There are few words in the English language with more negative connotation than “monopoly”. The word itself invokes images of greedy businessmen, ever eager to raise their prices to squeeze every last dollar of profit out of the consumer. Never a thought given to the workers or the common man, but only to his own hoard of wealth. The famous board game of the same name has only served to reinforce these feelings of anathema towards monopolists.
The general public certainly has no affection for monopolists, but how have economists view the topic of monopoly?
Economists have had their own reactions to the problem of monopoly. Mainstream/Neoclassical economics views monopoly as a problem that occurs on markets which the government can step in to solve. Many laissez-faire inclined economists have agreed that monopoly is a problem, but one that occurs very rarely on markets, and thus not an argument against free enterprise.
The core problem itself was never argued. The existence of monopolies was always assumed. It was not until Murray Rothbard’s seminal economics treatise, Man, Economy, and State that the question of monopoly itself was directly challenged. It would be his arguments against the problem of monopoly that would influence the discussion of monopoly going forward, especially in the Austrian School of Economics.
The Neoclassical/Mainstream view of monopoly is fairly simple. Under normal market conditions, the competitive price prevails. Firms cannot bring their prices up too high because they know that consumers will just patronage other stores. Thus, entrepreneurs keep their prices at the competitive level, as long as there are other businesses that consumers could buy goods from.
If we have a situation where there is only one business, that is where the problem arises. Because the single businessman knows that consumers have no choice but to buy his product if they wish to buy the good at all, he will raise his price above the competitive price that would prevail on a normal market to a higher monopoly price. The monopolist then enjoys his higher profit margins, as the consumers have no choice but to pay the higher prices if they wish to buy the good at all.
In Chapter 10 of “Man, Economy, and State”, Rothbard challenges this model. He sets out a scenario where an entrepreneur supplies a certain amount of a good, which is sold at a market price because of the demand for those goods. This is a standard supply/demand model. Rothbard then asks of the model:
“Is the market price a ‘competitive price’ or a ‘monopoly price’? The answer is that there is no way of knowing. Contrary to the assumptions of the theory, there is no “competitive price which is clearly established somewhere that we may OP [The market price in the model] with.” (Rothbard 689)
Rothbard goes on the explain in the next paragraph:
“Suppose that, after having produced 0S [The amount of the good that the producer supplies in the model], the producer decides that he will make more money if he produces less of the good in the next period. Is the higher price to be gained from such a cutback necessarily a ‘monopoly price’? Why could it not just as well be a movement from a subcompetitive price to a competitive price?…For there is no criterion that will determine whether or not he is moving from a price below the alleged competitive price or moving above this price.” (Rothbard 690)
Rothbard is arguing that the entire dichotomy between a “competitive price” on one hand and a “monopoly price” on the other is untenable. Entrepreneurs are always looking to maximize their profits. This is true in all areas of business and at all times, including when there is only one seller on the market. However, it does not mean that this lone entrepreneur will be selling his goods at a price higher than would have prevailed even if there were 1,000 producers.
The Neoclassical model is assuming that once all firms but one has exited the market, this firm will take advantage of its monopolist position and increase its prices. However, this relies on us having knowledge of a ‘competitive’ price that existed as the market price before the monopolist cornered the market. However, conditions are always changing on markets. The factors affecting the demand and supply of a good may change from one day to the next.
Thus, as Rothbard points out, we cannot simply assume that just because a monopolist raises his prices that he is indulging himself in his monopoly privilege. Perhaps he is just responding to an increased demand or scarcity of supply. Because conditions are always changing, we do not know what the “competitive” price would have been versus what the “monopolist” price is now. It is altogether possible that they would have been two different market prices, but also possible that they are the same price!
There is no way for us to distinguish between the “monopoly” price on one hand and the “competitive” price on another. There is only one price, the market price.
The Neoclassical approach also takes an unwarrantedly deterministic view of market phenomena. It is not necessary that a market with a single firm would see an increase in price. Entrepreneurs are aware of the fact that if prices are raised, that leaves room for unwanted competition to enter the market and siphon away customers.
The result of these two flaws in the Neoclassical analysis is that we can’t say if a “monopolist” will indulge himself by raising prices and creating a “monopoly price”, and we cannot point to the market price to indulge any information about competitive prices because we have no idea what the competitive price is! The only price we can see and know is the market price!
However, Rothbard does not throw out the concept of monopoly completely. For Rothbard, the only true definition of a monopoly is a monopoly created by the state. Rothbard states:
“Monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group. Entry into the field is prohibited to others and is enforced by the gendarmes of the state.” (Rothbard 669)
Rothbard also sees this definition of monopoly as being the original definition, citing Lord Coke, the English 17 thcentury legal theorist and jurist.
Rothbard’s critique of the Neoclassical analysis was a breakthrough in monopoly theory. Up to the publication of “Man, Economy, and State”, almost every economist, including some of the staunchest supporters of the free market, accepted the Neoclassical paradigm of monopoly theory. Rothbard broke out of that paradigm and showed the flaws in its analysis.
While all of this may seem to be no more than high-minded intellectual debates, it has a real impact on our economic realities. Discussions about monopolies and how to regulate them, mostly surrounding large tech companies, has now been thrust back into the public forum. The economic discussions of monopolies is not far removed from daily life, but rather, an important issue with important ramifications.
As with all other issues, it is important that our understanding of monopolies comes from sound economic theory. Bad economic theory leads to bad economic policy, which leads to bad economic outcomes. If we wish to avoid these outcomes, our understanding of economics must be sound.
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Originally published at https://www.thejwrich.com on September 17, 2020.
