Monopolies In An L-f Capitalist Economy?

[BNeptune]

I'm familiar with Capitalism and everything it entails. My question is, how does a free market prevent monopolies? Couldn't they crush competing small businesses? Even if the small business had a new innovative technique, it could still be crushed by methods that Microsoft used like Microsoft-only programs, etc, couldn't it?

My dad is very anti-free market. For example, he references that America was controlled by a single phone company (AT&T) that price-gouged for years until the government finally stepped in and broke it down into something like eight different small companies. When he ran his own business, his phone bill would be up to $600, and it made his profit margin almost nothing.

Consider me completely uneducated in economics. I'm interested in how monopolies are prevented in a free economy.

As a side note, my dad also cites that as it stands, private medicine is grossly innefficient. For example, its unions restrict membership to such an extent that we have to import thousands of doctors from places like India to make up for the shortages, just because the unions want to maintain their high wages. Also, all patient records are still in paper form, as opposed to computer. Though a computer is more efficient, the entire medicine community is fine just charging an extra five bucks per visit to make up for it, rather than put forth the effort to improve.

I understand and agree with all the ethical arguments for this, but what's the point of ethics if they're so impractical?

Edited April 27, 2006 by BNeptune

[tommyedison]

I'm familiar with Capitalism and everything it entails. My question is, how does a free market prevent monopolies? Couldn't they crush competing small businesses? Even if the small business had a new innovative technique, it could still be crushed by methods that Microsoft used like Microsoft-only programs, etc, couldn't it?

A free market cannot prevent monopolies. If a company is working extremely well in comparision to its competitors, it will gain customers. However it does ensure that if a monopoly tries to defy gravity by for example, charging astronomical rates for its services, it will collapse.

My dad is very anti-free market. For example, he references that America was controlled by a single phone company (AT&T) that price-gouged for years until the government finally stepped in and broke it down into something like eight different small companies. When he ran his own business, his phone bill would be up to $600, and it made his profit margin almost nothing.

The AT&T was aided and abetted by the government to mantain the monopoly. It was a coercive monopoly as it had the power of the government behind it. Competition was highly regulated and the government set the rates of the services. The AT&T monopoly was not an example of free market. It was a result of government coercion.

As a side note, my dad also cites that as it stands, private medicine is grossly innefficient. For example, its unions restrict membership to such an extent that we have to import thousands of doctors from places like India to make up for the shortages, just because the unions want to maintain their high wages.

The private medicine system is not free. On the contrary it is very highly regulated by organizations such as the FDA, etc. As for the union example, the unions would not be able to do so were they not backed by the power of the government.

[Felix]

I'm familiar with Capitalism and everything it entails. My question is, how does a free market prevent monopolies? Couldn't they crush competing small businesses? Even if the small business had a new innovative technique, it could still be crushed by methods that Microsoft used like Microsoft-only programs, etc, couldn't it?

Well, you'd have to overcome people's inertia by providing a really better product. Building a better mousetrap is not sufficient. The problem is to get people to actually use it (and buy it).

My dad is very anti-free market. For example, he references that America was controlled by a single phone company (AT&T) that price-gouged for years until the government finally stepped in and broke it down into something like eight different small companies. When he ran his own business, his phone bill would be up to $600, and it made his profit margin almost nothing.

Usually this includes government interference. I don't know anything about the AT&T case, but I can tell you what it was like in Germany. The telephone company was a monopoly partially in government hands. Then the government sold its shares (it needed money ) and made the company private. Since then we have all sorts of different companies coming up to sell communication services and the former monopolist has lots of problems keeping its market share.

Consider me completely uneducated in economics. I'm interested in how monopolies are prevented in a free economy.

In a free market every company has to fear constant competition. They can't force people not to compete, so if anyone actually has a better product or service, this usually means that the big guys lose market share. They may use their current share for their advantage, but if someone's actually really better, they'll have a hard time keeping people from switching. And in case there is actually a free market monopoly, then that's because the service they provide is actually the best.

[hunterrose]

Even if the small business had a new innovative technique, it could still be crushed by methods that Microsoft used like Microsoft-only programs, etc, couldn't it?

Nah, I don't think so. Take the scenario of Microsoft copying any (non-copyrighted) new innovations and operating at a razor profit margin, in addition to the fact that application developers have good reason to concentrate their efforts on Microsoft OSes. Someone creating a rival operating system has a HUGE disadvantage, but not an insurmountable one. To the extent that Microsoft sold products at a lower cost than anyone else could, I don't know that could be considered an inefficient method of being crushed and to the extent that they raised their prices, that's an opening for a competitor.

Application developers can be swayed by presenting them a quality OS (with a strong user base.) It might even be necessary for the rival OS maker to create its own applications at first. Technically more a market method than a MS one, but it can be overcome at any rate.

