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dad
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Hi All,

So this is my first post so please be gentle with me.

Can consumers be forced to pay more than they are willing or able to pay?

By way of illustration please consider a power company. There is no question people need some power and will pay any price but are they both willing & able to pay it. Don't many just run up debt they can't end up paying.

If so is this a by-product of monopolies?

Hope this is interesting for you.

I am very interested in what you say.

Cheers BW

Edited by dad
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Thanks Proud Dad,

I am open to any situation however the one you mention is most likely if indeed it is correct.

Importantly I mean in an 'Economics' sense rather than a 'Mafia' sense.

Forced is the key word

Edited by dad
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Importantly I mean in an 'Economics' sense rather than a 'Mafia' sense.

Forced is the key word

Then, no: this would not be an example of force.

Consider: the producer is free to shut down and go play on the beach. The consumer cannot force that producer to keep producing: that would be slavery. And, if the producer decides to keep producing, then he is free to do so on his own terms: maybe he refuses to serve that customer unless that customer converts to a new Rastafarian, or maybe he refuses to serve that customer unless that customer pays a higher price than anyone else, etc. If he decides to produce, he can decide to do so on his own terms.

Edited by softwareNerd
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It’s also useful to remember that a monopoly that is legitimate (absent of Government force like our modern utilities) can only exist because the owner already has the best product for the best price and achieves virtual 100% customer satisfaction. If that is the case then they are the person you want to do business anyway.

Also, practically speaking there is no such thing – Even Rockefeller, who achieved the closest thing we have seen to a morally ethical monopoly conceived through achievement still had competitors.

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It’s also useful to remember that a monopoly that is legitimate (absent of Government force like our modern utilities) can only exist because the owner already has the best product for the best price and achieves virtual 100% customer satisfaction. If that is the case then they are the person you want to do business anyway.

Not necessarily. For example: In my city, there's only one energy company and the rates are damn high. But because the startup costs are so expensive, this one energy company has a monopoly over the city's gas & electric. While that's fine for the business (they set their own price and as a consumer you can either pay it or not have energy), monopolies are bad for consumers because there's no competition driving down the price.

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But because the startup costs are so expensive, this one energy company has a monopoly over the city's gas & electric.

I keep hearing that terrible argument. What does "so expensive" mean? How much would a startup that supplies gas and electric to your city need? 100 million? 200 million? 500 million? 1 billion?

Fun fact: in the fourth quarter of 2011, venture capitalists invested a total of $29.1 billion in the US alone. If starting a second energy supplier in a city really was a profitable enterprise (not impeded by political forces), getting the money would not be a problem.

Edited by Nicky
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What does "so expensive" mean?

It means that a company founded over 100 years ago with 100 billion in assets, 22 billion in equity, and 15 billion/yr in revenue (that operates multiple nuclear power plants, etc..) is hard to compete with.

Edited by mdegges
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Hi Everyone,

Thank you kindly for your responses,

Found this on the net & thought it applicable since it is an 'economic' impact study.

Is the reference to 'forced to pay' applicable do you think?

From:

SECTORAL AND REGIONAL ECONOMIC IMPACT ANALYSIS

CONSAD Research Corporation

Pittsburgh, Pennsylvania

May 1998

CONSAD Research's key findings are that implementation of the Kyoto Protocol will mean:

  • Consumers and businesses will be forced to pay higher energy costs. The resulting increase in energy costs will also drive up prices on all consumer goods;

link http://www.consad.co...ports/kyoto.htm

Edited by dad
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Not necessarily. For example: In my city, there's only one energy company and the rates are damn high. But because the startup costs are so expensive, this one energy company has a monopoly over the city's gas & electric. While that's fine for the business (they set their own price and as a consumer you can either pay it or not have energy), monopolies are bad for consumers because there's no competition driving down the price.

Really?

Today we could go pick up an abandoned building on the cheap and place some used generators, or even better build our own for a steal right now. In fact, for a simple electrical system we could probably pick up most of the hardware on Craig's List for pennies on the dollar.

We could have a small electric house up and running to sell electricity to everyone in the neighborhood in no time.

Or are there other reasons that prevent us from doing it that simply? Permits, regulations, environmental cultists, taxes, zoning laws, looters who would stand in line and hold their hand out for permission, etc.?

Follow that and you’ll have your answer.

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Hi Everyone,

Thank you kindly for your responses,

Found this on the net & thought it applicable since it is an 'economic' impact study.

Is the reference to 'forced to pay' applicable do you think?

From:

SECTORAL AND REGIONAL ECONOMIC IMPACT ANALYSIS

CONSAD Research Corporation

Pittsburgh, Pennsylvania

May 1998

CONSAD Research's key findings are that implementation of the Kyoto Protocol will mean:

  • Consumers and businesses will be forced to pay higher energy costs. The resulting increase in energy costs will also drive up prices on all consumer goods;

link http://www.consad.co...ports/kyoto.htm

This is the case of how modern utility companies are examples of government enforced monopolies are the exact opposite of a legitimately earned monopoly. Or any real business earned the real way for that matter. Government enforced monopolies or cartels do cause inflation since they have their business through the privilege of pull, and any rotter who needs George Bush or Barak Obama to force people to do business with them will inevitably need the same miscreant to force those consumers to pay more when the business they didn’t earn can’t live up to their bribes.

