Monopoly and Competition

Licensing and its Economic Consequences

Licensing is a governmental action that can create near-monopolies.
State governments have historically been leaders in implementing licensing.
Licenses can range from simple business licenses that are essentially taxes to more restrictive licenses that limit entry into a field.
Milton Friedman identifies three categories of government authorization:
- Registration: A simple license, often a tax, that does not substantially restrict entry.
- Certification: Government recognizes expertise but doesn't restrict practice to those certified.
- Licensing: Restricts entry, giving those licensed some conditions of a monopoly.
Walter Gellhorn's work highlights the widespread nature of licensing across various professions and trades.
Licensing raises questions about justification, particularly in fields like medicine and plumbing.
Private certification could potentially replace government licensing.
Licensing has economic consequences:
- Denies opportunities for some individuals to earn a living.
- Increases the cost of goods or services.
- Reduces the availability of goods or services.
Licensing can create a deceptive appearance of competition within a field.

Private monopolies, strictly speaking, require government support or the use of force to prevent competition.
Without force, new competitors can enter the market.
The rise of large businesses in the late 19th and early 20th centuries sparked concerns about private monopolies.
The Standard Oil Trust, formed by John D. Rockefeller in the 1880s, became a symbol of private monopoly.
Standard Oil controlled 80-90% of the oil market at its peak.
Congressional investigations and the availability of more effective control methods led to the abandonment of the trust device.
New Jersey offered incorporation that allowed corporations to do business throughout the country and buy stock in other corporations.

Nationwide oil distributing business started by John D. Rockefeller in the 1880s.
It was the first of its kind and controlled between 80-90% of the market.

Other companies also achieved dominant positions in various industries.
Some perceived these large businesses as a threat to state and national governments.
The Pujo Committee in 1913 highlighted the vast influence of Morgan banking interests.
Concerns arose that the concentration of wealth could lead to undue political influence.
It is important to note that holding directorships in multiple corporations does not necessarily imply control.
Wealth does not automatically translate into political power.

Large corporations attained leading roles in many industries in the late 19th and early 20th centuries.
High capital requirements can make it difficult for new competitors to emerge.
History shows that competitors often emerge over time.
The U.S. government attempted to break up Standard Oil, but other companies like Gulf, Texaco, and Sunoco emerged to compete.

Some economists describe situations with several dominant firms as oligopolies rather than monopolies.
Oligopoly is when several large firms dominate the market, rather than one.
A common charge against oligopolies is that they administer prices to keep them above competitive levels.
This is allegedly done through tacit or explicit agreements not to lower prices.
Agreements to divide markets or fix prices are generally illegal and difficult to enforce.
Price competition is a key factor in gaining market share.
Evidence for administered prices is often flawed.
Inflation can cause prices to rise, which doesn't necessarily indicate collusion.

A condition in which two or more producers or distributors dominate the market.
Often accused of controlling prices, though the validity of these claims is doubtful.

It is difficult to monopolize a good or service, even for government monopolies.
Rising prices or declining service lead to the emergence of substitutes.
Once a commodity is sold, the buyer can compete with the monopolist by reselling it.

The government has a monopoly over first-class mail delivery, but this is limited by:
- Only extends to commercial delivery of mail.
- Only to letter boxes designated as recipients for such mail.
Communication can take many forms, including:
- In person
- Messenger
- Telegram
- Telephone
- Text
- Radio or Internet
The closest general competitors are the telephone and email service.
Rising postal rates led to increased use of the telephone.
Email service exploded in the 1990s and has largely replaced personal letters.
Cell phones and texting have also gained ground in the communication industry.

New technology often provides substitutes for monopolized goods or services like:
- Telegram
- Telephone
- Radio
- Computer technology
The Postal Service's actions are limited by these developments, even though it continues to act as if it had a monopoly.

Even government monopolies or cartels are limited by substitute modes of providing goods or services.
The Organization of Petroleum Exporting Countries (OPEC) is an international cartel of oil-producing countries.
OPEC's oil embargo to the United States in the mid-1970s, was punishment for certain American policies, including its aid to Israel in a war with the Arab countries and Richard Nixon's decision.

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

Briefly explain the significance of OPEC, Standard Oil Trust and J.P. Morgan in understanding monopoly.