"Bad" monopolies in a Laissez-faire system?

[penartur]

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...

[Hairnet]

I think that large companies from other industrires will threaten to move in if the monopoly slips up.

A good example is walmart stepping into the banking industry by providing lower income workers with check cashing and debt cards without having to have a bank account. A grovery store started offering banking services. They are cutting into a government mandated monopoly. Imagine if walmart could actually start banking legally!

Edited July 31, 2012 by Hairnet

[penartur]

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?

[thenelli01]

The point you're missing is that monopolies are still vulnerable to a downward sloping demand curve. If they decide to jack up the prices, as in your example, the demand will decrease and less people will buy. Even a monopoly wants to maximize its profits so if it increases the price too much, it will lose significant volume, which means less profit.

Edited November 18, 2012 by softwareNerd
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[penartur]

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?

[Nicky]

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.
  

How can we (or should we?) avoid the described monopolization of the market in the Laissez-faire system?

If by we you mean the general population, through the government, then we can't and shouldn't try to avoid anything except the violation of rights, in LFC. That's the definition of LFC, you can't use government force to achieve any other goals except the protection of rights.

If you mean "Can and should potential competitors avoid such monopolies?", well that is a question dependent on context. Someone always can, of course (because, if you're willing to lose money, it's fairly easy to enter any market - someone rich enough can even get people to use an alernate Twitter service: all he'd have to do is pay people to use his version), but whether they should depends on whether it is in their best interest or not.

If by we you mean "Can and should consumers as a group avoid monopolies?", the answer is yes, they obviously can (by refusing to use the services of any monopoly), but whether they should once again depends on the circumstances. For instance, if it's a company known to use agressive strategies to buy or squeeze out competition for the purpose of then exploiting their position, then they should. If it's a natural monopoly (formed because of the causes you listed), on the other hand, they shouldn't.

[softwareNerd]

Consider Walmart steps into the market with its $50 billion. Consider e.g. it wants to pay off their investment in 5 years.

A couple of questions:

Do you mean Walmart wants to earn a little over 20% return?

Using your numbers, what is Intel's % ROI before and after (i.e. @ 50% and @ 100% market share)?

[penartur]

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%.

Edited July 31, 2012 by penartur

[Nicky]

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".

We don't decide anything here, and I don't consider myself above any system. But, that aside, the answer is no, the users of this website cannot and should not avoid monopolies that don't concern them. Unless we belong to one of the two interested groups (potential competitors or consumers), we shouldn't care.

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.

I don't see how your likes or dislikes are relevant.

So, either some supreme power (aka government) should intervent, or the situation itself should not occur because of some market reasons.

There is a third option: your dislike of a natural monopoly is irrelevant, and you shouldn't get a say in whether they exist or not.

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?

No, it means that by your subjective standard of good and bad, Objectivism is bad. And, by any objective standard, it means that your standards are bad.

The way to settle this conflict is by falling back on reason and reality. Do you have any rational arguements against a monopoly? Do you have any rational arguments for a government that uses force, and violates people's rights to liberty and property, to break up such a monopoly?

Do you see a logical flaw in the arguments Ayn Rand made in favor of individual rigths?

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).

Being a monopoly does not lead to out of control prices or unlimited profits. Competition is not the only incentive a company has to keep prices low. Like Matt Gianelli explains above, due to the nature of demand, it is still in Intel's best interest to find the equilibrium price (the price where the opportunity cost does not exceed the marginal utility of their product, for a consumer -feel free to google those terms, and the concept of a demand schedule, to understand them).

With that in mind, you're right, no one should use force to prevent a monopoly that exists solely due to the free choices of market participants, and in general no one should do anything unless it is in their self interest.

[ToyoHabu]

The question as posed seems to have the implicit assumption that we have a right to whatever product we would like to have. No matter how awesome the product is, that someone has invented, we have no right to it. They have no duty nor responsibility to sell it to us and have the right to charge any price they want, that awesome product the make is theirs to do with as they please(insert normal cant kill me with it clause here).

