Is this a flaw in the free market?

[Knighted]

You could use that similar argument for Microsoft, saying that competition really does exist for them in the OS market in the form of Apple, etc. Hence, hurray! - they aren't monopolizing. But let's face it - when a company controls an enormously disproportionate amount of the market share, they may as well be considered a monopoly (and ready and willing to monopolize) for all intents and purposes. They control enough of the market to raise prices higher than they normally could and provide inferior quality compared to what might be available if competition was present and fierce. Likewise, you have situations where only two or three companies control nearly all of the market share, and they participate in collusion to keep other competitors out and increase their profit margins. They may as well be considered to be one giant monopoly, or oligopoly.

Actually, I think Microsoft is a good example. I don't know of any government intervention that has helped it succeed. Yet, if Microsoft decided to jack the price of its new operating system up from, say, $100 to $110, few people who already intend to purchase it are going to bat an eyelash about the price hike, because they are reliant on Windows. Meanwhile, Microsoft may have just increased its profit margins by 30% or more. (Pulling that number out of thin air, since who knows how much the actual input costs per unit are to create an OS)

 

[Number19]

You could use that similar argument for Microsoft, saying that competition really does exist for them in the OS market in the form of Apple, etc. Hence, hurray! - they aren't monopolizing. But let's face it - when a company controls an enormously disproportionate amount of the market share, they may as well be considered a monopoly (and ready and willing to monopolize) for all intents and purposes. They control enough of the market to raise prices higher than they normally could and provide inferior quality compared to what might be available if competition was present and fierce. Likewise, you have situations where only two or three companies control nearly all of the market share, and they participate in collusion to keep other competitors out and increase their profit margins. They may as well be considered to be one giant monopoly, or oligopoly.

Actually, I think Microsoft is a good example. I don't know of any government intervention that has helped it succeed. Yet, if Microsoft decided to jack the price of its new operating system up from, say, $100 to $110, few people who already intend to purchase it are going to bat an eyelash about the price hike, because they are reliant on Windows. Meanwhile, Microsoft may have just increased its profit margins by 30% or more. (Pulling that number out of thin air, since who knows how much the actual input costs per unit are to create an OS)

Microsoft is a pretty good example. People generally have liked the product and supported the company by purchasing the product. With Vista, there was a huge market backlash against what was perceived as a "bad" product and you saw Microsoft losing market share not only to Apple, but also to Linux, the open source OS.

People are "reliant" on Windows only so far as they are unwilling to move to and learn a new OS.

I am one of those who finally rebelled against Microsoft and insisted my latest computer come with the "old" XP OS and simultaneously installed Linux as a duel boot system. At some point in the future I'll be able to remove Windows completely.

 

[pdavis]

You could use that similar argument for Microsoft, saying that competition really does exist for them in the OS market in the form of Apple, etc. Hence, hurray! - they aren't monopolizing. But let's face it - when a company controls an enormously disproportionate amount of the market share, they may as well be considered a monopoly (and ready and willing to monopolize) for all intents and purposes. They control enough of the market to raise prices higher than they normally could and provide inferior quality compared to what might be available if competition was present and fierce. Likewise, you have situations where only two or three companies control nearly all of the market share, and they participate in collusion to keep other competitors out and increase their profit margins. They may as well be considered to be one giant monopoly, or oligopoly.

Actually, I think Microsoft is a good example. I don't know of any government intervention that has helped it succeed. Yet, if Microsoft decided to jack the price of its new operating system up from, say, $100 to $110, few people who already intend to purchase it are going to bat an eyelash about the price hike, because they are reliant on Windows. Meanwhile, Microsoft may have just increased its profit margins by 30% or more. (Pulling that number out of thin air, since who knows how much the actual input costs per unit are to create an OS)

Intellectual property.

 

[cheapseats]

The Sherman Antitrust Act (Sherman Act[1], July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7) was the first United States Federal statute to limit cartels and monopolies. It falls under antitrust law.

The Act provides: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal".[2] The Act also provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . . ]"[3] The Act put responsibility upon government attorneys and district courts to pursue and investigate trusts, companies and organizations suspected of violating the Act. The Clayton Act (1914) extended the right to sue under the antitrust laws to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws."[4]. Under the Clayton Act, private parties may sue in U.S. district court and should they prevail, they may be awarded treble damages and the cost of suit, including reasonable attorney's fees. [5]

http://en.wikipedia.org/wiki/Sherman_Antitrust_Act

 

[aravoth]

Well, I already did asked him a similar question, and he quickly named John D. Rockefeller's Standard Oil as an example, and how we needed to use anti-trust legislation to break them apart, since the poor and middle class were being pushed around by business tycoons that had more power than the government.

