Thursday, July 5, 2012

Monopolies and the Free Market

[Originally posted at Slacktivist.]
[Another thing that's just a comment that I've decided to bring over.  Discussion about the monopolies and the free market.]
While monopolies certainly may exist in the free market, if everyone is free to start a business, would not monopolies quickly be replaced by at least oligopolies, if not by an even more competitive arrangement?
No.  Being a monopoly represents an immense advantage over any would be competitor.  In a completely free market the monolpolies would be free to crush all attempted competitors before they were able to get off the ground.
Say you have a monopoly on the widget market.  You have widget factories, you have a widget distribution.  You're in all the widget stores.  You have brand recognition.  Everyone knows that when they want a widget they go to you.
So say want to get into the widget market.  First I have to start making them.  If I make them in a garage then I don't have the volume to compete much beyond locally.  You can flood the market in the area with low price widgets (you've got profits from the entire market to draw on, you can sell these ones at a loss if need be) and I won't be able to compete with that.  I'll be forced out of business.
If I have a factory that's nice, and I have more volume, but I still have no distribution network, no place on store shelves, and no brand.  Plus, since I just had to build that damn factory, I'm already in the hole.  I don't just need to make enough per widget to keep the operation running, I also need to cover the start up costs* so already I'm needing to sell at an inflated price while you can still screw with yours.  If you sell your widgets at cost everywhere I try to make a sale then you lose nothing.  If you sell them at below cost, it's probably an worthwhile investment to kill of competition, and you can afford it, because you have the entire market to draw from.
More than that: distribution and shelf space.  You have economies of scale, I do not.  You have immense negotiating power, I do not.  If you threaten to drop any distributor that picks me up, you can effectively shut me down there.  I could never offer enough volume to make up for what they lost by you dropping them.  Even if I do get someone to distribute my widgets, and I get someone to put them on the shelves in their store, you can still end me.
As established, you can undercut me, you can overproduce me.  Anywhere and everywhere you can outcompete me.  But let's talk about space in a store.
If a store depends on widgets you can threaten to pull out if they let my product in.  You're proven, I'm not.  At that point picking me up is a risky gamble in itself, but you can also remind them that they depend on widgets and if the next store over is selling cheaper widgets then they're be pretty well fucked.  If they give me space, you'll end them.
For the stores that you can't push around (say a store that sells all kinds of things of which widgets are just one, or one that is part of a larger group that can keep it afloat) you can keep your widgets in the story and make sure that yours are always the better buy.  In addition to offering equivalent products at a lower price, you also have a lot more funds to sink into R&D than I do. You can hit me on all sides, similar products for cheaper, somewhat better products for the same price, much better products for a somewhat higher price.
In eleventy-one ways you can end me.  Assuming I managed to build my factory in the first place.
*As someone who would like to manufacture some stuff, let me tell you, I hate start up costs with the fires of a thousand suns.

1 comment:

  1. Where costs to enter a market are non-zero, a monopoly is the only steady state. You've pointed out why a new competitor can't get in; existing competitors are always at risk of being sold to someone else, making fewer and bigger players.