free market, every entrepreneur has different ideas and talents. This difference is manifested in the way the product is made, the way it is packaged, the place in which it is sold, the way it is offered to the client.
For instance, a hamburger that is sold in a restaurant is a different product from a hamburger sold in a takeout shop. So, if the owner of a restaurant gains dominance in the sales of hamburgers, should he then be restrained for this? Should he then alter his mode of operation and convert his restaurant to a takeout shop in order to comply with the “perfect competition” model? All that has happened here is that consumers have expressed a greater preference to dine in the restaurant rather than buying from the takeout shop. So, what is wrong with this?
Let us now visualize that consumers have completely abandoned takeout shops and buy hamburgers only from the restaurant, does this mean that the government must step in and intervene? The whole issue of a harmful monopoly has no relevancy in the free-market environment.
A harmful monopolist can emerge when the monopoly of the state—by means of licenses, regulations, and other means—restricts the variety of products in a particular market. Ultimately, the government bureaucrats decide what products should be supplied in the market. By imposing restrictions, and thus limiting the variety of goods and services offered to consumers, governments undermine consumer well-being while legally privileging certain firms at the expense of others. Thus, governments—monopolistic and non-competitive—create monopolies.
Conclusion
The whole idea of the government regulating monopolies in order to promote competition and defend people’s well-being is a fallacy. If anything, such intervention only stifles market competition and lowers living standards. Furthermore, what matters is not the number of firms, but the freedom of firms and the variety of goods and services that consumers value. Without legal assistance from the government, monopolies cannot emerge.