Even to the extent that MS copies it's rivals (non-copyrighted) innovations, there's a necessary lag on that. It's going to take a specific amount of time for a pilfered feature to be incorporated into a new Windows product, and for that time span, the upstart's product is better in that specific way. At worse, this means that the newcomers have to continually improve their product to the point that savvy customers realize their choice is to have a better product now, or wait 6-12 months for new features from MS. To the extent that customers weren't savvy, indifferent customers really couldn't be considered a Microsoft problem.

I'm interested in how monopolies are prevented in a free economy.

I should toss in that Objectivists don't consider market juggernauts that don't forcibly prevent competition to be monopolies. Under L-F, a business doesn't have political means to prohibit another's market actions, and free markets don't (and shouldn't) prevent market dominators who aren't legally restricting others from competing.

As a side note, my dad also cites that as it stands, private medicine is grossly inefficient.

Depends on what is meant by inefficient. To the extent that both sides can make more money by changing business practices, private medicine entities choose to be inefficient, and other businesses can come in and offer a more "efficient" product. Unions can't restrict the number of people who want to practice medicine at the cost of not being in the union (if they can, then that's the problem.) And if a business wants to lose money for the sake of some other goal, that's their perogative - it might be financially inefficient, but efficient for them in other ways.

[Lathanar]

As a side note, my dad also cites that as it stands, private medicine is grossly innefficient. For example, its unions restrict membership to such an extent that we have to import thousands of doctors from places like India to make up for the shortages, just because the unions want to maintain their high wages. Also, all patient records are still in paper form, as opposed to computer. Though a computer is more efficient, the entire medicine community is fine just charging an extra five bucks per visit to make up for it, rather than put forth the effort to improve.

WalMart has actually offered to come in and help improve the health insurance industry by stream-lining their processes. The major drive on that initiative as far as I can tell is WalMart wants to lower the premiums it pays for coverage, a couple 100 million as a charity effort to lower premium costs will probably payback 5 to 10 fold in a couple years. It doesn't take governemnt intervention to correct these things. The government answer to this is to subsidize the insurance payments for the poor like what Mass has put into place which only ensures the insurance companies of more premiums being paid and policies sold. Going out of country to buy prescription drugs has been regulated by the government too, reducing a market pressure for American medical companies to lower their prices. There are many examples of how government regulation only makes matters worse in the long run.

[Dargormudshark]

I've also been curious about this, i'm still ignorant of this aspect. My question is this; If someone creates something like Rearden Metal and it becomes a crucial need for society and the owner charges an outlandish price. I realize that a free market system would mean he could charge whatever he wants and its up to potential competitors to dupicate (Rearden Metal in this case) it. But until potential competitors duplicate the product then that means we're stuck with paying outlandish prices for a product we need. So how does a free markest system prevent this from happening?

[hunterrose]

A product one needs? Or one that one benefits from?

[IAmMetaphysical]

"I need some Rearden Metal!"

"For what?"

"To build my house!"

"Why not use steel?"

"Because Rearden Metal is better!"

"That's why it costs more."

"But I don't want to pay what he charges, I want him to give it to me free!"

"Why?"

"Because I need it!"

"You could use wood, wood is cheap."

"I don't need wood, I need Rearden Metal!"

"You mean you want it?"

"Of course! That's what "need" means!!"

[Felix]

I've also been curious about this, i'm still ignorant of this aspect. My question is this; If someone creates something like Rearden Metal and it becomes a crucial need for society and the owner charges an outlandish price. I realize that a free market system would mean he could charge whatever he wants and its up to potential competitors to dupicate (Rearden Metal in this case) it. But until potential competitors duplicate the product then that means we're stuck with paying outlandish prices for a product we need. So how does a free markest system prevent this from happening?

Well, need doesn't give one the right to another person's life. That's why this isn't prevented at all in a free market. He who offers a product may charge any price he wishes to charge. People don't have a right to his product. That's because the product isn't just there. He has to produce it. Therefore he may decide his price. What people can do, however, is to ignore him and live on like he never existed. This is not a loss. It's just not a gain.

[Dargormudshark]

Well, need doesn't give one the right to another person's life. That's why this isn't prevented at all in a free market. He who offers a product may charge any price he wishes to charge. People don't have a right to his product. That's because the product isn't just there. He has to produce it. Therefore he may decide his price. What people can do, however, is to ignore him and live on like he never existed. This is not a loss. It's just not a gain.

I didn't say he didn't have the right to charge whatever he wants. But your statement about it not being a gain helped me see the answer a bit clearer, thanks for this insight.

[BNeptune]

http://www.cato.org/pubs/journal/cjv14n2-6.html

I found this, which seems to be truthful, and clears up that it was in fact a false argument. In fact, it helps to support mine...

The whole story reminds me of something. Anyone who read AS should see a lot of parallels.

Edited April 28, 2006 by BNeptune