There has never been a monopoly not based on government force that has ever acted in the manner you describe that has not resulted in its own destruction.

We have nothing to fear from monopolies in a laissez faire economy

[penartur]

We don't decide anything here, and I don't consider myself above any system. But, that aside, the answer is no, the users of this website cannot and should not avoid monopolies that don't concern them.

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).

I don't see how your likes or dislikes are relevant.

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?

No, it means that by your subjective standard of good and bad, Objectivism is bad. And, by any objective standard, it means that your standards are bad.

Can you please tell me, what exactly is bad with my standarts, and what exactly is good with the monopoly example in question?

The way to settle this conflict is by falling back on reason and reality. Do you have any rational arguements against a monopoly?

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"?

Do you have any rational arguments for a government that uses force, and violates people's rights to liberty and property, to break up such a monopoly?

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.

Do you see a logical flaw in the arguments Ayn Rand made in favor of individual rigths?

Probably, the assumption that the basic rights she mentioned do not interfere.

Being a monopoly does not lead to out of control prices or unlimited profits. Competition is not the only incentive a company has to keep prices low. Like Matt Gianelli explains above, due to the nature of demand, it is still in Intel's best interest to find the equilibrium price (the price where the opportunity cost does not exceed the marginal utility of their product, for a consumer -feel free to google those terms, and the concept of a demand schedule, to understand them).

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.

With that in mind, you're right, no one should use force to prevent a monopoly that exists solely due to the free choices of market participants

Customers are market participants, and they didn't choose to get a monopoly - suppliers did.

and in general no one should do anything unless it is in their self interest.

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)?

[penartur]

The question as posed seems to have the implicit assumption that we have a right to whatever product we would like to have. No matter how awesome the product is, that someone has invented, we have no right to it. They have no duty nor responsibility to sell it to us and have the right to charge any price they want, that awesome product the make is theirs to do with as they please(insert normal cant kill me with it clause here).

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.

There has never been a monopoly not based on government force that has ever acted in the manner you describe that has not resulted in its own destruction.

Could you please prove your point theoretically? Why such a monopoly (not based on government force) will result in its own destruction?

We have nothing to fear from monopolies in a laissez faire economy

This is what I'm trying to prove or disprove.

[Hairnet]

Walmart isn't a fair example for the CPU industry.

They were good for banking because they already have a whole lot of foot trafic in their facilities. It wouldn't be fair to ask "Well how is Men's Warehouse going to bust a banking monopoly?"

If you wanted a company that could get into the CPU market and still profit, you would need company with convertable capital.

A company who could get into the CPU market would be Hitatchi. They have clean safe faciilites and RND groups already. It would still take time and money to make a profit. This is not a problem though because the monopoly would persist until they created a profitable alternative to the monopoly. It would probably be a safe investment if they though they could make 90$ a cpu.

Lets consider then that Hitatchi would not be the only company doing this. Lockheed and Boeing also have high-tech facilities. They also probably have their own weapons chips. I could see them getting into the CPU business if they thought they could make 80$ or 70$ a chip.

My point wasn't that you could convert pure cash into a competitve business. My point was that similar industries are a threat.

[softwareNerd]

softwareNerd: I'm assuming Walmart wants to earn at least 0%...

You're using a non-standard terms. In standard terminology "revenue" is not profit. Framing the problem in this non-standard way, you end up missing some costs and not looking at it the way an investor would.

In your second post you compute $100 - $40 - $50 = net of $10. In this, the $100 would be referred to as "revenue", The $50 would not be subtracted the way you've done. Instead, the only cost involved is the cost of actually keeping the factory at its current state of functioning. In other words, $100 - $40 - $[ for upkeep of the factories] = Net profit. Let us assume that the cost to maintain the factory is already accounted for in the $40/unit cost. In that case, Profit per unit is $60. When 50 million are sold, we get a total profit of $3 billion. On a total investment of $50 billion, this is 6%.

