penartur

I understand why there is no possibility for such a problem in Ayn Rand's fiction world - these days, the industry just wasn't complex enough; there were no such entry barriers. A CPU industry is a bit more complex than that. You can't just take "clean safe facilities" (designed to manufacture something else) and begin making CPUs even having the full documentation from Intel; the facilities are specialized, and probably the only way Hitachi would benefit from their existing facilities is that they won't need to purchase a new land and to build a new building; probably everything inside the building has to be redone. And, BTW, from quick googling it seems that a new 450mm fabs are so expensive that no manufacturer could afford to build it just for themselves. Similarly, you can't just say "here I have a bunch of technicians / scientists, they will surely design a CPU microarchitecture and topology". Lockheed and Boeing are even worse in that sense. Hitachi, at least, has (had?) some experience with complex electronics. Sorry, I'm not that good into English, and there seems to be some mess about the terms. Your explanation is perfectly right. Yes, the total profit is $3 billion per year, and the total investment is diluted over the 20 years. Let's continue I don't see how cheaper and more innovative product may appear in my example, given the obstructing entry barriers. Maybe you do? The library's computer, perhaps. The rest you mentioned also contains a CPU (it is just that now there is a competition and there are different market segments). Still, the CPUs market is quite inelastic. 2x increase in a CPU price translates to 10% increase in a PC price, and 10% is not that much to cause customers to look for alternatives (especially where there are no any). Maybe I'm wrong here. Is there any objective reasonable definition of what is the essential good and what is not? E.g. the cell phone was a luxury once, but nowadays it is pretty much essential in the western world. I don't say "punish intel", I'm thinking of what are the solutions to the problem. Something seems to be fundamentally wrong for me, if a simple merge or arrangement affects the market price that much. Probably that's just me expecting too much of a Laissez-faire; but it wasn't me who advertised the competition between suppliers.

I didn't assume you have any right to the product. It is just the possible exploit of the idea "The supplier can't do whatever they want because there is a laissez-faire, and competition will save the customers". In my example, the monopoly got rid of the competition - not because it offers better or cheaper products than the competitors do, but simply because it is willing to pay enough money solely to get rid of the competitors and get the ability to do whatever they want. Could you please prove your point theoretically? Why such a monopoly (not based on government force) will result in its own destruction? This is what I'm trying to prove or disprove.

Then probably I visited the wrong website. I am interested in Objectivism, as it offers many advantages over the alternative approaches; but it seems there are some drawbacks in the ideology as well. I created this thread in hope somebody knows whether this is actually a drawback of Objectivism or it could be avoided in some way. My question is purely theoretical. Your answer, if I get it right, is "unless you face this specific situation in an Objectivist world, you shouldn't care". Do you mean that I should not answer questions on the ideology; that I should either blindly accept or reject it? IMHO this contradicts the core of Objectivism (which is supposed to be reasonable ideology, not the religion). So do you consider the situation described to be "good"? If the market is monopolized as in my example, and the demand is inelastic, doesn't that mean that the monopoly, to a certain extent, forces us to commit the purchase on a non-reciprocal conditions? Can you please tell me, what exactly is bad with my standarts, and what exactly is good with the monopoly example in question? Yes, I do. Unfortunately, I don't have an appropriate material at hand, but isn't the situation described "bad" by the same reason government-induced monopoly is "bad"? Thinking logically, if there is such a monopoly, does it matters how did it got to that? Had you shown the planet with such a situation and asked "Is it good or bad", what would you answer, "I don't know, it depends on what was 1000 years ago"? I'm unable to clearly formulate it at the moment, but I suspect that in the described situation there is a conflict between different people's basic rights (right as in "right to liberty", not as in "right to get food without working"). I created this thread to figure it out. Probably, the assumption that the basic rights she mentioned do not interfere. Again, the demand elasticity may differ for different markets. CPUs market is quite inelastic. Changing the price (to a certain extend) won't change demand significantly. Customers are market participants, and they didn't choose to get a monopoly - suppliers did. Leaving the monopolies aside. Roughly speaking, there are many different ideologies, one of which is Objectivism (and maybe there are some "patched Objectivisms" or so). There is a hypothesis that Objectivism is better than anything else. Shouldn't we then prove a theorem that, in any case, behaving by the Objectivism rules will not result in outcome worse than behaving by some other strategy (that is, there is no such strategy that for every player its outcome is better than the Objectivism outcome)?

