June 12, 2003

Regarding Monopolies

(In response to a letter)

Robert presents a number of common misconceptions about monopolies. He correctly points that natural monopolies may arise in certain industries because of economies of scale. However, it is important to keep in mind that the returns from increasing size decrease rapidly as the complexity of any given bureaucracy increase. Like many government agencies, large bureaucracies in business can also grow non-responsive to consumer trends, resist efforts to change, foster corruption and waste, and perhaps most importantly, grow stagnant because they fail to innovate. The major difference between public and private bureaucracies is that the invisible hand of the market quickly punishes companies that grow too large for their own good, and rewards small and innovative startups that are able to move quickly, and take the big risks necessary to take advantage of innovations.

Companies like Microsoft and IBM must constantly try to maximize efficiency and spent massive amounts of funds on research to stay ahead in their markets.  Microsoft may well have a “natural” monopoly on the Operating System market – but if it fails to constantly improve its products, foresee new trends, and keep its prices down, competitors will quickly eat up its market – and many will argue that competitors like Linux are in the process of doing just that.  Furthermore, the fact that Apple and Unix-based operating systems have formed a small but solid niche immune to any “undercutting” efforts by Microsoft – no thanks to the Antitrust Dept. --  clearly undermines your argument that abusive monopolists can simply wish competitors out of existence.  In any market where there is a monopoly, small competitors are always waiting for the first slipup to jump into the market.

Unfortunately, the major barrier to competition and sustainer of monopolies is not private companies but the government.  Cox Communication – your example of a “bad” monopoly, is only able to maintain it because the FCC makes it illegal for new competitors to enter the market without essentially bribing politicians into giving them a license (permission) to do business.  On the local level, Cox has made deals with cities (like BCS) giving them a legal monopoly over the local market.

Rather than increasing competition, the Antitrust Department is actually used as a tool by jealous competitors to force better and more efficient companies to compete in the courts rather than in the market. The only constant of the arbitrary rules used by the DOJ is that any successful business can be punished at any time for just about anything. When companies charge prices lower than their competitors, they are accused of “predatory behavior,” when they charge prices that are higher, they are fined for "gouging," and when they match their competitions, they are accused of “collusion.”

You suggest that the government should nationalize the communications market just like it nationalized the roads. You forget that like all other monopolies that only exist because of a politicians favor, this would form yet another gang that fines and imprisons inventors and entrepreneurs who try to introduce cheaper and better products. Imagine if the government got involved in the software market in the early 90’s -- I’d probably be typing this letter on an old typewriter rather than a sleek, cheap, and fast new computer.

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