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Monopolies In America Last edited October, 2003, Last reviewed September 2007 Amazingly enough, the subject of monopolies remains
one of the most misunderstood economic questions even today.
Economists, especially those of the Austrian school of thinking such as
Ludwig Von Mises, have long since dispelled the myths around the
subject. (Rather than reinvent the wheel here, it is suggested
that the reader see some of the material in the "recommended
reading" section of this website.) Apparently their work
has not yet found acceptance in mainstream understanding. Today it
is not oil barons or railroad tycoons who are lightning rods of
anti-monopoly (read: anti-capitalist) sentiment, but rather technology
mavens in software, hardware, or communications that are struck with the
brunt of societal anger and jealousy. Bill Gates of Microsoft is
clearly the devil incarnate, if you believe our government and the
competitors of his organization. For those interested in a
rational understanding of the question of monopolies, let's have a quick
review of past economic thought and then let's apply that information to
the present day. When speaking of monopolies, the threat expressed
is that of a single organization with enough market power to raise
prices for their products essentially at will. In other words, a
monopoly is said to have complete or nearly complete control over the
price of their product due to a dominant position in their market.
Such an organization can raise their prices without seeing a fall-off in
consumer demand. By contrast, an organization in a competitive
market selling at a competitive price would see a fall-off in demand
should they raise prices. Consumers would quickly realize that
they could have the same product or a comparable equivalent for less.
In the explanation of modern college textbooks, dominant monopoly positions are said to
occur from natural or monetary barriers of entry, from exclusive
ownership of resources, from patents, from government intervention, or
various other explanations. Some of these explanations are true;
some are myth. In any case, our American labyrinth of antitrust
law was developed in response to the perceived threat of monopolists
that would supposedly wreak havoc if left free in the market place.
They would damage consumers and would-be competitors through
"predatory" pricing and thereby make inordinate profits. The Austrian school of economists, the Chicago
school of economists and others have shown clearly that the only genuine
threat is from monopolies created by government intervention. That
is, when a government steps into a market place and grants a special
privilege to a single organization or small group of organizations to be
the sole entity in that market, the market is distorted to a degree that
does cause damage in both the short and long term. Such damage can
be in the form of high product prices, reduced technological innovation,
or even lower wages for certain individuals. Examples of
government-created monopolies include the former "Ma-Bell"
AT&T, power companies, television cable companies, and perhaps the
best example today: labor unions. Aside from these
government-created monopolies, is there any danger from a single entity
with very high market share? Having very high market share does
not mean that an organization can raise prices at will, at least over
the long term. If prices become too steep, consumers will look for
another producer or another comparable product to suit their need.
If profits of a single entity begin to rise dramatically over the long
term, other producers will step into the market place, producers of
equivalent products will market their goods to the same consumers, or
inventors and venture capitalists will find a way to create a new
competing technology. An entity in a free market attempting to
raise prices past a competitive point will soon find new competition and
lower sales. In fact, the only way an entity in a free market
can sustain a very large market share over the long term is by low
prices, technological innovation, or special perceived value by
consumers. Is such a monopoly actually a problem? One argument for accepting government regulation of
markets is that there are "natural" monopolies that would run
rampant over consumers if not controlled. A favorite example is
the electric power company. There can only be one set of power
lines through town, it is argued, for it would be prohibitively
expensive and ugly to run multiple sets of power lines through every
main street USA. Given that, power companies are said to be
natural monopolies that must be regulated so that they do not use their
advantage of power line ownership in order to overcharge consumers.
