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RUMMINATIONS ABOUT MONOPOLIES

Let us be clear. We are all for progress, the faster the better. Furthermore, we are for everybody’s progress, not just industrialists. However, because The Economy Cannot Be Forecasted, it requires a short cycle of improvements and innovations.

Capital is invested. New products and services are developed. The market is monitored to see how people respond to these changes. Accordingly, adjustments are made and the cycle begins again.

In order to be efficient, innovations must be adapted and corrected on an ongoing basis. Creating massive, long term projects is a particularly bad idea that governments are very adept at doing. The reason is simple: it is not their money! It is job security for politicians.

If the short tale of the UK National Grid teaches us something, is that pretty much anything, no matter how monstrous, is possible. All that requires is to throw money at it. Untold amounts of money… that could be satisfying you modest needs today instead of a “glorious” future tomorrow… a future that is far more complex and disappointing that anything you may have dreamed before.

In the end, sure, UK’s national grid works. Today. And sure, it provides benefits to an untold number of people. And yes, it increases their standards of living. No doubt. However, and there is always a however, at what cost? Nobody knows for sure. Yes, it was and it still is that expensive.

The free market was taking care of the problem, smoothly and consistently. It was a distributed system (which meant it did not had a single point of failure) and it was growing with the economy instead of trying to push it. It was evolving with people’s needs, not trying to invent new ones. It was what the people required, at a price they could afford; not what was imposed to them. Sure, it was a messier system and it wasn’t standardized. So what? The market is an evolutionary machine. The best designs come out of multiple trials-and-errors, as opposed to government designs which usually bring gigantic failures. Take into consideration something very small: the lonely electric plug. In UK its manufacturing is horribly expensive; it even contains a fuse. If you take a look at similar plugs in other countries with similar voltages, you will notice that they have a much simpler and cheaper design without sacrificing safety. That’s market power in action.

The correct answer to government monopolistic plans is always the same: don’t. The free market will take care of it.

 

ANTI-COMPETITIVE PRACTICES

This is a long list of so-called business “practices” that, according to politicians, damage the sacrosanct competition and must therefore, be regulated or punished. We will take-on some of this nonsense to debunk them. Not because this is a fun thing to do, but because it is necessary. To task.

 

Absorption

This is the practice of either purchasing a competitor’s product or purchasing a competitor altogether. This is obviously bad because it decreases competition… or is it?

Let’s take it apart. To begin with, a straight purchase no matter how “hostile” it may be, it still requires a voluntary agreement. In other words, company A does not send a battalion of troops to company’s B headquarters with an ultimatum: either you sell to us or we level you.

In the best case scenario, there is a total agreement between A and B. One wants to buy and the other to sell… for the right price… which will be negotiated. Every party wins.

Worst case scenario. company A wants to buy but the board of company B rejects the offer. Hostile bid…. But… hold on…who is the real owner of company B? Is it their board? Of course not! It’s their shareholders. Company A is simply bypassing the opinion of company’s B employees (board of directors) and dealing with the owners (shareholders). Without shareholders willing to sell, without their agreement, there is nothing that company A can do. On the other hand, if the shareholders agree, every party wins!

So, in either type of purchases, all parties win. Now, how about customers. Would they be better off if the purchase would not happen? To begin with, they have no saying in it (at least they should not have). Neither company A nor B are their property! How would you feel if I would interfere with your intention to buy a new car? Would you be happy? Of course not! Then, why do you believe that it is OK for the government (your representative) to interfere with the business dealings between A and B?

If company A succeeds in removing a competing product or company from the market, what would they do?

They could do three things. The first one is to rise prices. And what happens when prices rise? The rewards for potential competition increases exponentially. What happens then? Competition sprouts like weeds. Customers benefit.

The second one is to improve its own product and keep the same price. If competition appeared before, it will appear again. Customers benefit.

The third one is to decrease the features and/or quality of the product while maintaining or increasing the price. Customers are dissatisfied. A wonderful opportunity arises for competing forces. Competition shows up. Customers benefit.

In other words, absorption does not work. It is a temporary patch that solves nothing. Owners always benefit. In the medium to long term so do customers. Although it is true that in the short term customers may not benefit, eventually they do. The alternative is to have bureaucrats deciding who can purchase what and in which circumstances.

Consider this. Companies doing the buying and selling are doing so based of an educated guess. They are the ones with all the relevant information, yet, they don’t know for sure. And you expect us to believe that bureaucrats with no stake in the process, no inside information and no motivation can do better??? Of course not!

In the market, for every intervention there is a larger and opposite reaction. Prevent a purchase and upset the market balance which will ripple through our standards of living. Not a good choice, if you ask us.

 

Digital rights management

What? Have politicians finally come to their senses? Are they finally tossing away the whole Intellectual Property mess we discussed in the lesson Intellectual Property Rights Are Dumb (IPRs)? Not a chance. It would seem that if there are DRPs preventing you from buying used media or software, that would be anti-competitive.

Or would it be? The fact that one cannot purchase a second-hand medium (typically software) allows the company selling them to maintain or raise prices. Which spurs competition. Which benefits customers!

As usual, politicians got it all wrong. The issue is not DRP on used media or software, the issue is DRP, or more precisely IPRs! This particular issue is part of the gigantic mess that IPRs created. Remove IPRs and this, and many other anti-competitive issues simply go away.

 

Exclusive Territories

This is an agreement between two companies not to compete in their respective territories. The intention is to create competition-free territories or to have mini-monopolies and hence raise prices. The only problem with this scheme is that it won’t last long. As we pointed out before, the higher the profit margin, the higher the temptation to compete. Eventually other companies will come to those territories and begin competing. Sure, they can reach similar agreements with these companies too. Let’s take the worst case scenario. Let’s say that these companies divide the entire world amongst themselves and that there are no other competing companies. Guess what? Eventually, at least one company will have no choice but to expand and they will move into somebody else’s territory. Voila! Competition. Exclusive territorial agreements do not work for long, they never did. Sooner or later somebody gets greedy and oversteps agreed upon boundaries. Agreements are broken, competition begins. Sure, it may take some time, to occur, but eventually it will happen. The other option is, again, leave all this in bureaucratic hands… which will inevitably mess up a lot more things. No thank you.

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

Continue to We don’t need no stinking competition - Part 7

 

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