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Ludwig Von Mises

The Price Definition

OK. So due to the subjective assignment of value, it is not possible to define what is a "given product" from a monopolistic point of view. However, even assuming that all products are "unique", we can still go back to reality and we can say that:

"the manufacturer or supplier of such "unique" products has a monopoly when it can impose "monopolistic prices""

Again, this seem like common sense. If company XYW is the only company manufacturing the MegaWidget, then they can ask any price they want for them. Or at least they can ask "monopolistic prices". It is the old take it or leave it. Simple, right?

Well, no.

Again. If we are going to discuss a specific topic, we must define the topic first. Therefore at the core of this definition is the understanding of the meaning "monopolistic price".

Fair enough. For such a definition we go to mainstream economic theories they tell us that "monopolistic pricing" is a

"price that can be demanded and obtained above the price that would be possible in a state of perfect competition"

The idea here is that somebody will, by definition, have a monopoly if they can demand and get prices that are superior to the ones they would be able to obtain if there would be other companies competing in selling the same product.

But if we are looking for a price above a price set by "perfect competition" this by definition implies a price where there is no competition whatsoever. Fair enough, but then the following-up question is what is a price "without competition"? How do we determine this price and is this price even possible?

Let's see what happens in reality. In a free market, prices are simply the ratio of exchange between one good and another. It so happens that the most common good is money and thus we have a price. But money is also a good which suppliers want. This is the flip side of the most common exchange transaction. The problem is that there are many, many suppliers of goods, all wanting a fixed amount of money. What this means is that whether suppliers like it or not and regardless of their goods, they are all competing against each other for money! What this means is that it is not possible to have a price "without competition" because all suppliers are ultimately competing all the time against each other for your money!

And how does this translate into reality?

If the MegaWidget is too expensive, we will purchase a MiniWidget. If the MiniWidget is too expensive, we will purchase a DoubleWidget and so on. And what happens if everything is expensive? We won't buy the product and save our money! And what happens next? The suppliers of all Widgets don't have profits. And what happens next? They lower their prices to increase sales!

But if this is the case, can a monopolist force us to buy the MegaWidget? No. Because if you remember previous lessons, an exchange (or price) is strictly voluntary. A monopolist has no means to force us to buy the product at a price we don't want to purchase.

But what happens if a "monopolist" rises prices a great deal? Chances are excellent that competition -on the same product- will arise and undercut the price of the "monopolist" thus ending the monopoly and forcing to lower its prices. Or other "competitors" for money will lower their prices thus reducing the amount of money available to purchase the monopolistic good, thus forcing the monopolist to lower its prices. It is to be noted that this process of undercutting prices operates whether or not prices are theoretically "monopolistic" or not.

But what happens is a monopolist company buys out the competition and keeps prices high? This will only increase the opportunity for other competitors!

But what happens if the monopolist set prices below a profitable level to bankrupt the competition? First off, while they are doing so consumer benefit from an unusually low price.

Secondly, if a monopolist bankrupts the competition, the capital goods of the competition will be purchased by other competition at discount. Which means that the competition will now be able to compete with the monopoly much more efficiently!

Which means that any attempt at a monopolistic "pricing" eventually backfires and creates larger opportunities for competitors!

The bottom line is that from this point of view, the definition of "monopoly" is nonsensical simply because it is not possible to achieve a price "without competition" because competition is permanent and universal. This is true very much in real life and not in theory.

The Government Definition

The last definition of monopoly reflects government practices whereby the state grants a company the exclusive right to sell a good or service and this right is backed by the brute force of the government. Obviously this is a contradiction in terms because the government uses the "monopoly" excuse to intervene in the market to destroy "monopolies" while at the same time grants and enforce their own "monopolies"! And so it is nonsensical for a government to claim to be against and for monopolies at the same time. Furthermore, these kinds of monopolies are artificial and do not exist in the free market.

The Monopoly Threat

This analysis has been quite short and succinct, but it provides the basic information to dispel the notion that somehow "monopolies" are bad and that furthermore their so-called "destructive power" will be enhanced by a free market. On the contrary. A free market through its normal and natural mechanisms operates in such a manner that a monopoly (whatever it may mean) simply cannot be achieved.

This is so because regardless of the type of market, the very existence of money implies that by definition Catalactic Competition exists. All suppliers compete against each other for money.

As we mentioned at the beginning, the problem with the concept of "monopoly" is that its definition in rooted in governments' artificial market intervention concepts. As such, the definition itself is artificial and has no meaning in a free market simply because in a free market monopolistic conditions (whatever they may mean) cannot be achieved.

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

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