Monopolies wouldn't exist in the free market?

[doucy]

Simple question. I've heard it said before that monopolies would not exist in the free market. But I can't seem to grasp why. If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly? If there are other posts here or articles online that can explain this to me, you can just link me.

[Borodog]

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Simple question. I've heard it said before that monopolies would not exist in the free market. But I can't seem to grasp why. If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly? If there are other posts here or articles online that can explain this to me, you can just link me.

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You have to be careful about terminology. For hundreds of years "monopoly" meant precisely a government grant of special privelege to preferred providers. In the 1920s and 30s with the advent of the "perfect competition" revolution in economics, "monopoly" came to mean only a single provider, or perhaps few providers, as opposed to "many", which is what the theory claims is needed for "perfect" competition.

Under the original theory of competition (which is still the Austrian theory), there could be a single provider, but the only way it could maintain position as the sole provider would be to produce at costs and sell at prices sufficiently low that no would-be competitors could profitably enter the market, which is obviously not bad for consumers.

There is also the neo-classical theory of "natural monopolies", wherein industries with heavy fixed costs like electrical power production come to be dominated by single firms which can then underprice all competitors because the marginal cost per additional buyer is so low. This is essentially a restatement of the original theory with the added proviso that these natural monopolies can then somehow go on to charge high monopoly prices. But this would immediately invite competition, and the theory is not supported by the historical and empirical evidence at all anyway, since these industries always experienced extremely heavy competition until governments started granting utility and telephone monopolies. There are in fact still many towns where utility monopolies were never granted, and still experience municipality-wide competition amongst several firms for all residents.

Basically in theory a sole provider could evolve on the market and maintain its position by underpricing all would-be competitors (I think this has almost occurred historically in things like zinc or aluminimum production, but I'm not sure), but (a) it's extremely difficult, and (b) it would be good for consumers, not bad.

A good book on the history of utility competition is Primeaux's Direct Utility Competition: The Natural Monopoly Myth.

[foal]

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.

[GoodCallYouWin]

"If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly?"

It could. Harmful monopolies cannot exist in a truly free market, but it's certainly possible for some brilliant entrepeneur to corner the market; just once they start charging crazy prices some other dude can come in and compete with them.

[foal]

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just once they start charging crazy prices some other dude can come in and compete with them.

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What happens when he buys the other guy out?

[DcifrThs]

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"If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly?"

It could. Harmful monopolies cannot exist in a truly free market, but it's certainly possible for some brilliant entrepeneur to corner the market; just once they start charging crazy prices some other dude can come in and compete with them.

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in a free market, are there regulators?

if not, then it is obviously possible for harmful monopolies to exist.

this seems a trivial question though.

Barron

[lehighguy]

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just once they start charging crazy prices some other dude can come in and compete with them.

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What happens when he buys the other guy out?

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Then another person will take thier place...and another...and another, until our original monopolist runs out of checks to buy companies with.

As long as you charge a price higher then a potential competitor could sell for, there will be people willing to enter the market.

[pvn]

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"If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly?"

It could. Harmful monopolies cannot exist in a truly free market, but it's certainly possible for some brilliant entrepeneur to corner the market; just once they start charging crazy prices some other dude can come in and compete with them.

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Well, to get nitty, they can exist, it's just really unlikely for them to persist for any significant period of time. It's always possible that everyone will be too lazy to take advantage of the HUGE market opportunities that such market participants create.

[pvn]

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just once they start charging crazy prices some other dude can come in and compete with them.

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What happens when he buys the other guy out?

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When a "monopolist" starts buying everyone out, he's ENCOURAGING other people to enter the market, specifically because they know they can make a quick buck getting bought out.

When this happens, you can't buy everyone out. Rockefeller tried. When he failed, he turned to government to erect barriers to entry in the refinery market, under the guise of "safety standards".

[pvn]

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"If a firm were truly able to provide a product better than anyone else could, why couldn't it sustain itself as a monopoly?"

It could. Harmful monopolies cannot exist in a truly free market, but it's certainly possible for some brilliant entrepeneur to corner the market; just once they start charging crazy prices some other dude can come in and compete with them.

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in a free market, are there regulators?

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Sure. Just not any coercively funded ones whose arbitrary decisions creating binding obligations for market participants.