I don't want to extrapolate this to the other examples above unless you're fine with this type of framework for analysis. If you have questions about it, do ask. If you think it is a correct approach, then I will continue to extrapolate to the other examples.

[thenelli01]

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?

This is an unrealistic situation and I don't accept the premise that Intel would be able to sustain a monopoly, especially if it shut down R&D and significantly increased the prices, as companies like apple would be looking for a cheaper and more innovative product.

Any increase in the price of the CPU will pass on to the price of the pc. If this happens as you say, consumers that don't want to pay that amount will be looking for an alternative - something that uses less chips or something with less cost. Example is an ipod (which I am using now), an ipad, a tablet, or using the library's computer. But again, it would not be in any monopoly's best interest to increase the price above the equilibrium price.

I don't know how a pc qualifies as an "essential good."

Most importantly, how does it make sense to punish intel or taxpayers because you don't agree with their pricing? People don't have a right to a pc.

Edited August 1, 2012 by Matt Giannelli

[penartur]

A company who could get into the CPU market would be Hitatchi. They have clean safe faciilites and RND groups already.

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.

---

You're using a non-standard terms. In standard terminology "revenue" is not profit. Framing the problem in this non-standard way, you end up missing some costs and not looking at it the way an investor would.

Sorry, I'm not that good into English, and there seems to be some mess about the terms. Your explanation is perfectly right.

When 50 million are sold, we get a total profit of $3 billion. On a total investment of $50 billion, this is 6%.

Yes, the total profit is $3 billion per year, and the total investment is diluted over the 20 years.

I don't want to extrapolate this to the other examples above unless you're fine with this type of framework for analysis. If you have questions about it, do ask. If you think it is a correct approach, then I will continue to extrapolate to the other examples.

Let's continue

---

This is an unrealistic situation and I don't accept the premise that Intel would be able to sustain a monopoly, especially if it shut down R&D and significantly increased the prices, as companies like apple would be looking for a cheaper and more innovative product.

I don't see how cheaper and more innovative product may appear in my example, given the obstructing entry barriers. Maybe you do?

Any increase in the price of the CPU will pass on to the price of the pc. If this happens as you say, consumers that don't want to pay that amount will be looking for an alternative - something that uses less chips or something with less cost. Example is an ipod (which I am using now), an ipad, a tablet, or using the library's computer. But again, it would not be in any monopoly's best interest to increase the price above the equilibrium price.

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).

I don't know how a pc qualifies as an "essential good."

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.

Most importantly, how does it make sense to punish intel or taxpayers because you don't agree with their pricing? People don't have a right to a pc.

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.

Edited August 1, 2012 by penartur

[Hairnet]

Hitatchi has "clean rooms". I did not mean that they had a nice apartment bulding somewhere, but clean rooms. Sorry for not making that clear.

http://en.wikipedia.org/wiki/Cleanroom

http://www.hitachi-metals-techno.com/products/floor/cr/

These are required for making sophisiticated electronics such as CPUs.

http://www.sciencebuddies.org/science-fair-projects/science-engineering-careers/Elec_semiconductorprocessors_c001.shtml

* Has people making processors in clean room, you can skip that one as it is for engineering students pursing a career in electronic engineering. Super boring.

Hitatchi currenty, with mitsubishi, produces microcontrollers, which are similar to microprocessors, but are built for more specific specialized tasks where as microprocessors are meant to be diverse.

http://microcontroller.com/news/Renesas_tech.asp

http://www.renesas.com/products/mpumcu/superh/index.jsp

450mm fabs don't exist yet.

http://circuitdesignworld.blogspot.com/2010/12/intel-first-450mm-wafer-plant-to-open.html

http://www.eetimes.com/electronics-news/4389918/First-450-mm-fabs-to-ramp-in-2017--says-analyst

Lockheed Martin has clean rooms, in abundance apparently.

http://www.moonviews.com/archives/2009/08/lockheed_martin_donates_clean.html

http://www.cleanroom.byu.edu/Links_Industrial.phtml?state=All

Lockheed Martin are apparently paying people to develope quantaum computers. That is kind of wacky but whatever its worth mentioning.

http://en.wikipedia.org/wiki/D-Wave_Systems

　

Boeing would be most challanged as they seem to not own their electronic providers in company nor do they publish anything I can look at easily. I have also had relatives who work for Lockheed Martin and Hitatchi so I thought boeing would be similar. I guess they are not.

