Let us consider the case of Jan. Jan is stupendously rich. She has decided that she wants to have a monopoly on potatoes to enable herself to raise their price and exploit all the people who want potatoes. Thereby, she hopes to expand her vast fortune to even more lofty heights and eventually to be able to bathe in molten, potato-fueled gold.
The free market presents a host of steep obstacles to stand in the way of Jan's goal.
Obstacle 1: Supply and Demand
The first obstacle that stands in Jan's way is basic supply and demand. This law of economics states (among other things) that when demand for a thing increases, the price of that thing will increase and the supply of that thing will increase [1].
What this means is that as Jan begins to purchase potato farms in bulk, she is drastically increasing the demand for potato farms. This will increase the price of the farms, and consequently will give large incentives to people that own land to turn that land into potato farms; because that will enable them to sell their land for inordinate sums of money to Jan.
This is a huge barrier for Jan, since each potato farm she buys will be more expensive than the last, and the number of potato farms will skyrocket as people realize that Jan will buy them for crazy sums of money. This makes it very unlikely that Jan will be able to buy enough potato farms to make it matter before she runs out of money, no matter how much money she started with. It also makes it unlikely that the mountains of gold that she expends on purchasing potato farms will ever be returned via the means of their exploitation.
Obstacle 2: The Competitor
The second obstacle that stands in Jan's way is her competitors.
Let's say that Jan has managed to largely overcome the "Supply and Demand" barrier, and has bought enough potato farms that she has a huge majority market share. She is now using her evil market-share superpower to increase the price of potatoes dramatically, causing money to flow like the liquid gold of Erebor [2] into her pockets. With this new influx of wealth, she is attempting to buy out any farm that threatens to compete with her before it can become a problem.
This situation is extremely unstable, and won't last for long. Here's why: As the price of selling potatoes is rises far above the price of producing potatoes, and as Jan begins to enjoy this massive influx of wealth, other people will see this. It will create further incentive to create new potato farms (which will further aggravate the "Supply and Demand" barrier), and it will create a huge incentive to undercut her.
Because potatoes from Jan's empire are very overpriced, a competitor that has a small market share will have a massive opportunity to increase his market share and profits by offering potatoes for a more reasonable price. All it would take for her paradise of exploitation to start it's inevitable decline into dust is for one competitor to refuse to sell his farm to her and instead insist on undercutting her. And many will want to do so as the opportunity to carve massive market shares for themselves out of the lumbering, gold-filled corpse of Jan's potato empire is just too tempting.
Obstacle 3: The Substitute
Let's say that Jan has managed to overcome both of the aforementioned obstacles. She has either out-competed, bought out, or allied with every other potato producer in the world to create the ultimate potato cartel. Let's even say that this cartel owns every acre of land that could be used to produce potatoes, so there is no opportunity for new potato farms to appear.
No potato is created without Jan's say-so. No potato is sold without her signature on the contract. She has declared herself the Potato King and has scheduled her first molten gold bath. Surely such a cartel cannot be undermined! Surely there must be intervention, for no more perfect potato monopoly could exist!
Not so! Introducing, an amazing substitute, the radish [3]! You have no more need for potatoes, for you can now eat these amazing roots. Cook them and you will find that they are indistinguishable from potatoes for most uses. And only 1/2 the price!
Or perhaps feast your eyes upon the Potatonator 5000! This specialized device allows potatoes to be grown for 1/2 the going price in environments that were formerly inhospitable to them!
... You get the point. Even an extremely unlikely monopoly such as this one is unstable. As potatoes rise in price, people will have strong incentives to find or invent substitutes for them, and to find or invent new innovative ways to get potatoes.
This is another thing that is dictated by the law of Supply and Demand. As the price rises, the demand falls. It falls because less people can afford potatoes, and more people buy substitutes. These substitutes and new technologies will be able to out-compete the potato cartel unless the cartel starts selling potatoes at competitive prices. This very phenomenon is currently in progress in NYC, as Uber is out-competing the existing taxicab monopoly [4].