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I should add that I understand the impact of environmental regulation from that study, and it is applicable as well. I more than understand that the Granola Death Cultists need to go. But for this discussion it is one example of the nature of Government Planning and how that intervention hurts the economy.

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It means that a company founded over 100 years ago with 100 billion in assets, 22 billion in equity, and 15 billion/yr in revenue (that operates multiple nuclear power plants, etc..) is hard to compete with.
Large size can be a barrier to entry, but much less than it appears at first glance.

In today's economy, capital is not a constraint for huge projects, is they can show that they will be profitable. Billions flow freely into highly speculative companies.

Also, in today's economy, a lot of firms perform admin functions for other companies. There was a time when large companies would set up their own towns. Today there is no need to do so. There was a time when a company needed all sorts of fixed costs: human resources, accounting, software development, design, etc. Today, there are specialist firms to whom different aspects can be outsourced. Consider, for instance, the tiny banks that have 10-20 branches. Still, they have software to run their books, and to offer customers online services, because some other company makes those things and rents it to smaller banks.

Still, the most common way to attack a large corp is to focus. Typically, the customers of any large firm follow the 80:20 rule, where 80% of the profits come from 20% of the customers (numbers merely illustrative). So, the small guy attacks by trying to take away the 20%. This is an area where he can do best. Also, it is the area where the big guy will find it costliest to undercut by taking a loss.

Consider how Southwest came in against the big airlines. Consider how Nucor came in against the large steel companies. Both these were industries where large capital layouts were the norm. Yet, these two decided to focus, and in doing so they established themselves, and grew from that base. There was a time when Kmart execs thought they were invincible. When Sam Walton ran a little 5-and-dime Kmart HQ probably did not know about his existence. When he expanded to a few stores in a concentrated geographical area in the south, the district managers probably wrote him off as just another little local chain.

Along with economies of scale, large businesses also tend to become bureaucratic and out of touch. So, size can also act as a disadvantage.

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In today's economy, capital is not a constraint for huge projects, is they can show that they will be profitable. Billions flow freely into highly speculative companies.

My point is that starting a large scale energy company costs a lot of money.. as opposed to, say, starting a telephony business out of your home, where all you need is a few servers and computers. Or opening a restaurant, which can cost less than $500,000. Or creating a website or app, which costs practically nothing. You don't need to befriend a lot of rich people to invest in your idea, it's something you can probably afford on your own (with the help of a small loan). Utility companies seem different, because you need billions- but I see what you mean about starting small and working your way up. Just looking at the revenue that these big utility companies make, it seems like an extremely lucrative business. I assumed the reason more people weren't jumping on those nice figures was because of the start-up costs.

Or are there other reasons that prevent us from doing it that simply? Permits, regulations, environmental cultists, taxes, zoning laws, looters who would stand in line and hold their hand out for permission, etc.?

Good point. I was looking into the amount of money it would take to build a nuclear power plant. It would cost a few billion, not including the cost to store nuclear waste. Some sources say that almost half of these costs would be spent on purchasing licensing and permits, and it would take decades to get everything approved and start building.

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You don't need to befriend a lot of rich people to invest in your idea

Befriending rich people is easy. You just have to be charming and mildly amusing. But you can befriend all the rich people you want, it's not gonna get you a billion dollar startup. Rich people didn't get rich by trusting their charming, funny pals with their money.

They got rich by being objective. To get their money you need to demonstrate skill, not to befriend people.

The purpose of starting a business is to make cooperation with others easier. That is the main skill a businessman needs: the ability to persuade others to deal with him using logical arguments and objective evidence.

Of course starting a large business is harder than starting a small one. Of course it takes a lot more skill and effort. And that is a good thing. That is what makes capitalism effective. That is what insures that the most skilled, hard working individuals end up in charge of the most capital, and get to run the most important ventures: the fact that a demonstration of extraordinary skill and effort is needed even before your business lays the first cable or pipe.

Edited by Nicky
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From my basic understanding of economics, the first question related to a 'fair price'. In a Free Market Economy, the price is determined by supply and demand. However it does not mean that at every transaction the price will always be the 'perfect' price. Some suppliers will charge price x, then someone will come up with a way to produce it at a lower cost and will charge y where y<x, if the two products are exactly equal in quality consumers will switch to the cheaper product. However some consumers will still pay price x and some will pay price y (and with time more will decide to pay price y). However consumers, if acting rationally, will never pay more than they are willing to pay. For example, gasoline. As gas prices go up some consumers who are not willing to pay that price will switch to more economic cars (you can see this effect happening today). Some consumers simply are no longer willing to pay the price at all and switch to public transit or move closer to work.

