just a question (i’m sure Alex will be able to answer this!)
in an market, it is impossible to achieve perfect competition. therefore, as imperfect competition (for example oligopoly and monopolistic competition) don’t benefit anyone, why don’t we run all markets under monopoly power? then we could benefit from increased economics of scale, and, with regulation, the consumer would not suffer.
why is this such a bad idea?
increased economies of scale wouldn’t affect the price as much as competition would. stronger competition would force the prices down to a greater extent. plus monopolies leave a huge gaping hole for capitalists to sqeeze as much money from market as possible, usually at the expense of the workers and the customers.
Why do economists love perfect competition? In a perfectly competitive market, in the long-run, allocative and productive efficiencies are achieved. This means that average costs will be reduced to a minimum and the consumer is not prepared to pay any more for the good he buys (because price = marginal cost [the extra cost of producing that last good]. This is the theoretical idea behind perfectly competitive markets.
Why do economists dislike monopolies in comparison? As macca said, competition is the BEST FORM OF REGULATION and therefore brings down prices as far as they can go. Monopolistic market structure is less efficient because it is neither productively nor allocatively efficient. So it’s less efficient, the quantity supplied is lower and the price is undoubtedly greater. The only way in which monopoly can be advantageous is if the economies of scale it achieves are SO GREAT that total consumer and producer surplus (i.e. welfare to society) are greater than in a situation of perfect competition.
In summary the problems with monopolies are: inefficiency, high prices, low quantity, poorer quality products and the ideological belief that they are unfair and too powerful.
but surely with monopoly we could at least achieve lower prices through economies of scale? currently many consumers are being ripped off through collusion and other anti-competitive practices… perfect competition simply isn’t possible, and at the moment the consumer is being exploited
when a monopoly is formed it means there is no competition and the firm owns the entire market. therefore they can charge whatever price they want for the good (if it is a need) or the price at which they will make the largest profit (if it is a want), the correct price if the unit is a want is where supply and demand are weighted towards the company, so that even if lesss units are sold the profit will be larger, the largest profits are virtually never at the lowest prices and usually in the medium ot high end prices, so the firms would charge the price where they can make the biggest profit. this is a feature of almost every economy in the world irrespective of it being capitalist, communist or whatever the price that will create the greatest revenue will be used.
what about regulation?
regulation won’t work. the regulations will be imposed to restrict the company, and to hold the economy in a monopoly state. these laws would control the prices, profit margines, production numbers, etc, for that company. no company will just surrender it’s self in this manner, and it would launch a string of court cases agains the government. in the EU the commission for competition would step in to say it was an illegal practice and the company would sue the government in the EU court of human rights. foreign competitors would also launch court cases saying that the governemnt is trying to restirct fair trade (which it is), and a trade war between the country trying to create the monopoly, and the countries where foreign competitors are comming from. this is just the start, and it’s already very complicated. also in the government enforcing the monopoly they would have to stop new businesses of that kind operating, this would mean forcibly closing shops, which would look VERY bad slapshed across the world newspapers.
taken down a level it would mean the governemnt would have a seriously large ammoutn of court cases to deal with, aswell as the EU telling them they are in the wrong (as well as just about every other trade organisation in the world), and splashed across the front pages of the newspapers would be government officials closing down perfectly legal businesses.
there is another way though, it would be possibly to have state run businesses take over, but it is quite a different system and even though less frought with court cases, it would mean (yes i am saying this) that the business would probably be less effective if it was a shop or a similar business.
Firstly about regulated monopolies. Regulation is fine and does work despite it being very difficult to get right but as I said in my last post, it is better to introduce competition than to regulate. For example, just 2 weeks ago OFGEM (the regulator for Gas and electricity markets) said it would shortly stop using the (RPI - X) pricing formula in the gas markets because there was so much competition that this form of regulation was unnecessary. Competition will cause prices to lower to a socially optimal level faster than regulation. It doesn’t matter whether the market is perfectly competitive (in reality no market is perfectly competitive).
