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> Milton Friedman always said it’s rare to find monopolies form in a free market Why would that be true? Once a company becomes big enough, it has resources t

> Milton Friedman always said it’s rare to find monopolies form in a free market Why would that be true? Once a company becomes big enough, it has resources to squash competition in various ways.

TangoTrotFox 8y ago
He was mostly talking of for-pay goods and services. The current trend of offering "free" services, that are anything but, is severely distorting the market. It's exploiting a current gap in consumer knowledge where people are massively undervaluing the literal value of their private information. But in a normal pay-to-play business, the argument is self evident. Either the monopolizer is malicious or benevolent. If they're benevolent then a monopoly doesn't matter. If they're malicious then that means that they're exploiting their market positioning to artificially inflate the prices of their goods/services. When a company has unreasonably high prices this enables competitors to come in and gain marketshare easily by offering lower prices. And you're definitely right that the company can do things like try to buy out the smaller company, perhaps put pressure on their suppliers, etc. But this is a never ending game since for instance the smaller competitor could then even begin to develop their own supply chain, etc. And a small company getting bought out for some fat paycheck before they even really hit their stride is hardly discouraging to other would-be competitors! So long as the pie and the end of the tunnel is large enough, there will be an incentive to compete against the monopoly. There is also the innovation issue. Coercive monopolies do not often innovate. Their focus is on profit whereas innovation tends to be focused on competition. This lack of innovation once again offers a big gap in the market for competitors. The aerospace industry vs SpaceX are the best example here. Boeing/Lockheed had a partially government enforced coercive monopoly in a field with greater barriers to entry than practically any 'material' industry. Yet a guy with 'nothing' but a few hundred million and the understanding that something worth on the order of let's say $20 million of material costs should not cost $500 million to build and launch, was able to enter the field and rapidly rise to dominance by working on nothing but innovation and non-monopolistic prices. Boeing/Lockheed by contrast were still so stuck in the past with their MBA style executive leadership that now, many years after the 'threat' of SpaceX has become self evident, that they've still been unable to effectively react. So to avoid retro-fitting the past to fit a narrative, I expect in the future we'll be able to spin an exact tale of the telecoms industry. Once again another [heavily government enabled] monopoly that's completely failed to innovate and charges unreasonably high prices. Something like the proposed SpaceX constellation of LEO satellites for the purpose of low-cost high-stability internet stands to leave them completely taking over that industry. Of course the failure of Google fiber is an argument to the contrary, but that gets into an entirely different tangent and I think there were many reasons for that failure that lay squarely with Google.
eksemplar 8y ago
I’m not sure it would be true, but government sure spends a lot of money on Microsoft licenses.
AnthonyMouse 8y ago
> Why would that be true? Once a company becomes big enough, it has resources to squash competition in various ways. Notice how most of the squashing methods are government based: Patents, litigation cost of unmeritorious litigation, government-enforced contracts that should not be enforced under any reasonable antitrust rules, regulatory capture, etc. The main non-governmental one is economies of scale, but that has a hard limit. The monopolist can't extract more from the market than the efficiency it creates by being a monopoly, or it would make it viable for competitors to enter. In an industry with low fixed costs, that doesn't buy you much. The place where you would actually expect to see monopolies is the "natural monopoly" industries that are dominated by fixed costs. But even there, there's a limit to what the monopoly can do before competitors appear when there aren't government restrictions on entering the market. Starting a neighborhood ISP isn't cheap, but if the incumbent is offering slow service for high prices, it's what would happen, because paying (or even borrowing) $10,000 to invest in a new fast ISP that serves your own home is cheaper than paying more than that amount over time for worse service from the incumbent. But not if the incumbent has laws passed to make that purposely uneconomical or outright prohibited.
- baddox 8y ago
  > The main non-governmental one is economies of scale, but that has a hard limit. For anyone interested, this concept is called https://en.m.wikipedia.org/wiki/Socially_optimal_firm_size https://en.m.wikipedia.org/wiki/Socially_optimal_firm_size
- adrianN 8y ago
  Imagine if there were no governments. Big companies could hire mercenaries to enforce their contracts, but small companies would have no means at all to protect themselves.
  - AnthonyMouse 8y ago
    "Imagine if there were no governments" is a category error. There are always governments, not all of them are formal. Whoever has the most mercenaries can make rules. The thing that works is to have a coercive force which is primarily used to quell other large coercive forces. So you have a police force that prevents violence etc. But it needs to be limited in scope, because it has no natural predators. It's always tempting to use the coercive force for <thing> where <thing> is literally anything. Laws are molasses. They have benefits, but they also have costs, and the fact that the costs and benefits apply to separate people makes it much too easy to do net-negative things.

