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.

[Borodog]

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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.

[Phil153]

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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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As part of an economics assignment in college, I looked at an Australian Senate report into the Australian supermarket industry. One of the things it looked at was the behavior of supermarket chains in rural areas. The large chains - there are only really three in Australia - would set up shop, and charge city prices for goods, which was below cost once transport was factored in, especially for fruit&veg. This would drive many of the existing small stores out of business. A year of so later, pricing would be consistent with that in other country areas (significantly higher than the city prices they were first charging).

Isn't this exactly predatory pricing?

Now I agree that in an area with a large population and a large of capital and entrepreneurship, predatory pricing of many goods and services would not be viable. Economics 101. Duh. But many areas and situations don't fall under the freshman economic assumptions you REQUIRE to be true in order to make many of your claims.

[Copernicus]

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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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As part of an economics assignment in college, I looked at an Australian Senate report into the Australian supermarket industry. One of the things it looked at was the behavior of supermarket chains in rural areas. The large chains - there are only really three in Australia - would set up shop, and charge city prices for goods, which was below cost once transport was factored in, especially for fruit&veg. This would drive many of the existing small stores out of business. A year of so later, pricing would be consistent with that in other country areas (significantly higher than the city prices they were first charging).

Isn't this exactly predatory pricing?

Now I agree that in an area with a large population and a large of capital and entrepreneurship, predatory pricing of many goods and services would not be viable. Economics 101. Duh. But many areas and situations don't fall under the freshman economic assumptions you REQUIRE to be true in order to make many of your claims.

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Of course...and when you find an example the answer will be "oh that didnt have predatory intent"

[BCPVP]

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Isn't this exactly predatory pricing?

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Something tells me there's more to it than that. The model most people describe involves the predator company charging monopoly prices once it is established because they need to make up for the low price during the predation period and because they are now the only firm in the area and can "threaten" potential entrants. Lots of businesses start out with discounts, low prices, etc to gain a foothold in the market otherwise there probably won't be much reason for customers to switch. Unless the new stores offer something different which defeats the point of it being predatory.

I won't say that it's impossible to engage in predatory pricing for a time. But it is very difficult for reasons mentioned as well as documented by many people and so rare that it shouldn't merit the powers conceded to government to "deal" with such practices.

[ianlippert]

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As part of an economics assignment in college, I looked at an Australian Senate report into the Australian supermarket industry. One of the things it looked at was the behavior of supermarket chains in rural areas. The large chains - there are only really three in Australia - would set up shop, and charge city prices for goods, which was below cost once transport was factored in, especially for fruit&veg. This would drive many of the existing small stores out of business. A year of so later, pricing would be consistent with that in other country areas (significantly higher than the city prices they were first charging).


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Its possible that these supermarkets, once they acquired their foothold and put mom & pop out of business, now provided a better service that the smaller stores couldnt compete with. People love the convenience of the big box stores. To really determine if this was a predatory monopoly we'd need more information. Do you know how much more the monopoly stores were charging over the smaller stores? Do you know what the monopoly stores were making in terms of ROI?

[TomCollins]

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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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Incorrect. For example, airline prices in Cincinnati. Delta has a near monopoly on the city. Delta has extremely high prices (the airport was the 2nd most expensive in the country last year, behind Honolulu and ahead of Anchorage). If anyone comes in (which airlines have tried to do in the past), Delta drops prices temporarily until they leave.

[tomdemaine]

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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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Incorrect. For example, airline prices in Cincinnati. Delta has a near monopoly on the city. Delta has extremely high prices (the airport was the 2nd most expensive in the country last year, behind Honolulu and ahead of Anchorage). If anyone comes in (which airlines have tried to do in the past), Delta drops prices temporarily until they leave.

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Governmental restrictions on airspace and airport land?