You seem to be rather against oligopoly and yet pro-monopoly. Your point about economies of scale is correct but usually the price fall, due to competition, in a competitive market is greater than the price fall due to economies of scale achieved by a monopoly. With oligopoly, the government can usually act to prevent collusion as we saw a few months back with that pharmaceuticals case. Oligopoly also maintains prices at a stable level which is usually close to the optimal free market level. Consider the petrol market for an e.g. of this, ignoring the big shocks we sometimes get from things going on in the Middle East.
[This message has been edited by alex (edited 18 December 2001).]
how can you choose to ignore things like that though? i mean, oligopoly can work, i’m not denying that… but we have no idea how many collusions are going on without us realising. often the government don’t even know. so how can we regulate collusion and use it to our benefit when we often can’t even detect it? (i’m not actually pro-monopoly, i don’t know what i am, this is to help me decide!)
collusions, or cartels, happen all the time, the most obvious of these is OPEC. under EU competition laws (assuming an EU country joined it) OPEC would have to immediatly dispand as it is controlling production to deliberatly drive the price of it’s product sky high. (one other point about OPEC, all the OPEC countries have oil in them, but they don’t actually go and find it or drill it, western oil companies do that). although monopolies can never be 100% near monopolies exist, eg microsoft, near monopolies are just as bad and do exactly the same things.
the best way to achieve lowest prices for consumers is to let businesses fight it out, or have state run businesses, although they are less efficient in certain areas of the economy.
let us alone!
I’d just like to point out that perfect competition is perhaps the best for the consumer in the form of prices being at their lowest yet workers, although not being exploited, may not obtain the benefits of workers in a monopolistic market such as job security.
The economies of scale enjoyed by a monopoly may not always be as beneficial to an economy as those of perfect competition. For example, due to a monopoly restricting it’s output and maintaining the same staff continuosly, the establishment of support industries and training agencies which would otherwise be present is put to a halt. If this were more competitive, firms would seek support agencies which are highly efficient, and workers to be trained off-the-job. This creates further industry and employment.
The most important point in this debate is I think that Governments wish for their firms to be efficient unlike monopolies which are often wasteful of resources. In a world where raw materials are becoming more scarce as we speak and oil and gas reserves are rapidly being depleted, the use of these efficiently is of ever growing importance.
To answer your question in one line, monopolies don’t allow for the maximum level of employment to be achieved. They do not allow entrepreneurs to thrive. These are the foundation step for the growth of an economy as they create employment and stimulate economic activity. A state operating under a monopolistic situation, as described by you, would face many of the social problems faced by the former communist states, ie low moral, slower development of technology due to no competition, general discontent in the workforce, and general discontent in the public because it is a truth universally achknowledged that the public are in want of a large choice of products.
Btw, just for clarity, did you mean imperfect comp as a market structure or just an alternative to perfect comp in general?
The only fair market is a Competitive market
The only working market is captiolsim.
How should markets be run?
The correct anwer to that question is, they shouldn’t.
Kurt Webber, I don’t whether it’s ignorance, stupidity or cruelty, but I find your view quite virulent. I’m not going to bother writing for hours about how a total free market would see mass unemployment, great inefficiency in industry, deterioration of the cultures and values being exploited, and the rest. Primarily, an economic system should be judged on the effect it has on people’s dignity.
Kurt, as out-there as it must make you feel, your Ayn Rand signature is Totally wrong. Total free-market capitalism, no tax, no redistribution, the sort of passive individualism that would follow, is about as immoral a system as has ever been suggested.
‘Objectivism’ and a belief that our freedom is maximised by abolishing the state, or removing tax are beliefs I have only ever seen held by those whose understanding of society’s dynamic goes little further than the first why.