I think that the tech industry is filled with a lot of similar companies trying to fill specific nieches as best they can. There are different companies who make computer chips for cars, medical equupment, phones, missles, and home computers, These industries all have similar knowledge bases and similar equipment.

You are correct in pointing out though that it would take time for these people to switch to a different branch on the tech-tree, how much time is entirely dependent on how similar their products were.

[Nicky]

Can you please tell me, what exactly is bad with my standarts, and what exactly is good with the monopoly example in question?

Sure, as soon as you articulate what your standard is, in response to this sentence. (so that I can find it more easily - I haven't read the whole thread).

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?

Sure, but only after you've come up with a rational and objective standard for what is a good and bad outcome.

(that is, there is no such strategy that for every player its outcome is better than the Objectivism outcome)

Wanting a positive outcome for every player, irrespective of that player's behavior, is irrational. If that is your standard of good (everyone wins, no matter how they "play"), then that's a terrible standard. There is no economic system that rewards both rationality/productivity, and irrationality/destruction. Irrationality and destruction can only be rewarded at the expense of a producer.

Objectivism does have a standard by which to judge an economic system: its standard of a good economic system is one that rewards rationality and productivity. Objectivism argues that the use of force to obtain material values or benefits is irrational and destructive, not produtive.

[softwareNerd]

Yes, the total profit is $3 billion per year, and the total investment is diluted over the 20 years.

The key is that Intel still has the plant etc. which we are valuing at $50 billion (at least that is the replacement cost you assumed if Walmart were to try to get into the field. So, they are earning a 6% Return-on-Investment ROI. It is best to think in terms of ROI, because that allows us to compare between two options, regardless of scale.

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.

You're placing an unfair requirement when you say that Walmart wants to get back its $50 billion in 5 years, when Intel has been using the plant for 20 years. Once again, you should compute an ROI.

You assume that Intel's plant can keep functioning and being maintained @ the $40/ unit cost. Therefore, it is reasonable to assume that Walmart's plant will still be fully-functional at the end of 5 years, 6 years, 10 years. In other words, they will still have a plant worth $50 billion. If they take 9.6% market share, they're selling 9.6 million CPUs. Let us assume that the price is still at the old number ($100). This gives them a revenue of $960 million and a cost of $ 384 million, for a profit of $576 million, which is an ROI of 1.2 %

However, there is another unfair assumption here: the idea that Walmart would have to spend $50 billion even though they are only going to produce 9.6 million CPUs. This is highly unlikely. Even if we assume that many costs are fixed costs, one can almost always create a somewhat smaller scale. It would be more reasonable to say that Walmart might be able to invest just $20 billion (this is probably still way too high). Perhaps at this level investment they will never be able to scale up beyond (say) 20 million units, but let's assume they do not want to. So, if we assume $20 billion, we have an ROI of ($576 / $20,000=) 2.9%

Given these numbers, it seems that Walmart would not be interested if the price stays @ $100 / unit.

However, what if the price really went to $1000. At this price, and a 10% market share, and a $20 billion investment, Walmart would have an ROI of 48%!

At these prices, Intel (with 90% share) is earning 172% ROI.

Walmart could drop their price to $500, sign up another 10% from Intel's customers for long-term contracts and still get a 46% ROI.

But wait, there's more: the idea that Intel would be able to produce 90 million CPUs using investment that was previously producing only 50 million is unrealistic. Intel will almost certainly have to spend some more on investment. Perhaps you meant that it took over AMD's plant. If so, that plant was probably worth $50 billion too. So, Intel's total ROI (at cost/replacement value) is actually $100 billion. So, with a the price of $1000 Intel will earn an ROI of 86%.