Nicky, by "we" I mean "we who discuss on this topic, who stand above the specific system, and who decide whether a specific system is good or bad". Of course, in the world of perfectly free market nobody is allowed to interfere with market. From the other hand, I don't like the outcomes pictured in my example. So, either some supreme power (aka government) should intervent, or the situation itself should not occur because of some market reasons. If the latter is impossible, then it follows that, in the world of perfectly free market, a "bad" monopoly could form. Does this mean Objectivism is not that good and makes things worse being applied to the real world? As for your mentions of competitor- and customer-POVs, it seems that in described example nobody should do anything to prevent monopoly (as you have said, customers shouldn't do it because it is a natural monopoly; and for competitor it is more profitable to sell themselves to Intel for some fraction of huge profit Intel will get being a monopoly, than to continue the competition). softwareNerd I'm assuming Walmart wants to earn at least 0% (so that they will pay their expenses). In my example, the cost of CPU is composed of two parts: the cost of making the CPU on the already existing fab ($40, independent of the production scale or CPU complexity) and the cost of R&D, fab building etc. ($50 billion). It is the second part (entry barrier) that prevents Walmart from being profitable in the foreseeable future (in order for them to pay their entry barrier expenses, they should to either sell really many CPUs or to set really high price). Before the merge, Intel sold 1 billion of CPUs (20 years @ 50% market share) with the retail price of $100/each and manufacturing cost $40/each. This gives us $60 billion of income sans manufacturing expenses, and, subtracting the R&D, it gives us $10 billion of revenue ($500 million per year, or $10 per CPU, or just 11%). After the merge, each year Intel sells 100 million of CPUs with the retail price of $1000/each and manufacturing cost $40/each. This gives us $96 billion of income sans manufacturing expenses. There is no need in R&D anymore (it was only needed because of the competition), there is no need in building newer fabs (existing ones do well), so the revenue is $96 billion per year, or $960 per CPU, or overwhelming 2400%.

The demand could be quite inelastic in respect to the price. With the example above, as computers are now used everywhere, and CPU forms only fraction of a computer's price, the demand on CPUs does not depend on the price (to a certain extent). Increase of CPU price from $100 to $200 will result in increase of laptop cost from $1000 to $1100, which will lower the demand on laptops by, say, 1%. Another example are utilities. If the electricity prices rises tenfold, I won't stop using the fridge. Additionally, the demand could be quite inelastic in respect to the price. With the example above, Intel could produce CPUs of lower performance, that are cheaper to produce (e.g. cost goes down from $40 to $20), and sell those for the same price. It won't affect demand significantly. You're perfectly right in that such monopolies could only exist in some areas where demand is inelastic (such as base used for living wage estimation); but we could not ignore these areas. The obvious solution would be for government to control the essential goods (basic shelter, food, PC etc) market entirely and either to regulate the prices or to provide the goods for free to any citizen (at the cost of additional taxes on those who work); but this solution has its drawbacks and is counter-Objectivist. Also, I can't think of it now, but surely there are other areas / markets with such a problem. Are there other solutions?