A recent "innovation" by the government is to allow the
separation of transmission line markets and power producing markets to
foster consumer choice. Both markets are still tightly regulated,
of course. This natural monopoly argument is false. The
argument depends on the belief in a static market place in which no
innovation will ever take place. Of course, if the regulations are
allowed to stand, such a thing may come true. Freed from
government intervention and allowed to make profits, there are many
producers who might offer alternative forms of electrical power for use
by consumers and businesses. For example, solar power, wind power
and fuel cells are three current technologies capable of creating enough
power for an individual home or farm, a large business, or a small town
or county without the use of existing transmission lines. They
will not run Manhattan as of yet, but they do not need to in order to
have the effect of keeping prices competitive in a truly free electric
market. In the short term, it might well be that an electric
company would raise prices in a free market. Over the long term,
however, such extra profit is the incentive for other producers to
create innovations in service. For a society to advance, profits
are the motivation for innovation and efficiency. Even in the
darkest days of the Soviet Union, technology advanced due either to
replication of Western technology or to the profit motive of individual
scientists and engineers who received for themselves and their families
the extra pay and benefits, unique opportunities, and special
recognition reserved for the successful elite. The "trust-busting" efforts of our
government are sometimes aimed, ironically, at the very monopolies that
the government itself created through market intervention in the form of
licenses, tariffs, and other laws! When the government broke up
"Ma-Bell", the fact that it was a government regulated and
government protected entity was largely ignored. The telephone
system was considered a "natural monopoly" and, as such, was
tightly controlled by the government. In the beginning of the
telephone era, there was competition for phone service, but it was
quickly squashed in favor of intervention for the "public
interest". While many still pine for the simple days of
having one phone company, some thorny questions remain. Left open
to competition, would phone service have advanced sooner in technology
or would prices have come down lower? If prices remained high,
would that have spurred faster adoption of wireless technology or some
other technology we've yet to see? We will never know. Even
now, the market is not de-regulated; it is differently regulated.
There is not a free market for telephone service today, there is a
complicated regulation scheme supposedly designed to avoid monopolistic
behavior and encourage competition. Yet, how can we encourage
competition by stopping competition? In the case of telephone
service, even alternative technology such as wireless, satellite and
internet telephony is regulated. What competition that does exist
occurs by slipping through the cracks of government bureaucracy too
inefficient to catch it. Who knows what service is really possible
or what price is available on a truly free market? For a plain example of how individuals can be hurt
or unduly rewarded by a government-created monopoly, look no further
than your local labor union. Through the National Labor Relations
Act and other federal labor laws that award organized unions their
coercive monopoly as the sole collective bargaining agent for their members,
the government has created little monsters within the labor market that
have, in many cases, raised prices (the wages of their captive members) until
consumers are harmed, businesses are made uncompetitive or bankrupt, and
union members are paid without regard to performance. Since
workers are given no legal choice but to submit to their union and accept its
representation, and since in many cases workers are forced to finance
their union through payroll deductions, it is easy to see why unions
qualify as a government-created monopoly. Such a monopoly can
force unionized companies to pay wages that make it uncompetitive with
other producers due to higher costs and therefore more expensive in the
pricing of its products. Sometimes tariffs and other protective
measures in the market place distort the market even further and allow
the unionized company to continue paying higher wages than otherwise
would be without losing market share. The automobile industry has
lessons in this regard, as does the steel industry. In such a case
only the consumers lose. Furthermore, some individuals who might
be sub-standard employees are paid more than they would be in a free
market, and some individuals who might be outstanding employees are paid
less than they would be in a free market. Government-created
monopolies are truly "bad" monopolies because they truly have
a stranglehold on some aspect of the market. That stranglehold can
only exist, though, through the intervention of the government.
Without a government to grant and protect the special privilege, the
monopoly collapses under its own weight. Why, then, if only government monopolies are a true
threat, does antitrust law persist and supposed bad monopolistic
behavior still threaten consumers? A look at a very recent example
will give some clues. The Department of Justice took action based
on the Sherman Antitrust Act against Microsoft Corporation in 1999
stating that: "The plaintiffs charge, in essence, that
Microsoft has waged an unlawful campaign in defense of its monopoly
position in the market for operating systems designed to run on
Intel-compatible personal computers ("PCs"). Specifically, the
plaintiffs contend that Microsoft violated §2 of the Sherman Act by
engaging in a series of exclusionary, anticompetitive, and predatory
acts to maintain its monopoly power. They also assert that Microsoft
attempted, albeit unsuccessfully to date, to monopolize the Web browser
market, likewise in violation of §2. Finally, they contend that certain
steps taken by Microsoft as part of its campaign to protect its monopoly
power, namely tying its browser to its operating system and entering
into exclusive dealing arrangements, violated § 1 of the Act." For anyone who is intellectually honest and who is
familiar with the computer market, this civil action was nonsense.
