1.1.13 monopolies

In contrast to the Neoliberism and the Austrian School, Adam Smith didn't consider governmental intervention as the biggest risk for a free market economy, but the free market economy itself.

Entrepreneurs tend to create monopolies, trusts, cartels and to agree on prices at the expense of the consumer in order to avoid competition. For Adam Smith, the biggest risk is a diminishing intensity of competition.

This is if we want as well a difference between neoliberalism and the Austrian school at one side and the ordoliberalism at the other. Neoliberalism and the Austrian School consider the government as the main menace for a market economy. For the Ordoliberalism, a market economy, more in the sense of Adam Smith, market economies bears already the risk of abolishing themselves.

This different views has other consequences. Due to the fact Neoliberalism and the Austrian School consider the government as the principal menace, they are more reluctant as well to interventions of the government aiming to maintain the intensity of competivity as ordoliberalism. The main topic of Neoliberalism and the Austrian School is not economic efficiency, but liberty.

One of the famous quote of Wealth of Nations quoted very often is this one.

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.

Book I, Chapter XI

We can deduce from this quote that the idea of the homo economicus, a term not used by Adam Smith, although the basic idea, in a market economy the personal interest is compatible with the general interest, see homo oeconomicus, is already there, is not as simple. Only in a market economy with a sufficient intensity of competition is the homo oeconomics a useful concept. However, the entrepreneur tries to eliminate the competition. Competition means that only the efficient entrepreneur earns money.

The market price is determined by the costs of the less efficient producer who is able to enter the market given a certain demand.

(Simplifying the issue a little bit: If there are five companies who can produce the product at costs of 2, 3, 4, 5 dollars and a demand of five consumers who will pay 4 dollars, the market price would be 4 dollars. The suppliers will not offer their products for less if they can get more. The most efficient producers will get a producer surplus of 3 dollars. This 3 dollars is due to fact that the other producers are less efficient. If the demand is less, the price will fall. The suppliers will compete until the price is reduced to 3 euros. If the demand rises, the price will increase to, for instance, 5 dollars, allowing the less efficient producer to enter the market.)

Actually, only the partial equilibrium of Alfred Marshall describes that correctly as we will see later. The total equilibrium of Léon Walras supposes that all companies have the same cost structure. If they all have the same cost structure, there are obviously no consumer surplus. In other words, with a lot of mathematical equations Léon Walras produced a lot of bullshit, see exchange market/market where products are produced. The mere use of mathematical modelling doesn't lead to more precise results. See mathematical modeling.

If we want to be exact, Alfred Marshall is not the inventor of the producer surplus. We find the same idea already in Principles of Economics of David Ricardo, although he applies this idea only to the production of food. If the demand for food increases, more and more infertile or distant soil must be cultivated and food becomes more and more expensive. The price of food is determined by the last soil able to produce given a certain demand. The other soils get a rent.

(On may ask why David Ricardo didn't apply the same logic to the rest of the economy. The answer is, that for the other productive factors, labour and capital, he assumed complete mobility.)

The term homo oeconomicus is a useful concept only in a market economy with a sufficient intensity of competition. In public administrations, where payment doesn't depend on performance, the concept doesn't make any sense. In all articles about the homo oeconomicus, for instance in the article of wikipedia, see homo oeconomicus, there is broad discussion about whether the assumed rationality of the homo oeconomicus is a realistic assumption. That's irrelevant. For the working of a market economy, it is irrelevant if the homo oeconomicus is fully informed or not. It is enough that it pursues its own happiness with the information he has, being these information complete, incomplete, wrong or false. If they are incomplete or false, he is less efficient as his competitors. That's all.

The idea of market economies is that earning should be the result of a better performance, but not of power. The earnings of a monopoly, a cartel, a trust, an agreement on the prices is not based on better performance, but on power. A monopoly, a cartel, a trust etc. doesn't improve the situation of the consumer. There is no incentive for the entrepreneurs to be more efficient.

(With similar arguments John Stuart Mill pledges in favour of inheritance taxes.)

Adam Smith doubts that it is possible to impede monopolies, trusts, cartels and agreements on prices through legislation. That kind of legislation is always an assault on liberty and very often it is unclear if the consumer is better off after the elimination of this kind of structures.

This is another difference between neoliberalism and Austrian school at on side and ordoliberalism at the other. The first ones focus on liberty menaced by governmental intervention, the last one focuses on maintaining competivity sufficiently intense through governmental intervention.

Recent intervention of the European anti-trust authority questionned the idea that governmental interventions protects the user. If Microsoft has to pay 2.5 billion dollars for not having pre-installed competing browsers on windows, the goal was to earn money and not to protect the user. Everybody could install in five minutes any browser of his choice. For the European anti-trust authority, it would have been no problem if microsoft delivered windows without any browser. In this case, it would have been impossible to install another one.

A similar situation we have nowadays with google. The European anti-trust authority reproaches google to make abuse of his monopolistic situation on the search engine market by discriminating his competitors in other services.

The thesis has never been actually proven and is sometimes not very plausible. Google is for instance accused to give a better ranking to his adwords customers. That's not very plausible. If they have a good position in the search engine, they wouldn't pay for advertising.

The assumed abuse of a monopolistic situation is a way to earn money, to justify the existence of a bureaucracy and a big chance, as in the case of google, for lobby groups to obtain what they were not able to obtain through competition. All that doesn't help the consumer.

