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Ludwig Von Mises

Today we are going to look at one of the biggest areas of fear people have when they look at corporations: monopolies. But why are people so afraid of monopolies? Because they imply powerlessness, exploitation and all around bad karma. But is it so and if so wouldn't free markets make them widespread and invincible? In a word, no. But don't believe us. Let's think it through together.

Bad Definitions

To begin with and if we are to deal with a subject, we need to define said subject. And so we first need to define what precisely is the meaning of a "monopoly". This would seem like a trivial question, alas is not. This is so because as we will see, monopolies (or what regular people understand as such) have their origins in politics, not economy. As such a clear economic definition should not be expected and this is most definitively so. As a matter of fact, there are multiple, sometimes even competing, definitions of monopoly which are used by people with total and complete disregard of their actual definitions. People equates monopoly with bad economic conditions regardless of its definition(s) or meaning. This is a large problem because definitions matter.

Why so?

Because definitions typically imply some sort of mechanism and it is this mechanism that allegedly produces the monopolistic damage. Praxeology is an economic science and such it cannot address gut feelings and perceptions. We have seen this as we have stated multiple times that the concept of value is individual and subjective. Praxeology states very clearly that it only deals with actions, not with intentions. Thus, if we want to analyze monopolistic actions, we need to understand such actions and thus we need mechanism and thus we need clear definitions.

The Supply Side Definition

The most common definition that we typically encounter is the pseudo "common-sensical" one which has to do with only one company manufacturing one specific product. The definition goes more or less as follows:

"a monopoly is a company that actually or virtually controls all the supply of a given good or service"

The idea being only one supplier of a given product therefore only one seller. The problem with this definition is that it is never defined what is the meaning of "only one product". This seems silly because we all know that if the company XYW is the only company on the planet selling the MegaWidget, that means that there is only one company in the planet selling the MegaWidget. Simple, right?

Well, not so.

If we bother to watch how people actually act we will immediately notice a problem. Given the option of buying the MegaWidget from a corner store or buying the same MegaWidget, at the same price, from the Big Bad Store, some people will prefer the first one and some people will prefer the second one. This is a fact. But if both stores sell the same MegaWidget for the same price, why would people prefer one or the other?

Because Praxeological actions are subjective. People do differentiate the corner store from the Big Bad Store, even though the MegaWidget they sell are identical and are being sold at the exact same price. The problem is that the subjective estimation of value (the preference of one good over another), takes into consideration many elements that the mere similitude between goods and their prices cannot explain.

Thus, for people buying the MegaWidget from one store or another is actually different. In their minds, they are buying two different products. This is regardless of the fact that there is only one company manufacturing the MegaWidget and they are all identical! In their minds buyers are choosing product A (corner store) against product B (Big Bad Store). They are choosing between "two" different products in the very real sense of the word.

Therefore, if we cannot have a specific good, the supply of which cannot be controlled by a given company because in the eyes of the buyers other value considerations apply, is it possible to have a monopoly of such good? Of course not.

Each item of such a product has the potential to become a separate product itself. As this potentiality is commonly expressed in the marketplace through actions, we must conclude that this definition is meaningless.
This is not to say that we cannot have scarcity. Of course we can have. For example XYW may manufacture too few MegaWidgets and therefore the demand will be greater than the supply. Does this mean that XYW has a "monopoly" as previously defined? Of course not. This is so because we choose to purchase the MegaWidget from store A and not B regardless of scarcity.

Take for example your favourite carbonated drink. It is the same drink. It costs the same in many dispensing machines throughout the city. Yet, you prefer to buy your favourite drink from that machine which is close to your workplace or in a nice spot or simply in a convenient location and not in the other 347 ones spread out throughout the city.

Why?

Because to you it is indeed a different product at each location!

Now, if we define as that drink in that dispensing machine as "unique", this means that every single dispensing machine in the city is "unique" thus selling a "unique" product. Which means that every machine has a "monopoly" of that "unique" product.

And going a step further, we can also conclude that every single company manufacturing every product on earth is thus manufacturing "unique" products and they are all therefore a monopoly!

Nonsensical definition indeed!

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

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