Like the famous TV commercial in which an old woman questions,
"Where's the beef?", intellectually honest people asked
"Where's the harm?". Where is the supposed harm to
consumers by Microsoft? A short history is in order to understand
this case. Microsoft produces operating systems for a specific
type of personal computer using Intel processors, general office
software for these same and other types of personal computers, and a
number of other software products. The personal computer market
was created in large part by the efforts of Microsoft to popularize PCs
and their resulting efficiency and innovative new processes for
businesses and individuals. At one time computers were the
strictly the domain of large corporations who ran centralized processing
units called mainframes with hundreds or thousands of "dumb"
terminals communicating with the central unit. Minicomputers came
later and allowed medium sized organizations some of the same benefits.
When personal computers first appeared, the nascent market was full of
promise and new potential. Some PCs ran an operating system called
CP/M and supported exciting new applications such as the LOTUS 123
spreadsheet. Others ran the DOS operating system marketed at
various times by IBM or Microsoft. Commodore computer and some
others provided operating systems based on the BASIC computer language.
Over time the producers of all this software came to realize that
user-friendliness would be the key to selling more product. The
average Joe couldn't be bothered with arcane commands. Microsoft,
at this point in ownership of the DOS operating system previously
controlled by IBM, continued to add
features to the software, but that was not enough. Over a period of a few years, two competing systems
became the market leaders in providing a user-friendly personal
computing experience: Apple computers and computers running the new
Microsoft Windows operating system. The Apple Macintosh computer
quickly took over market share in schools and in art or graphics
oriented businesses. The same company produced the computer
software and hardware, it worked together elegantly, and it gave a user
experience like nothing before. Microsoft played catch-up.
Its first versions of Windows were clunky and they required the base DOS
operating system to work. Not until its third major release did
the Windows product catch on with any certainty. Unlike Apple,
Microsoft did not produce the PC hardware and it was therefore required
to enlist the support of manufacturers to sell more software.
Microsoft made in-roads into the business market place and soon offered
networking support in its operating system so that businesses could
connect personal computers to other computers, especially to specialized
file servers running Novell Netware or to minicomputers through the
addition of terminal emulation software. The competing approaches wrestled in the market
place for some time. Apple defenders reasoned that a more elegant
interface and a legion of students learning computing skills on
Macintosh computers would eventually win the day for a company devoted
to an integrated product with superior originality. Microsoft
defenders reasoned that the ability to sell software through many
hardware producers and the legion of business people adopting the
Windows platform would make Microsoft the eventual standard. For
its part, Microsoft took a lot of hits from users and from pundits.
Many were well deserved. Still, with each new release, Microsoft
continued to add new features, correct past mistakes, and maintain or
lower the price of its Windows operating system. At first, having
to support so many hardware manufacturers was as much a burden as a
blessing for Microsoft. PCs running Apple Macintosh or Microsoft
Windows operating systems were comparable in price, but Microsoft had to
work harder in order to support the myriad combinations of hardware. Then something changed. Hardware
manufacturers started to standardize on parts and components, which, in
time, led to lower hardware prices. Now consumers and businesses
could purchase a PC running Microsoft windows for less than a similar
Apple Macintosh. Apple, which did not use as much of the same
standard hardware components in its PCs, was now forced to position its
operating system as superior to Windows in order to justify the higher
cost of the package. For a while that strategy worked.
Microsoft, though, relentlessly pursued new features and uses for its
operating system. It pushed hardware manufacturers to share
advertising and selling costs and it tightened licensing agreements.