However, if Walmart is selling at $500, Intel's days are numbered. Soon enough, they will be forced to drop their price. To consider this case, we must introduce a new assumption: the typical market ROI. We must ask: what is the typical ROI a company can expect in this economy when it makes an investment. (Not in CPU-production, but average across all sorts of possible industries.) Let us assume that that rate is 10%.

Since Walmart is making 46% with the price of $500, they're very happy. Their smaller plant can produce a max of 20 million units, but they will be happy to hit that max. In some time, they will have 20% market share and Intel will be down to 80%. In addition, by this time, Intel will probably have lowered their price from $1000, to try to fight Walmart's erosion of their market share. Let's say they're down to $800 (still a huge premium over Walmart). Now, their ROI is down to 60%.

Since the market return is just 10%, Walmart would be more than happy to sign up more customers for longer term contracts on the understanding that they can get the CPUs for $250 each. This is a great deal for customers. Let's say Walmart can get another 20 % market share. They will still earn ROI of 23%, which is much more than they can get elsewhere. Meanwhile, Intel is down to 60% marketshare, which gives them a 46% ROI if they have kept the price at $800. Realistically, they probably had to come down to $500, to match Walmart's $250 price, so they're only earning an ROI of 27%.

The actual sequence of events will be different, but the basic method is the same. If a company is earning significantly over the typical market ROI in any industry, this will attract new entrants who will be willing to come in at an ROI somewhere in between.

Actual history shows that so-called huge monopolies rarely make profits that stay consistently much higher than the market return across a period of multiple years. This is particularly true in products that are evaluated objectively (as opposed to things that are a question of taste).

Actual history also shows that you can attack scale by focus. What this means is that you do not have to make the huge investments of the giant. You have to make much smaller investments, as long as you're willing to focus on one market segment.

For instance, think of the steel industry. In the 1950's people used to talk about steel companies in the way you were talking about Intel. These were huge behemoths. Who could ever compete with them? Then, what happened was that someone figured out that one could make a mini-mill, but one would not be able to make certain very high quality steels. No matter,... a company called NUCOR started to built mini-mills. The trick was to start with scrap steel as the input, instead of starting with iron-ore etc. This process could not produce certain types of fine steel. So, Ford and Chrysler would not buy steel for car doors from Nucor, because they would not get the smooth finish they wanted. However, people who simply wanted girders for buildings were fine with the roughness. Long story short, the big mills went out of business (unions were their other major problem), and Nucor kept grow year after year until they're a bit like big steel now!

Consider another example: airlines require huge investments. Yet, small airlines were able to set up, focus on regional travel in a small area and beat the big carriers, Southwest did something similar. In this case, and the case of steel, the main idea is that the competitor will not attack across your whole front. They will choose one area and attack strongly there. I don't know enough about the CPU business, but I'd bet there are similar opportunities there. If Walmart could only produce less CPUs, they would focus all their efforts in a few segments: perhaps CPUs for some specific categories of devices. They would build advantages in that one sector while Intel has to spread itself over every area, including areas that Walmart would completely ignore (thus saving money) because they know they do not have the scale to service them.

Edited August 2, 2012 by softwareNerd
Grammar, clarity, spelling etc.

[overt]

Why is being so great that no one can compete with you considered bad? Not that it could happen, but if it did, I would be amazed and extremely grateful for anything that company or individual could offer me.

[Tabernac]

Imagine a company develops a monopoly over the land ownership and services provided to an area, so that there are no realistic alternatives.

For example: a town exists as an enclave within a very large parcel of land owned by a company - the company provides services to the enclave and controls access corridors to the wider world through their land. The company charges high rates for the use of roads leading through their land - these roads need to be used for the survival of the town's inhabitants, but the usage fees are so high that it impacts the townsfolks' lives to a great negative extent. Imagine that they are unable to relocate out of the enclave area for lack of money, perhaps because of the high fees they have h to pay to the company their whole lives.