Beside that, it is not plausible that something like monopolies, cartels, agreements etc. could exist in a globalised world. Whoever would try to manipulate prices, would immediately attract foreign competitors. Anti-trust authorities can be abolished. We don't need them anymore.

Anti-trust authorities focus on a special regional market, but regional markets are irrelevant.

The only existing monopolies are run by the government itself. The German railroad is an example for that. Formally it is a private company, but actually, the government owns this company. Until recently, it was not allowed for bus companies to install parallel lines to connections offered by the railroad. Since this regulation was abolished, the prices has fallen by 70 percent. When the mononoply of the German Telecom, a public run phone company, was abolished, the prices fell by 80 percent.

Most cases where the German anti-trust authorities intervenes are simply ridiculous. Dismantling an assumed coffee cartel is ridiculous if customer duties on coffee keeps out of Germany foreign producers of coffee.

It is ridiculous to have anti-trust authorities in every country of Europe, but to subsidise the European agricultural industry with 400 billion euros. It can be assumed that these 400 billion euros are a heavy burden for underdeveloped countries who depend on the exportation of food. A profitable agricultural industry would allow them to built a technological infrastructure, the condition of further development.

There are a lot of strange phenomenon related to the debate about monopolistic structures. Copyrights for instance are valid for 70 years. That's strange, if we agree, what we actually don't do, that monopolies are not even accepted if they rely on better performance.

However, that's not the only problem. There are more or less six millions of protected songs, but three millions belong to BMG, Universal and Warner Bros. These type of companies buy the right in bundles of several thousand. Not to promote the music, it is impossible to promote 3 millions songs, but to pursue "copyright infringement". In this case, the monopolisation is not only protected by law, but the law makes it a very profitable business. A similar case are the patent trolls. In general monopolies, they are the result of governmental intervention. We will return on this issues in the chapter about Milton Friedman.

However, even in the very improbable case that a monopolist can maintain his position for a while, Microsoft if one of the very rare examples of this kind of monopoly, it is not sure, that the consumer is worse of in this situation.

Both, the monopolist and the polypolist will sell until the marginal costs of production, actually the supply curve, equals the price. The difference is, that the polypolist is confronted with a market price and adaptself to the market price by varying the amount. The monopolyst can vary the price and the amount. If it is more attractive for him to sell less at a higher price, he will do that.

(Simplifying. If he can sell 5 pieces for 3 dollars or 3 pieces for 6 dollars, he will sell only 3 pieces. The polypolist doesn't have this choice.)

If the aggregate supply curve of the polypolist is the same as the supply curve the monopolyst the consumer is worse off. But the situation changes, it the monompolyst can produce cheaper than the polypolists. If for instance the water supply were organised by polypolists, every polypolist must have his own pipes. That would be very expensive and prices for water supply would rise dramatically.

(We are not going to into details here, the basic idea is clear. We talk about natural monopolies, if the costs fall when the amount is increased. That's why we had in the past companies controlled by the government, phone companies, water supply, railroad, electricity and so on. It was assumed, that the government sets the polypol price. In most cases it turns out that this concept is wrong. There are only very few natural monopolies and in general public owned companies are inefficient.)

The case of Microsoft is special. The dominance of Microsoft leads to a standardisation of technical standards. Without this standardisation it would have been difficult for programmers to produce software. The consumer benefited from monopolisation.

250 years ago Adam Smith expressed serious doubts whether it is possible to maintain competivity through regulation. In the last 50 years of anti-trust regulations, it was not possible to prove that it makes sense. In most cases, it is useless and very often, this regulation is used to generate revenues. What actually should be abolished are governmental run companies.

Sometimes the discussion about monopolies becomes surrealistic. The today discussion, we are still in the year 2014, about Google is absurd. It may be that Google has a monopoly on the market of search engine, although there are a lot of others, Bing, Altavista, Yahoo, Lycoos, Fireball etc. but the search is FREE. It is actually very hard to see how a company can abuse his power if the service is free, but we agree that the consumer would be better of, if Google pays the people for using its service. However, something like that never happens in the real world.

If we consider the market for advertising, that's the real problem for the companies who complain about Google, the situation is even more curious. Traditional advertising is almost 20 times more expensive, if we consider the internet, or 100 times more expensive, if we consider the print media. In other words, advertising with Google adwords or adsense programme costs more or less 5 percent compared to any alternatives. This gives even small and very specialised companies the opportunity to advertise for their products all over the world.

The todays procedures of the european cartel authority shows a serious problem. The basic problem for the mass media is the fact that Google is the goalkeeper of information and google doesn't care it the information comes from a little website with special knowledge or from a big publishing house. Google just tries to find out who has the more valuable information. That changes the rule of the game and that explains the daily attacks against Google on the mass media.

In the case of Google not the consumers complain, this is the group the anti-trust regulations should protect, but the different competitors of Google.

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Monopolies, polypolies and natural monopolies

Adam Smith considers the inherent tendency of free market economies to abolish competition as the central thread for free market economies. Neoliberalism considers governmental intervention as the biggest thread.

In a globalised world it is not very plausible that a monopoly can persist for a long time

Natural monopolies can be run as well by the government, but experience shows that there are only few really natural monopolies

The most problematic monopolies are those created by the government itself

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