I doubt banking market is a good example of monopoly. Nevertheless, it hardly has anything to do with my example, as the entry barriers are quite low. I don't see how could large company from other industry overthrow Intel. I doubt Walmart will invest $10 billion to a microprocessors industry, given it will get its first income only after spending the entire sum; let alone revenue. Consider the following (purely speculative, given for illustration) figures: Demand for CPUs: 100 million per year (relatively inelastic). Cost of production per CPU: $40. Cost of R&D and fabs building etc. (all that has been done by Intel in the last 20 years): $50 billion. Average Intel market share during the last 20 years: 50%. Average cost of R&D and fabs building etc. per CPU produced up-to-date: ($50bln / 50%) / (100 million per year * 20 years) = $50. Current market CPU price (with AMD and Intel competing): $100. Average Intel revenue per CPU produced up-to-date: $100-$40-$50=$10. After Intel-AMD merge: Demand for CPUs: 100 million per year (relatively inelastic). Cost of production per CPU: $40. Progress stops, so there is no more R&D and fabs building expenses: $0. Considering all R&D has been paid off before the merge, we can start from the blank page and consider R&D expenses per each CPU produced after the merge being $0. Market CPU price: $1000 (Intel sets the prices, customers have no choice but to pay). Average Intel revenue per CPU produced after the merge: $960. Consider Walmart steps into the market with its $50 billion. Consider e.g. it wants to pay off their investment in 5 years. That means Walmart should generate $10 billion of revenue each year. Assume Walmart market share would be X, and the market price of CPU would be Y. That gives us the following equation: X * 100 million * (Y - $40) > $10 billion; X * (Y - $40) > $100; Y > ($100/X) + $40. That means even with $1000 per CPU Walmart will be unable to make any profits at all unless they'll somehow manage to take 9.6% of the market. And we definitely won't see the pre-merge prices even if Walmart will take over the entire market (as even with all market using Walmart's CPUs, they need to sell CPUs for $140 each just to pay expenses). And anyway the progress stops. I don't see how with this figures we can break out from the hypothetical situation of Intel merge with AMD. The entry barriers are so high, that no new company will help to bring prices down and/or to keep progress going. Even at $1000 per CPU it would be quite hard for Walmart to make profit. At $140 per CPU they won't get any profit independent of their market share, while Intel still will make $100 from every CPU sold. Considering Walmart does only care about their profits and doesn't care about customers, in the described situation I doubt Walmart will consider entering the CPUs market at all; thus, Intel monopoly persists. Any suggestions on how should we deal with this?

I've googled this for hours and with no success. It seems there is a widely accepted idea that there are "good" and "bad" monopolies, with former attained their position by the means of competition (and still working under conditions of potential competition - that is, monopoly charging customers too high or providing too poor goods will allow for alternative supplier to compete), and latter attained their position by the means of force (which is, we all know, illegal). Okay, let's assume we have an ideal world with the ideal free market, so there could be no "bad" monopolies. Still I don't get why the "good" monopoly sells goods for a "market" price, and will not jack its prices up to the sky. As I see it, the assumption is made that, at the moment monopoly became such (getting rid of the latest competitor), even the slightest change in price or goods quality or demand etc. will make a place for some competitors. Such an assumption ignores the fact there may be some entry barriers. With the entry barriers, it might be that only tenfold increase of price, combined with tenfold decrease of quality, will make entering the market profitable to the potential competitors; and, thus, the soon-to-be-monopoly bringing down their last competitor will result in, say, the remaining company raising prices tenfold compared to the previous "market-price". The opinions may vary, but I dislike such a monopoly, and maybe sometimes it is worth it to somehow, by force, prevent soon-to-be-monopoly from bringing down their last competitor. Otherwise, what will remain is clearly far from the free market, with the single company being able to dictate its rules (to the certain extent). Anyway, some small company death resulting in tenfold price increasing on the entire market does not seem like a steady system. From articles I have read it seems that monopolies I described fall into a "bad" monopolies, that get to their position by force (e.g. by the government intervention). However, there are entry barriers that are not related to any force; for example, from Wikipedia: Capital - need the capital to start up such as equipment, building, and raw materials Economy of scale - Large, experienced firms can generally produce goods at lower costs than small, inexperienced firms. Network effect - When a good or service has a value that depends on the number of existing customers, then competing players may have difficulties in entering a market where an established company has already captured a significant user base. Research and development - Some products, such as microprocessors, require a large upfront investment in technology which will deter potential entrants. Consider microprocessors, for example. Assume that Intel was able to successfully overthrow or merge with AMD (and other non-x86 CPU manufacturers) by market means solely (which doesn't seem so unrealistic). Any other company to enter the CPUs market will need to develop their own CPU architecture (which takes tens or hundreds of thousands person-years), to build a factory (which costs about $10 billion) etc.; this means that, effectively, no company will enter the market unless Intel does some really bad thing. The government has not intervened the market in my example. There weren't any kind of regulations. But still, before AMD acquisition by Intel, the prices were e.g. $100 per piece and the quality increased every year, while after AMD acquisition, Intel easily could set the prices to be e.g. $1000 per piece, and to shut down their entire R&D team (there is no point in spending money to create new CPU models, because the old ones are being sold as well). So, the question is: How can we (or should we?) avoid the described monopolization of the market in the Laissez-faire system? PS: Please, forgive me my bad English...