Monopoly and Competition

Oil Crisis and Human Ingenuity

During the oil crisis, OPEC's restriction of oil production led to increased prices for gasoline, motor oil, kerosene, electricity, and other oil-derivative products.
This prompted the development of fuel conservation methods and the search for substitutes.
Examples include:
- Increased insulation in houses.
- Exploring solar heating.
- Adjusting thermostats to conserve fuel.
- Adoption of smaller cars.
- Adding alcohol to gasoline.
- Adapting furnaces to burn less expensive fuels.
Vast new sources of oil were developed in the North Sea and Alaska to compete with OPEC countries.
OPEC eventually realized they were losing revenue due to overpricing, and the cartel's prices could not be maintained.
Human ingenuity and the availability of substitutes can undermine attempts to monopolize goods or services, even by governments.

Railroads and Competition

The assertion that railroads engaged in monopolistic practices in the late 19th and early 20th centuries is misplaced.
Pressure for federal regulation of rail rates mounted in the 1880s, following unsuccessful state attempts in the 1870s.
The Supreme Court ruled that states could not regulate interstate rates, leading to the Interstate Commerce Act.
The railroads add value by transporting people and goods, similar to other modes of transportation.
The purpose of transportation is to make goods and people available from all over the world without differential charges based on distance.
Railroads never had a monopoly on transportation:
- People could travel on foot, horseback, in carriages, and on boats.
- Goods could be transported by people walking, on pack animals, in wagons, and on boats.

Incentives for Attractive Rates and Good Services

Even without competition, railroads had incentives to offer attractive rates and good services.
This was true even when railroads weren't often competing with one another.

Economics of Railroading

Railroads have unusually high fixed costs: costs that precede the performing of the service. Example: purchasing a building.
- Examples include: purchasing and maintaining tracks, building and keeping up passenger stations, crossings, rolling stock, safety devices, sidings, and traffic signals.
Railroads have unusually low variable costs: the change in the cost of producing an additional unit of some good. When costs are highly variable, it means each additional unit can be produced at a significantly lower cost than the one that preceded it.
- Railroads can increase the amount of service with declining costs for each additional unit.
- A train of fifty cars can be hauled for very little more than one of ten cars, both in terms of fuel and personnel costs.
- The cost per mile traveled declines as the distance is extended, since most of the fixed cost is in loading, unloading, and related activities.
- Each car added and each additional mile traveled costs less than the one before.
Railroads have tremendous incentives to increase the length of their trains, the frequency of them, and distance traveled to recover their fixed costs and take advantage of low variable costs.

Discriminatory Practices and the Interstate Commerce Act of 1887

Railroads may adopt practices that appear discriminatory.
It's less expensive to haul people or goods per unit on much-traveled lines than on those that are little used.
It may be quite expensive for a train to stop at a station for one passenger or at a depot for one or two packages.
Congress included a provision in the Interstate Commerce Act of 1887 virtually prohibiting charging more for a short haul than a long haul over the same line.
Such a provision completely ignores the economies of railroading.

Discrimination and Competition

Railroads did discriminate among customers, as do many businesses.
It is less expensive to supply large quantities of goods to a single buyer than small quantities to many buyers.
Producers usually pass some of that saving along to quantity buyers.
Henry Fink (1905) insisted that discrimination is the underlying principle of all railroad tariffs:

Railroads could not be successfully operated without discrimination as it would hamper and obstruct commerce, and cause great injury to the public.

People at different distances from a particular market need to be able to offer the same sorts of goods at competitive prices.
Example: Providing milk for New York City. If railroads only charged based on miles transported:
- Farmers near Poughkeepsie might have to pay twice as much per unit for transportation as those near Peekskill.
- Farmers near Albany four times as much as those from Poughkeepsie
- Farmers near Syracuse three times as much as those from Albany.
Railroads had to be aware of the competition among producers for particular markets in setting their rates.

Competition Beyond Railroads

It doesn't cost railroads that much more to haul goods long distances than short ones.
Competition among railroads and among producers who use the railroads tends to keep down prices.
Competition exists among producers of different products that may be chosen as substitutes.
Human wants are extensive, and the means for gratifying them are numerous and diverse.
If the price of one good rises significantly, alternative means may be used to gratify the want (e.g., apples for oranges).
Consumption of commodities for which the demand is elastic will decline as the price rises, particularly if it rises in proportion to the prices of substitutes.
If prices of some good or service are lowered, consumption of it may be expected to increase.

Monopoly and Market Freedom

So long as the market is generally free, the dangers of monopoly are not great.
Even government monopolies or government grants of monopoly are restrained by substitute means of satisfying wants.
New technology tends to offer competitive means of breaking monopoly, even where it does exist.
Other means of transport were soon developed to compete with the railroads.
- Trucks
- Automobiles
- Buses
- Airplanes

Business Strategies to Lessen Competition

Producers and sellers seek ways to avoid the rigors of competition and often thrust toward monopoly.
Businesses establish temporary monopolies and take advantage of these by raising prices.
However, competition erodes any short-term advantage.
Store credit: Allows customers to buy now and pay later
- A department store issues its own credit cards, which are only good for its own merchandise.
- General merchandise stores in times past used credit in this fashion.
- The offering of easy terms has for many years been used to lure customers.
Producers and sellers try to gain customer loyalty by distinguishing and differentiating their product from all other similar products.
Indeed, this is one purpose of having name brands.
Many products do not differ significantly from those of their competitors (e.g., gasoline).

Advertising

Advertising is used most extensively to differentiate between competing products.
The basic function of advertising is to inform people of the existence of some product and what it can do for them.
Advertising today goes much beyond informing to persuading or salesmanship.
Advertisements are often used to move people to some action, commonly to purchase some good or service.
The aim of advertising is to develop or solidify consumer loyalty to some particular product or service by providing a promise of consistent quality to the customer.

Criticisms of Advertising

Vance Packard: Charged advertising with being "Hidden Persuaders,"
- Claimed that people are being influenced and manipulated in their everyday lives more than they realize.
John Kenneth Galbraith: Argued that advertising and salesmanship were changing the nature of economic development.
- Advertising creates wants and desires that did not exist before.

Counter-Arguments to Criticisms of Advertising

Wants are more independent of advertising than Galbraith suggests.
Example: The Edsel, introduced by the Ford Motor Company in the 1950s, did not sell well despite abundant advertising.