Would anyone here support or propose a mechanism to avoid this kind of monopoly, or is it just tough luck to the townsfolk?

[Tabernac]

Why is being so great that no one can compete with you considered bad? Not that it could happen, but if it did, I would be amazed and extremely grateful for anything that company or individual could offer me.

Have you read Climbing Mount Improbable by Dawkins? In it he discusses the concept of a fitness landscape - whereby evolution can develop a trait to its maximum functionality, but that maximum level is limited by the fundamentals of the trait. E.g. some arthropods have eyes that are about as good as arthropod eyes can possibly get, but are still crappy in comparison to vertebrate eyes due to the fundamentals of their makeup (i.e. they have climbed a peak on the fitness landscape, but not the highest peak possible).

Likewise perhaps you could get a company with a monopoly, that for some reason relating to their fundamental makeup or operational style, has flaws that limit its productivity. The company occupies a lower peak on the fitness landscape. Other more innovative people realise this and wish to act upon it to create a company that can climb to a higher peak on the fitness landscape by using different methodologies, etc. But the monopoly prohibits the innovators from getting off the ground. Thereby productivity is kept in a stranglehold and prevented from rising to its maximum potential by a dinosaurian monopoly that, while providing services well enough, shows no interest in innovation or improvement.

[softwareNerd]

Would anyone here support or propose a mechanism to avoid this kind of monopoly, or is it just tough luck to the townsfolk?

In broad and general terms, yes. Rights go beyond just rights to a patch of land. Just because you buy a piece of land, does not mean you get a right to all the earth encompassed by a cone (or whatever) drawn from the center of the earth to your boundaries on the surface. Nor do you get a right to the air-space that is a continuation of that projection, all the way into the rest of the universe. Typically, when someone buys a property in the U.S., it comes with easements. In Britain, when commons were being converted to owned-property, many easements were created. For instance, I might buy a farm that was once the village commons, but it comes with an easement in perpetuity which can never be removed, which entitles way-farers to cut across as long as they too follow certain rules (e.g. shutting cattle gates behind them, sticking to any pre-cut path, etc.)

Property rights are not just about land. They are a bundle of rights to actions and control of that property. What these ought to be is a detailed question of law, but there's nothing wrong with easements in principle.

As far as "imprisonment" goes, a law that says that property rights cannot be used as a means of imprisonment (e.g. I suddenly find you have bought up everything in my sub-division except for the plot on which I just woke up), is perfectly compatible with Objectivism. Some non-Objectivist libertarians would have problems with this, but not Objectivism.

Edited August 10, 2012 by softwareNerd

[Nicky]

Have you read Climbing Mount Improbable by Dawkins? In it he discusses the concept of a fitness landscape - whereby evolution can develop a trait to its maximum functionality, but that maximum level is limited by the fundamentals of the trait. E.g. some arthropods have eyes that are about as good as arthropod eyes can possibly get, but are still crappy in comparison to vertebrate eyes due to the fundamentals of their makeup (i.e. they have climbed a peak on the fitness landscape, but not the highest peak possible).

Likewise perhaps you could get a company with a monopoly, that for some reason relating to their fundamental makeup or operational style, has flaws that limit its productivity. The company occupies a lower peak on the fitness landscape. Other more innovative people realise this and wish to act upon it to create a company that can climb to a higher peak on the fitness landscape by using different methodologies, etc. But the monopoly prohibits the innovators from getting off the ground. Thereby productivity is kept in a stranglehold and prevented from rising to its maximum potential by a dinosaurian monopoly that, while providing services well enough, shows no interest in innovation or improvement.

Here's the trouble with analogies: it's very easy to extend them too far. And when we do that, we accept unchecked premises.

In this case, the analogy is false because, unlike the arthropods, participants in a free market don't kill their opponent. By running with the analogy, you simply accept the baseless assumption that they have some means, that is analogous to an animal killing another animal, of destroying their competition.

But they don't. That assumption requires proof. Only after it is proven would the analogy you are making be valid.