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MONOPOLIES AND OLIGOPOLIES

Now we are venturing into an interesting subject. The “popular” interpretation of Monopolies and Oligopolies, is that they are “evil”. Actually, that they are so evil that “something must be done”. And again, nothing can be further from the truth. Politicians and their economic drones do nothing to dispel this gross error; they actually foster it whenever possible because it is to their advantage to do so. To be seen “doing something”.

All these people are idiots or worse, fraudsters intentionally working to deceive you and make you dependent upon them. Job security through lies. Sounds familiar?

 

Natural Monopolies and Oligopolies

What we mean by “natural” is monopolies and oligopolies that were created by the market strictly following market rules. There were no government interventions of any kind.

The “classic” interpretation of Monopolies and Oligopolies by politicians and their economic drones, is that they are not “evil” if they are natural, but they are not to be trusted and therefore they need to be “regulated”. If they cross this mythical “regulatory boundary” then “something must be done”: they must be disbanded.

And again, nothing can be further from the truth.

These Monopolies are simply the beginning of any free market. They are the natural state of free markets from where all other competition evolves. Consider this. You have a farm. Your friend Xi also has a farm. You plant wheat and he raises pigs. You go to his farm and exchange three bushels of wheat for one pig.

Voila! Presto! Magic! A free market at work. For this transaction, you have a wheat monopoly and your friend has a pig monopoly. Through a free market transaction, you both benefited. No competition was necessary. Is this really something so horribly bad? Of course not! It is leveraging everybody’s particular skill set for the benefit of the both of you. It’s called division of labor (we won’t get into it right now, we will leave this subject for a future lesson).

This is one example of a natural monopoly. As more farmers travel the roads, they discover that some of them are also planting wheat and some are raising pigs. They are still a small group, but nevertheless there is a little bit of competition. Joe’s wheat is better than yours, but Paula’s is even worst. This means that Joe’s wheat will be the most expensive, then yours and then Paula’s. They all benefit because at the end of the season, they all sold their wheat, although not at the highest price. There is compensation, however. The same process happened with pigs. So, although your wheat did not command the highest price, the pigs you purchased were also discounted; and so, in the end, you benefited significantly. This is oligopoly. Is it that bad? We think not.

Eventually, as transportation improves, more and more farmers get to know each other and at some point there will be so many of them that straight competition will develop.

Also consider this. When a company engages in substitute competition, they are actually creating a new product or service. This product or service is, by definition, significantly different from the product or service they could not copy. Therefore, it is a de-facto (as a matter of fact) monopoly! Yet, we don’t see people complaining that there is only one company manufacturing Hummers. For this market, one company seems enough, it is all that the market can support simply because of the manufacturing price. Hummer has a monopoly on Hummers, so what? If you have the money, you can purchase one. This is good.

But, of course. Politicians have trained you to believe that you “must” have “equal” opportunity to purchase whatever it is that you want to purchase. Why? Where does this “right” come from? They will tell you it is so because it is for the “benefit of society”…. we see. So, when can we expect to purchase a Hummer at half the price? Oh… never? Why? Well… that’s because Hummers are “luxury” items and therefore not for the good of society. Why? Who defines what is a “luxury” and what is not? Who defines what is the “good of society” and what is not? Politicians, of course! If you follow the breadcrumbs long enough, you will find out that the concept of “good of society” is purely subjective and determined by the political needs of politicians. There is no rationale behind it.

Consider this. Monopolies bring to you new products and services. These products and services are typically expensive. It is reasonable. They were developed and implemented by pioneers. They took large risks to bring those products and services to you. Why would they not charge whatever the market will accept? They are their products and services. They did it by themselves. They gave you another option.

What? Not enough? Of course! You always have mommy government to where you can go and scream “Not Fair!”.

A typical contentious example for a monopoly is Internet Service Providers. Arguably, only large corporations can afford to provide access to entire towns or cities. Why is it so? Because it is very expensive to bring this technology to you. Not only it is very expensive but the recovery times can be measured in a decade or more! This means that investors must risk untold amounts of money and they won’t see a cent worth of profit for more than a decade! And all this assuming they can actually sell the service!

Yet, all that people seem to scream is give me, give me, give me! My ISP is too expensive. It charges too much. It is too restrictive. It is incompetent. It is arbitrary. The list of complaints has no end.

Well, there is a solution: don’t use their services!

Ahh.. but you have to have online access in this day and age. But do you? Seriously? I mean, what would be the worst that may happen if you cannot go online? You may not receive e-mails or messages from your friends? Then use the phone or physical mail. You won’t be able to do online banking? Go to a branch. You won’t be able to shop in eBay? Shop from work, go to a library or rent access in an Internet kiosk or coffee shop.

The truth is that for most people Internet access is not a “necessity” but an optional. The other option is to increase inconveniences for you. So, when you pay to an ISP, however expensive and incompetent it may be, you are not actually paying only for their troubles and services, but for your convenience!

All monopolies bring options and new products or services to the market. As such, they fulfill a critical role: they increase our standards of living. They are not evil and they don’t need management. Since monopolies are only the beginning of competition, free markets will take care of that in time. You don’t like the time frame for this to happen? It is not happening fast enough? Feel free to begin a competing company yourself!

Why should we, the people, pay through our taxes so that you may have “affordable” Internet connectivity? Where is the benefit for us? Answer: there is none. The only ones that benefit are politicians.

And then, there is always one. The “essential” good or service that only this or that evil, evil monopolistic company can provide at a price that only few can afford. Let’s consider something truly awful. A novel cancer treatment that may extend your life months if not a full year, but there is a problem. It is horribly expensive. You can’t possibly afford it, therefore, it’s the government’s “duty” to “do something” about it. Call it a “national health insurance scheme”, call it “socialized medicine”, “managed health care”… whatever. That will fix the problem and give you the medication “you deserve”. And the question again is why?

Without being cynical, why do you deserve to have this medication? Because a life is at stake? So… this means that every time that a life is at stake people should receive “free” medical services, correct? If something is good for you it is therefore good for everybody else. So… free surgeries for everybody? Yes. Free doctor visits for everyone? Yes. Free medication for everybody? Yes. Great! There is only one tiny, tiny little problem with this idea. Who is going to pay for all of this? Because, you know, either companies provide all those goods and services or the government does. If companies do it, they will need incentives (i.e. profits); if the government does it, it will also need money and it will be far more inefficient. So the options are either we pay for efficiency or inefficiency. Fine. But from where? Taxes? OK. You convince the politicians to shut almost everything else down and spend the entire budget on health care. Because, you know, there isn’t enough money to pay for everything. Not to mention the fact that politicians will never allow it because it will spell instant job loss.

The truth is that “free” health care is not really “free”. Governments pay for it either through inflation, borrowing or taxes, and most of the time through all three of them at the same time.


Note: please see the Glossary if you are unfamiliar with certain words.

Continue to We don’t need no stinking competition - Part 4

 

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