As hardware prices continued to drop, as Microsoft continued to improve
their operating system, and as Apple continued on its original strategy,
the Apple Macintosh became less and less competitive. Even in the
school market, where Apple computers once ruled, Microsoft PCs became
the norm as administrators, school board members, and parents all
advocated the installation of PCs that students would one day find in
the "real" world. Apple market share collapsed. Today Microsoft does have a monopoly on a certain
segment of the computer market. Yet, who is being harmed?
Consumers and businesses can purchase a personal computer for a fraction
of the price they would have spent just a couple of years ago.
With that PC they will receive new features and functions that did not
even exist a couple of years ago. Product innovation is so rapid
and prices are falling so quickly that the toughest part is educating
consumers on the availability of the new features. Some software
is even said to have too much functionality. At the same time,
Microsoft is wary of new competition on the horizon. Linux, though
not yet a serious force in personal computers, has made tremendous
in-roads into the server operating system market in which Microsoft
operates. The internet and network models of computing under which
"thin" clients running just a browser or some other minimal
software is the only requirement is yet another threat. While
Microsoft continues to innovate and lower prices, it still has
competition that could destroy its business model as easily and as
quickly as Apple's was destroyed. It is a monopoly for certain
products, but it does not act in the way that people fear. Why? According to the Justice department the market in
question here is the personal computer market for operating systems
designed to run on Intel-compatible personal computers. They
define the market narrowly in order to support their claims. The
computer industry today is a big place. There are personal
computers with lots of different processors available from lots of
different manufacturers. There are personal hand-held devices
running an assortment of processors and operating systems. There
are computers running as internet, file, database and application
servers, minicomputers and mainframes running business applications and
databases, and black-box devices to do the work of servers without
operators of any kind. In short, the computer market place is as
wide open and as teeming with possibility as one would expect in a free
market place. Only by defining Microsoft's market in such narrow
terms could the Justice Department attempt to ignore the reality that
Microsoft's hold on its market share is tenuous and dependent on
continued innovation and efficiency. Once narrowed in definition, the complaint zeros in
even further on the internet browser functionality included with the
operating system. Microsoft has the temerity to offer its Explorer
browser at no extra charge to consumers. That, it is alleged, will
further their monopoly by putting competing browsers out of business.
It is worth noting here that a browser can be (and has been) written in
a matter of months by a crack group of programmers. There is
nothing to prevent such a browser from being run on a Windows based
computer. Further, there are many companies, such as AOL and other
internet service providers, who give browser software to their own
customers for their use and who will pay the licensing fees to the
browser programmers if need be. The point being, consumers have
more than one free browser choice available, and they have nothing to
prevent the use of any browser they wish, free or not. Since
Microsoft is giving its browser away for free, any competing browser
will likely also be free or very low cost. Since any competent
group of programmers can produce a new browser in short order, Microsoft
will dare not charge much for its browser even if it ever does decide to
charge a price. This is called free market economics. If
Microsoft is an evil monopolist, where is the harm to consumers? There is no harm. Microsoft is branded a
monopolist and evildoer for two reasons. One, there are people
within the government whose job is to prosecute monopolists, among other
things. A big case against an industry lightning rod is good for
headlines and careers whether they win or lose. Some within the
government may genuinely believe in the case. That doesn't make it
right. Second, players within the computer industry, as in other
industries, have come to realize that the antitrust laws can be used for
an effective competitive advantage. When the Microsoft case was
brought forth, lots of other software and hardware companies were only
too happy to offer accounts of supposed monopolistic behavior by
Microsoft that damaged them and their customers. Bad public
relations for Microsoft mean a competitive advantage for them. Why
spend resources trying to innovate or price your way ahead of Microsoft,
when the Justice Department will help you compete nearly for free?
And what better target than Microsoft with its billionaire founder Bill
Gates? Everyone has a jealous streak and it is easy to play on
that when the object of abuse is someone so filthy rich that the average
Joe cannot comprehend the wealth. Yet, where is the harm to
consumers?
*** Copyright 2003, rationalamerican.com *** To cite this article: Painter, John. Monopolies in America. (October 2003). Retrieved month x, 2xxx, from <http://rationalamerican.com/economics>
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