But what about the historical examples?
Most historical "monopolies" that you learned about in school gained tremendous market share by out-competing their competitors. These so called "monopolies" drove prices down into the floor, and didn't raise them back up again. The only monopolies that have been able to successfully drive prices up have been backed by State power [5].
As you can see, in a free market it is very hard for a monopoly to form and remain stable for any significant amount of time. The obstacles are just so ... vast. And even if a monopolistic firm does arise, it will be short lived.
Footnotes and Resources
1- If you are unfamiliar with the concepts of markets, supply, and demand, I recommend this video by crash course as a decent introduction.
They also mention market failures in the last part of the video. Market failures are not an economic law like supply and demand, but rather an opinion about whether the result of the free market is the most desirable result. Obviously, different people desire different things, making the concept of market failures a highly subjective matter. This puts market failures into a different category from supply and demand (which are just descriptions about how reality works), and I find it unfortunate that they included it in the video. However, I don't know of a better resource to direct you to if you are unfamiliar with supply and demand.
To get another perspective on a kidney market (mentioned in the crash course video), and markets in general, see this video hosted by economist Brian Caplan. The accompanying playlist is also enlightening.
For more about economics (it's important guys) I recommend Economics in One Lesson by Henry Hazlitt. Available online here.
Additionally, a huge library of amazing econ literature compiled by Tom Woods can be found here.
They also mention market failures in the last part of the video. Market failures are not an economic law like supply and demand, but rather an opinion about whether the result of the free market is the most desirable result. Obviously, different people desire different things, making the concept of market failures a highly subjective matter. This puts market failures into a different category from supply and demand (which are just descriptions about how reality works), and I find it unfortunate that they included it in the video. However, I don't know of a better resource to direct you to if you are unfamiliar with supply and demand.
To get another perspective on a kidney market (mentioned in the crash course video), and markets in general, see this video hosted by economist Brian Caplan. The accompanying playlist is also enlightening.
For more about economics (it's important guys) I recommend Economics in One Lesson by Henry Hazlitt. Available online here.
Additionally, a huge library of amazing econ literature compiled by Tom Woods can be found here.
2- This is obviously a Hobbit reference, as the vast wealth of Erebor (also known as the Lonely Mountain) was legendary.
4- This video and this other video by Reason go into more detail as to the specifics of the rise of Uber. It is a pretty intriguing story.
5- There has been much written about the subject of historical monopolies. The historical examples of monopoly actually follow the trend of either supreme customer service, or supreme state backing.
Links!
The Misplaced Fear of “Monopoly” - Article by Tom Woods. This article is focused on refuting "Predatory Pricing", and does contain some mention of historical "monopolies"
Big Business, Monopoly, and Predatory Pricing - Speech Excerpt by Tom Woods which is entertaining and touches on the historical "Robber Barons".
The Robber Barons and Monopoly - Podcast by Tom Woods. This podcast goes through in great detail many of the "Robber Barons" stories. As well as many stories about State backed monopolies and subsidized industries.
Fear of Monopoly - Article by Edmond S. Bradley. This article makes a very similar case to the one that I have made, but couched in some "too hard to enter" industries: Automobiles, Airplanes, and Electric Power.
Links!
The Misplaced Fear of “Monopoly” - Article by Tom Woods. This article is focused on refuting "Predatory Pricing", and does contain some mention of historical "monopolies"
Big Business, Monopoly, and Predatory Pricing - Speech Excerpt by Tom Woods which is entertaining and touches on the historical "Robber Barons".
The Robber Barons and Monopoly - Podcast by Tom Woods. This podcast goes through in great detail many of the "Robber Barons" stories. As well as many stories about State backed monopolies and subsidized industries.
Fear of Monopoly - Article by Edmond S. Bradley. This article makes a very similar case to the one that I have made, but couched in some "too hard to enter" industries: Automobiles, Airplanes, and Electric Power.
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