Monopolies wouldn't exist in the free market?

[pvn]

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so who gives the regulators their authority and funding?

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I don't know. I don't formulate business models for free-market regulators.

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what authority would they have?

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I don't know. Probably whatever authority those who are funding and patronizing them give to the regulators.

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how would they execute their authority?

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I don't know. See response #1.

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and why would regulators be needed if monopolies wouldn't exist in free markets?

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Needed? I don't know. They might *exist* if there's a market demand. I'm not sure what "need" means, though.

All sorts of voluntary industry regulatory bodies exist nowadays.

http://www.soa.org/

http://nfl.com/

http://www.oukosher.org/

[pvn]

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The bad sort of monopoly isn't achieved by undercutting or making a better product, it's achieved by buying up all other providers of that product and then price gouging. This is a hobby of mine in the World of Warcraft auction house.

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Luckily it doesn't work in the real world. "Predatory pricing" is the Unicorn of economics. There's a lot of mythology written about it, but nobody has ever observed it.

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i also just realized that this logic is quite strange.

1) predatory pricing doesn't work in the real world. i know this because predatory pricing has never been observed.

2) regulators around the globe are created and tasked with eliminating monopolies and prevent predatory pricing.

oops...see that. bad logic.

non-observance of predatory pricing cannot be attributed to its inability to work in the real world. in fact, you could just as logically argue that the lack of observance of predatory pricing is the result of the regulatory agencies doing a great job. we should give those guys awards.

in addition, there are instances where the predatory pricing (or predatory actions by would be monopolists) were struck down by regulatory agencies. thus we never observed the predatory pricing, but we did observe something that would have very likely led to it.

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What? The regulators are pre-emptively punishing companies *before* they commit these pricing crimes?

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take microsoft vs. netscape et al. microsoft was barred from its practices by the US regulatory agency. if allowed to continue, do you really think another software company could have even come close to competing with MSFT (given that they would program their world standard operating system to not work with other manufacturer's products?) ? do you think MSFT wouldn't be a monopoly? or not have the ability to price preditorially?

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LOL.

Another company could compete by delivering a product that gave consumers more value for their money, just like in every other industry.

Natural barriers to entry are lower in software than in any other market.

Why should any company be forced to make their products work with anyone else's product?

The microsoft antitrust case is one of the MOST blatant examples of the use of such antitrust legislation as a weapon weilded by politically-connected companies against more successful competitors.

[mosdef]

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That is not the logic why Borodog doesn't think predatory pricing would never work. Predatory pricing doesn't work because:

1. It requires a business to run at a loss for a (long?) period of time. This is obviously awful for businesses who consider it and good for consumers. not true. You just need to be able to have a lower cost of goods than your competitors and make sure THEY don't make a profit.

2. If a firm actually does manage to run its competitors out of business, the high price level (and profits possible in that industry) will encourage other firms to compete with it. Again, bad for the firm trying it, good for consumers. Not when they know that as soon as they come in, the prices will drop and no profit will be made, and they lost any investment they had in getting to market
3. When a firm goes through stage one, if it is publicly owned and traded, it can be short sold by the general public. This, combined with the whole "running a loss for an indeterminate amount of time" thing are probably why firms don't try this strategy.assumes that they take a loss.

Or, there might not be any examples of predatory pricing because government regulation prevented them all. Pretty obvious what side to bet on here IMO...

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Your counterarguments as laid out here seem to suggest that the "predator" is actually just winning the competition. Are you really saying that when one company is able to get all the business by offering lower costs to consumers at lower profit to them, that's bad for consumers? This seems to run counter to your example of Delta, which you've asserted is charging higher prices to consumers than it otherwise could, and I infer is making an "unfairly high" profit, not a reduced profit.

[Chips Ahoy]

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take microsoft vs. netscape et al. microsoft was barred from its practices by the US regulatory agency.

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The punishments regulators have put on MS have always come so late as to be moot, much to the dismay of the slashdot crowd. MS has learned legal and lobbying expenses are a cost of doing business.

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if allowed to continue, do you really think another software company could have even come close to competing with MSFT

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Yes, since MS is facing stiff competition (not all from 'companies'), but MS has not changed how they do business. MS does exactly what regulators require them to do as a specific remedy and then find workarounds to blunt the effects.

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(given that they would program their world standard operating system to not work with other manufacturer's products?) ?

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Your 'given' doesn't work. MS does not, and has not used technical means to break competitors. Instead, they go to great lengths to maintain "bug for bug" compatibility between versions, so that whatever program you use continues to work. This takes enormous effort on their part (documented in this blog and book).
MS is far superior to Apple or Linux in backwards compatibility and it has been a big contributor to their success. Also, they produce a new OS version about every 5 years. That's too slow to crush competitors.

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do you think MSFT wouldn't be a monopoly? or not have the ability to price preditorially?
Barron

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MS is a monopoly by market share. The forces that keep MS prices in check are competitors, not regulators.

[BCPVP]

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but existance of the regulators whose purpose, in all, some or part, is to prevent predatory pricing from occurring, does prevent the statement from being logically sound. by "the statement" i mean that "because predatory pricing has never been observed, it could therefore never work in the real world."