  • Consumers and businesses will be forced to pay higher energy costs. The resulting increase in energy costs will also drive up prices on all consumer goods;

That isn't even a theory anymore. For Ontarians (that's in Canada) this is a reality. Our Provincial Premier created an elaborate Green energy program, combined with a double dipping tax on gasoline, made Ontario the most expensive area in North America. And whats the result, businesses are dying here. Small business cannot compete with the high operational costs, while major corporations are leaving town. And they are not leaving to China or some 3rd world country, they are going to Ohio and Wisconsin. Because it is still cheaper than doing business in Canada.

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Befriending rich people is easy. You just have to be charming and mildly amusing. But you can befriend all the rich people you want, it's not gonna get you a billion dollar startup.

I imagine it takes a lot of time and effort just to get a meeting with a billionaire. Then again, maybe it's not that hard - that's the 5th result when googling 'get a meeting with a billionaire.'

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I imagine it takes a lot of time and effort just to get a meeting with a billionaire. Then again, maybe it's not that hard - that's the 5th result when googling 'get a meeting with a billionaire.'

Someone who graduated near the top of his class in business management from a top university, and spent the next few years managing a smaller, successful startup of his own (that's someone with the minimum qualifications required to even be considered for the job of managing a city wide energy supplier started from scratch), would have no problem getting a meeting with at least one billionaire.

On the other hand, someone who has achieved nothing and wants his first job to be as owner and CEO of a large energy supplier would stand no chance.

Like I said, that's a good thing. People should have to work their way up, otherwise private businesses would be just as incompetent as government.

Edited by Nicky
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  • 3 weeks later...

People ought to stop asserting that large start-up costs necessarily entail a monopoly situation. High capital requirements need not be an insurmountable barrier to entry. In a competitive market scenario, it will make sense for investors to pour money into a high start-up cost venture that replicates an existing producer if the investors believe the market can sustain greater supply and return a profit.

In the utilities context, which seems to be one referred to frequently, a high capital requirement, by itself, is not the primary reason why we tend to think of those as exemplar monopolies. High start up costs are part of it, but equally important are:

  • lack of substitute,
  • huge economies of scale/increasing returns to scale (meaning essentially that the cost of producing more units goes down as the volume of production increases.),
  • high fixed costs (essentially the high start up costs) yet low variable costs (all the other costs).

These are what we call natural monopolies. There are other situations where there is only one producer in a market, and these are monopoly situations, but absent these elements those other situations aren't natural monopolies.

Monopolies can exist in other forms. An owner of intellectual property has a legal monopoly over the use of the property. Rand was a strong supporter of IP monopoly rights.

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Not necessarily. For example: In my city, there's only one energy company and the rates are damn high. But because the startup costs are so expensive, this one energy company has a monopoly over the city's gas & electric. While that's fine for the business (they set their own price and as a consumer you can either pay it or not have energy), monopolies are bad for consumers because there's no competition driving down the price.

It is not true that "monopolies are bad for consumers". Monopoly or near-monopoly is actually an important stage in economic development, and they contribute enormous gains in standardization and efficiency. Nor is it always true that the price would be lower if there were more competitors on the market--the economies of scale available to a monopoly may serve to keep costs significantly lower than they were otherwise.

The truly abusive monopolies that have existed in the past were all government-enforced monopolies. That's not to say that non-coercive monopolies can't occasionally be a bit cheesy, as with Microsoft's behavior when they were first marketing the DOS operating system. However, all of Microsoft's efforts still didn't suffice to keep Apple off the market.

The biggest company in the world can't force you to deal with them, though. You may not have a choice IF you want to use some particular service, but you can always forego that service. Electric power is a terrific convenience and improvement. But it's not necessary to human life. And, if you REALLY dislike the power company, you can always buy a generator. Build a windmill in your backyard. Install one of those treadmill things in your kitchen. The reason most people choose not to do this is because it is enormously more expensive and inconvenient than paying the local power company. Yet they still complain, totally without context, that the power company's rates are "too high". Too high compared to what?

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The biggest company in the world can't force you to deal with them, though. You may not have a choice IF you want to use some particular service, but you can always forego that service. Electric power is a terrific convenience and improvement. But it's not necessary to human life. And, if you REALLY dislike the power company, you can always buy a generator. Build a windmill in your backyard. Install one of those treadmill things in your kitchen. The reason most people choose not to do this is because it is enormously more expensive and inconvenient than paying the local power company.

While in general I'd say you're correct,

the problem is that the government is doing everything they can (slowly, in the manner of bringing a frog to a boil) to elimiinate the ability to get around their power monopolies.

I do not use utility co generated heat in my home- my home is heated only by my wood fireplace. However, in some cities (not mine yet, but there's been grumbling) fireplaces are being banned under the guise of "pollution" and "global warming".

Same with grills if you don't want to use electric/gas to cook.

In many places it is now illegal to collect rainwater on your own property.

Several cities have started enacting ordinances to discourage or limit production of one's one vegetables on their own property.

The choices are vanishing as we speak.

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While in general I'd say you're correct,

the problem is that the government is doing everything they can (slowly, in the manner of bringing a frog to a boil) to elimiinate the ability to get around their power monopolies.

And this has what to do with Capitalism?

This is government action, not the action of a company on a free market.

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