Monopoly and Competition Notes

CHAPTER 12: MONOPOLY AND COMPETITION

Overview

  • Monopoly and competition are often misunderstood and misused, leading to confusion.
  • Monopoly has historically carried a negative connotation, especially in the 17th and 18th centuries, associated with exclusive privileges granted by rulers.
  • In the late 19th and early 20th centuries, the term "monopoly" was applied to large private businesses or "trusts," viewed negatively.
  • Competition also faced criticism, with "cutthroat competition" labeled as detrimental during the New Deal era in the 1930s.
  • Monopoly and competition are not mutually exclusive; both are essential for an effective market.
  • Every tradesman has a monopoly over their wares, and every buyer seeks exclusive control over goods or services.
  • The market relies on monopoly and thrives on competition.
  • Some monopolies can exclude or reduce competition, and tradesmen often try to avoid competition.
  • Monopoly and competition are complex and vital for understanding the market.

Definitions

  • Trust: A business holding company that combines similar products, production processes, or diverse business enterprises.
  • Cutthroat Competition: Excessive or mean-spirited competition, difficult to distinguish from regular competition.
  • Monopoly: The absence of competition for a supplier of particular goods or services in a market, historically an exclusive right granted by ruling powers.

12.1 Monopoly

  • Monopoly, in its broadest sense, means "exclusive possession or control of something."
  • Private property is a monopoly of its owner, who has exclusive rights to control and dispose of it.
  • Competition between sellers or buyers is possible because they have a monopoly on the goods they dispose of.
  • The most basic monopoly is the exclusive right of free people to sell their labor services, differentiating freedom from slavery. It is a natural right and a natural monopoly.
  • Individuals can dispose of their labor at a mutually agreeable price because of this monopoly.
Monopoly of Individual Labor
  • The most fundamental monopoly is the exclusive right of free individuals to sell their labor.
  • This right distinguishes freedom from slavery and is considered a natural right, hence a natural monopoly.
  • The individual alone has the authority to direct the constructive use of their labor.
Landed Property
  • All landed property is a monopoly of its owner.
  • The owner possesses, controls, has dominion over, and may exclusively dispose of the land and structures on it.
  • Governments often qualify the monopoly of land ownership.
  • Restrictions prevent landowners from using their land to harm others, except in self-defense.
  • In the U.S., eminent domain allows the government to take private property for public use with just compensation.
  • Eminent domain has been controversially used for commercial development to increase the tax base.
  • Excessive government qualifications erode the monopoly character of property, undermining voluntary trade and exchange.
Other Private Property
  • All other private property (tangible or intangible, shares, cars, copyrights, patents, currency) is a monopoly of the owner.
  • The owner is sovereign over their property and determines the selling price.
  • Economists refer to consumer sovereignty, but neither buyer nor seller is sole sovereign; each has a veto over what they offer.
  • The sovereignty of owners over their goods is crucial for free enterprise.
Public Discussion
  • Public discussion of monopoly often revolves around "exclusive control of a commodity or service in a particular market" or "control that allows price manipulation."
  • Two different types of monopolies warrant separate discussion.

12.1.1 The United States Postal Service (USPS)

  • The government grants the USPS an exclusive privilege to deliver first-class mail, making it a government-created monopoly.

  • The USPS contracts with private carriers for mail delivery.

  • The USPS claims a monopoly on delivering personally inscribed messages (First Class mail).

  • Its enforcement extends to advertisements and messages, claiming exclusive rights to deliver to postal or mail boxes.

  • Mail boxes are generally private, but the USPS restricts their use by other carriers.

  • The USPS demonstrates typical objections to monopoly, where prices are arbitrarily set without direct competition.

  • The USPS sets prices, and buyers can accept or reject them, lacking voluntary agreement between buyer and seller.

  • It is difficult to determine whether prices are high or low because other sellers are excluded.

  • The USPS's policies are sometimes arbitrary, political, or ideological rather than economic.

  • Charging the same price for local and distant deliveries is uneconomical.

  • The USPS once charged lower rates for local letters but abandoned this distinction.

  • Parcel post deliveries use a zoned system, but book rates are uniform across the U.S.

  • The USPS's rate system appears to be based on arbitrary, political, or ideological motives.

  • Governments tend to monopolize goods or services they offer for public sale due to their monopoly on the use of force.

  • Government operation is often bureaucratic, regulation-ridden, and governed by non-economic factors.

  • Strict rules are necessary to prevent arbitrary and despotic use of power.

  • Governments, focused on maintaining peace and enforcing laws, may carry these habits into the market.

12.1.2 The Tennessee Valley Authority (TVA)

  • The Tennessee Valley Authority (TVA) exemplifies government's tendency to monopolize services.
  • Authorized in 1933 during the New Deal, the TVA aimed to develop the Tennessee Valley region.
  • Critics have labeled it socialistic due to government ownership of electricity production.
  • The TVA became monopolistic, excluding private electricity companies from its region.
  • Initially, electricity production was a byproduct of river taming and navigation improvements via dams.
  • Electricity production and distribution became the TVA's dominant activity.
  • The TVA sold electricity to municipalities, cooperatives, and non-profit organizations.
  • As demand exceeded dam capacity, the TVA built coal-fired and nuclear plants to increase electricity production, establishing and maintaining its monopoly.

12.1.3 Government Grants of Monopoly

  • Government grants of monopolies to private entities have historically been more common than direct government provision of goods and services.
  • This practice was especially widespread during the mercantilist era of the 17th and 18th centuries.
  • Trading companies were granted monopolies for specific goods or trade routes. The British East India Company's tea monopoly led to the Boston Tea Party.
  • Early America fostered road and bridge building by granting monopolies to companies, allowing them to collect tolls.
  • State and local governments now grant monopolies to private companies through exclusive franchises for public utilities like electric, telephone, and transportation companies.
  • These franchises are often justified as natural monopolies, where multiple providers would be impractical due to infrastructure constraints (wires, tracks, pipelines).
  • The rationale for granting monopoly franchises weakens for services like buses, garbage collection, and trucking, which are not inherently natural monopolies.

Natural Monopoly

  • Natural Monopoly: A natural monopoly refers to a service that is impractical to have multiple companies provide. Examples include services that require extensive infrastructure such as laying wires, tracks, or pipelines like electricity or land-line telephone service.