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I won't go as far as saying 'predatory pricing' is unequivocally impossible, but it is such a difficult strategy to pull off for reasons mentioned that it doesn't warrant ceding the power to destroy companies to the government because of the incentive for any poor competitor to attempt to use such power to hobble his competition. There's been several books and papers detailing the history of exactly that type of behavior being engaged in by poor competitors.

[Jdanz]

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That is not the logic why Borodog doesn't think predatory pricing would never work. Predatory pricing doesn't work because:

1. It requires a business to run at a loss for a (long?) period of time. This is obviously awful for businesses who consider it and good for consumers.
2. If a firm actually does manage to run its competitors out of business, the high price level (and profits possible in that industry) will encourage other firms to compete with it. Again, bad for the firm trying it, good for consumers.
3. When a firm goes through stage one, if it is publicly owned and traded, it can be short sold by the general public. This, combined with the whole "running a loss for an indeterminate amount of time" thing are probably why firms don't try this strategy.

Or, there might not be any examples of predatory pricing because government regulation prevented them all. Pretty obvious what side to bet on here IMO...

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The problem that most people have is with item 2, I don't see the logic to 3 either but maybe another time.

The thing about 2 is that it doesn't take into account the strategic reactions of other "players of the game". I forget who wrote it, but one of the big players in management consulting/efficiency/business strategy wrote about how all the banks in one area were open 5 days a week originally. Then one guy had the bright idea to open his bank on Saturdays to try to draw extra customers, which he did. Eventually all the banks opened saturday and that competative advantage was lost, so now all the banks were open saturday better serving the customer while generating no additional profit.

So that's the example of the free market working to the customers benefit. However, the point of the article was to show how to avoid competition that would be zero-sum, that one has to account for how others will react. The author goes on to tell how other banks in other areas have refrained from competing with one another in similar ways which only benefit customers while hurting the businesses. Businesses know that even if they could provide a better service and capture market share, they're only hurting themselves if other business will have to follow their lead.

To natural monopolies.

The main argument in 2 is that if someone is charging "predatory" prices than people will compete to provide the same good/service to access these windfall profits. The problem is that the "predatory" firm doesn't stand still. If someone enters the market to try to take advantage of overpriced goods/services the original provider will simply match the new entrant. In industries where there are generally significant capital expenditures to start a business potential entrants to the market are deterred because they don't actually have access to the current inflated market.

Therefore a predatory natural monopoly can "gouge" largely in relation to the capital expenditure required to start a competing business. Knowing how valuable the price premium is to the original firm a potential competitor understands before trying to compete the cost of overcoming the vested interest, and knows that it will, itself, not be able to charge that premium. Further it knows that it must be enormously overcapitalized as the first firm will have an incentive to take losses to forestall competition.

In general knowing the likely reactions of the "natural monopoly" firm competitors will be unlikely to enter the marketplace.

I think the above disproves 3 as well, as shorting a stock doesn't work if what i described above is seen by other stock holders as likely to be effective.

edit: and frankly this in less obvious forms happens all the time, imho, but is likely outweighed by the times it doesn't. I'm not really very pro-regulation in this context, as the medicine seems worse than the disease, but i think the disease does exist. The occurrence by far more harmful to consumers is a general urge by competitors to, well, not compete, but I certainly don't think that qualifies as a "natural monopoly"

[GMontag]

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Your 'given' doesn't work. MS does not, and has not used technical means to break competitors.

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Wow, I don't think I've ever seen a post more divorced from reality. There are many documented cases of Microsoft using technical means to try to break other companies' software, including IIS intentionally responding slower to requests from Netscape than from IE, their various attempts to break DR-DOS, changing the .doc format every version to break Open Office and (earlier) Corel and Lotus, and their numerous "extensions" to open standards designed to make them proprietary (see Kerberos and their failed attempt with Java).

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Instead, they go to great lengths to maintain "bug for bug" compatibility between versions, so that whatever program you use continues to work. This takes enormous effort on their part (documented in this blog and book).
MS is far superior to Apple or Linux in backwards compatibility and it has been a big contributor to their success.

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Backwards compatibility is easy to maintain when you know exactly what changes you are making to try and shut everybody else out.

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Also, they produce a new OS version about every 5 years. That's too slow to crush competitors.

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Windows is not MSFT's only product.

[stephan]

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3. When a firm goes through stage one, if it is publicly owned and traded, it can be short sold by the general public. This, combined with the whole "running a loss for an indeterminate amount of time" thing are probably why firms don't try this strategy.assumes that they take a loss.

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Worst counter-argument ever. Isn't the definition of predatory pricing selling below cost, aka, losing money?

[ianlippert]

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Worst counter-argument ever. Isn't the definition of predatory pricing selling below cost, aka, losing money?


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This isnt what we are worried about though, we are worried about the monopoly pricing that will eventually come in the future.

I think the inherant problem with the predatory pricing arguement is that its generally much harder to put people out of business than it is for businesses to open up shop. So you end up taking losses for longer than you are going to benefit from monopoly pricing. I have yet to see a convincing example of real world predatory pricing, and if it were economically viable its something we'd see a lot more of.

[ianlippert]

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Windows is not MSFT's only product.

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And pretty much every MSFT product competes with free software.