> Milton Friedman always said it’s rare to find monopolies form in a free market Why would that be true? Once a company becomes big enough, it has resources to squash competition in various ways.

TangoTrotFox 8y ago

He was mostly talking of for-pay goods and services. The current trend of offering "free" services, that are anything but, is severely distorting the market. It's exploiting a current gap in consumer knowledge where people are massively undervaluing the literal value of their private information. But in a normal pay-to-play business, the argument is self evident. Either the monopolizer is malicious or benevolent. If they're benevolent then a monopoly doesn't matter. If they're malicious then that means that they're exploiting their market positioning to artificially inflate the prices of their goods/services. When a company has unreasonably high prices this enables competitors to come in and gain marketshare easily by offering lower prices. And you're definitely right that the company can do things like try to buy out the smaller company, perhaps put pressure on their suppliers, etc. But this is a never ending game since for instance the smaller competitor could then even begin to develop their own supply chain, etc. And a small company getting bought out for some fat paycheck before they even really hit their stride is hardly discouraging to other would-be competitors! So long as the pie and the end of the tunnel is large enough, there will be an incentive to compete against the monopoly. There is also the innovation issue. Coercive monopolies do not often innovate. Their focus is on profit whereas innovation tends to be focused on competition. This lack of innovation once again offers a big gap in the market for competitors. The aerospace industry vs SpaceX are the best example here. Boeing/Lockheed had a partially government enforced coercive monopoly in a field with greater barriers to entry than practically any 'material' industry. Yet a guy with 'nothing' but a few hundred million and the understanding that something worth on the order of let's say $20 million of material costs should not cost $500 million to build and launch, was able to enter the field and rapidly rise to dominance by working on nothing but innovation and non-monopolistic prices. Boeing/Lockheed by contrast were still so stuck in the past with their MBA style executive leadership that now, many years after the 'threat' of SpaceX has become self evident, that they've still been unable to effectively react. So to avoid retro-fitting the past to fit a narrative, I expect in the future we'll be able to spin an exact tale of the telecoms industry. Once again another [heavily government enabled] monopoly that's completely failed to innovate and charges unreasonably high prices. Something like the proposed SpaceX constellation of LEO satellites for the purpose of low-cost high-stability internet stands to leave them completely taking over that industry. Of course the failure of Google fiber is an argument to the contrary, but that gets into an entirely different tangent and I think there were many reasons for that failure that lay squarely with Google.

eksemplar 8y ago

I’m not sure it would be true, but government sure spends a lot of money on Microsoft licenses.

AnthonyMouse 8y ago

> Why would that be true? Once a company becomes big enough, it has resources to squash competition in various ways. Notice how most of the squashing methods are government based: Patents, litigation cost of unmeritorious litigation, government-enforced contracts that should not be enforced under any reasonable antitrust rules, regulatory capture, etc. The main non-governmental one is economies of scale, but that has a hard limit. The monopolist can't extract more from the market than the efficiency it creates by being a monopoly, or it would make it viable for competitors to enter. In an industry with low fixed costs, that doesn't buy you much. The place where you would actually expect to see monopolies is the "natural monopoly" industries that are dominated by fixed costs. But even there, there's a limit to what the monopoly can do before competitors appear when there aren't government restrictions on entering the market. Starting a neighborhood ISP isn't cheap, but if the incumbent is offering slow service for high prices, it's what would happen, because paying (or even borrowing) $10,000 to invest in a new fast ISP that serves your own home is cheaper than paying more than that amount over time for worse service from the incumbent. But not if the incumbent has laws passed to make that purposely uneconomical or outright prohibited.

baddox 8y ago
> The main non-governmental one is economies of scale, but that has a hard limit. For anyone interested, this concept is called https://en.m.wikipedia.org/wiki/Socially_optimal_firm_size https://en.m.wikipedia.org/wiki/Socially_optimal_firm_size
adrianN 8y ago
Imagine if there were no governments. Big companies could hire mercenaries to enforce their contracts, but small companies would have no means at all to protect themselves.
- AnthonyMouse 8y ago
  "Imagine if there were no governments" is a category error. There are always governments, not all of them are formal. Whoever has the most mercenaries can make rules. The thing that works is to have a coercive force which is primarily used to quell other large coercive forces. So you have a police force that prevents violence etc. But it needs to be limited in scope, because it has no natural predators. It's always tempting to use the coercive force for <thing> where <thing> is literally anything. Laws are molasses. They have benefits, but they also have costs, and the fact that the costs and benefits apply to separate people makes it much too easy to do net-negative things.