Ach! Ayn Rand
Let me say, that without laws (aka those dreaded “regulations”) there could be no free markets. The most powerful would take control and there would be nowhere to complain. Hobbes, baby, Hobbes. Laws that protect property are already a market regulation that determines how things are (not) to change hands. Once you admit that, how much other regulation you make is a matter of pragmatism and taste–you’re no longer entitled to your moral stand against it, not if you want to remain a capitalist.
“Unregulated market” is an oxymoron. Even with kids trading Pokemon cards, there is an implicit set of ground rules. When trade is no longer between people who have personal ties with one another, those rules need to be made explicit and enforceable. Otherwise coercion will supplant bargaining.
blauboad, you wrote that under the given scenario ‘the most powerful would take control and there would be nowhere to complain’.
Do you think that many right-wing commentators and politicians who call for a programme of large-scale deregulation, actually moralise and absolutize market principles as a cloak to cover their intention to retain or recover priviledge and maintain the status quo? A vehicle for their megalothymia?
Of course, that’s what they’re doing.
I was going to argue the same thing Blauboard did. Glad someone got there before me.
Well, being a close friend and/or relative to a few of them has led me to believe no, they’re just wrong in the ordinary kind of way. It’s an easy and romantic ideology, and has the same appeal as old-school Marxism or fundamentalist christianity. It’s a moralism, at its root. And moralists are quite often well meaning and self-sacrificing people. Not that that’s an excuse, those idealistic Saudis who destroyed a mile of New York and murdered 3000 people were very well-meaning and self-sacrificing, the blossom of youth and naivete–at least in terms of the fundamentalist Islam they believed. Like the poor suckers who really believed the Bolshevik–the Nazi–the Maoist propaganda. Absolutist moral stances in politics always have a dangerous edge.
However, in terms of public debate, the Ayn Rand-libertarian position is a pretty tiny contingent. The ordinary leftists–the ones without Kalishnikovs under their beds–really don’t argue against capitalism per se, nor do the righties argue against regulation per se. It’s all a matter of which regulations, on what, how much. Even Reagan or Thatcher’s deregulation was not a moral stance against laws, but attempts to encourage business investment. Insofar as those policies have had considerable successes, the Clinton-Blair left has conceded the necessity of business friendly policy. In a globalized world, governments cannot afford to tax and regulate business as heavily as they could during the cold war, because these businesses will just leave if it gets bad enough. Now, as a leftist head of state, are you serving your constituents by chasing investment away from your country?
The difference between left and right nowadays is a matter of degree, a difference over the precise means (how much to insulate the population or environment from market forces). Both, though, agree on the ends and the general means (more wealth through capitalism).
We are in a post-ideological age.
Ok, locally, in specific pieces of legislation or court decision or what have you, intentionally-scummy things go on, and often too. I’m talking on the macro level. Yes there are rightists like those you say, just as there are still populist demagogue types who would promise a Ferrari in every garage if it got them elected. I mean in big picture.
blauboad, you’re writing the exact responses I would give to my posts.
The politics of ideology are certainly no more, at least for now. There are still small yet significant ideological differences between political players, in some parts of Europe at least, though I think that this can be related to the following.
The politics of ideology have been replaced by the politics of identity. The effect of globalisation in allowing the values, ideas and symbols of the market to spread throughout the world, has been to provoke the conservation of identity and uniqueness.
Globalisation and its discontents are well-known, from propogating inequalities within societies (wider and local), to the desecration of developing countries cultures’ as the alien decandent Western market-led occupation reinforces its stronghold. I could go on. I could express these ideas with varying degrees of paranioa and blessing for the good things the growth of free trade can achieve for people. I am, however, becoming inclined towards thinking that globalisation is seemingly ‘out of control’. I say this, as I think the public debate regarding the positive and negative effects of a common global market is reaching few of the people it will affect. Too few people are taking part in this debate, which has people’s livelihood, culture and dignity at stake.
I think a more profound and pressing answer is needed to answer the question “how should markets be run?”, or more pertinently “how should markets be regulated?” What exactly should be foremost in the mind of government before answering this question?