He's a little mislead about that I think. Pretty sure there was a loophole in the Sherman act or whatever it was, that allowed them to destroy competition the way they did.

And they never broke up the Company, or the Trust it formed. The Supreme court broke the trust apart yes, but it remained in the control of the origional shareholders.

So the government allowed the creation of a monopoly by restricting what companies could invest in, standard oil found a way around it, other companies did not, and they couldn't compete becuase of it, then when the government broke Standard oil up, they gave the pieces right back to the owners, who then went on to fix prices and screw over people like they do today. You know some of them today still. ExxonMobil, Chevron, ARCO, ConocoPhilips

Again, it all started with the idea that restricting what companies do creates competition, and obviously, it did the exact opposite.

 

[noxagol]

If another company is going to come into my area and undersell me below my cost, I would thank them to death because they just became my new supplier. I would go and buy them out of everything and resell it in my store for normal price, maybe even a little less. I now make more money because my costs are cut and they do nothing but lose money. Win win for me. Read the example in "The Politicaly Incorrect Guide to American History" by Thomas woods regarding the guy who made bromide.

 

[Dark Aerow]

I cant believe no one has mentioned this yet...

Predatory pricing is absurd for a few reasons....

A company successfully lowers prices and suffers losses for long enough to drive competitors out of business and then they raise prices...Now they are leaving room for competitors to break back into the market, their profits would be very short lived and once again they'd have to resort to putting prices extremely low again....

Now, lets say there is a particularly smart guy, he see's that the retailer is selling products for less than they are actually worth...so he buys up their invetories and Ebays them or waits for them to bring their prices back up and then resell them in his own store...I think you can see how badly that company would fail...

I encourage any company to come and sell goods below the market rate, it's like getting free stuff.

EDIT: Damnit, Noxagol beat me to it, probably some other guy did as well.

 

[forsmant]

Microsoft is becoming increasingly irrelevant and has lots of competition. Linux is used by many companies to run their servers, mac is dominating in the artsy community, and the internet is loaded with diffent browsers. Microsoft is not anywhere close to a monopoly. They have a large market share with their OS and office programs. If they raise the price too much, others will quickly take their market. Bill Gates purposely branched into other markets because he was aware that the OS market would eventually become more competitive.

Microsoft is a very succesful corporation but there is increasing competition of free software that is better than microsoft.

 

[Paulitician]

My friend told me that in a totally free market, monopolies reign supreme and can raise the prices and lower the qualities of goods. He explained it to me very simply.

"If a well established business enters your area, they can afford to temporarily lower their prices to the point in which the smaller competition cannot compete against it. After this big business takes a minor blow with extremely low prices, all of their competition has left. Now they are free to charge what they want and not provide the best quality they could possibly offer. If a smaller emerging business decides to enter the area during this 'era of high prices', the established business can just repeat the process and get rid of their competition."

He seems to have a point, but I am not educated enough in economics to refute his argument.

Does anyone on this message board have an answer to this?

That simply doesn't happen. One, the business that lowers their prices too low increase the risk of bankruptcy and losses of their profitability. Two, even if it were successful and chronic, wouldn't people catch on and just boycott the business entirely? It's not only prices that people respond to, but reputation as well. So either the business is satisfying consumers or it isn't, you can't have it both ways.

What I want to know is why people automatically assume that in a free market there are just monopolies. Where does this idea originate? I think people swallowed the Marxist kool-aid.

 

[Knighted]

That simply doesn't happen. One, the business that lowers their prices too low increase the risk of bankruptcy and losses of their profitability.

Wouldn't the bankruptcy risk be greater for the newly budding company trying to compete with the flush-with-cash megacorp, though? New companies tend to start with a large amount of debt, and if they're lucky enough to find investors, those investors expect a profit to be made in the near term. Large, well established companies also have the benefit of name brand awareness. If a consumer has to choose between a name brand they know and a no-name that is 10c cheaper, they will still go with the one they know and trust. Megacorp doesn't necessarily need to undercut the competition or offer identical prices to remain the leader. The prices just need to be comparable.

As for new companies coming along to compete once megacorp has driven the small business out of the industry, I think there would be major time lapses before that takes place. Products are not researched, developed, marketed, and produced all overnight. I'm guessing the average process tends to take years before a product actually arrives on store shelves.

 

[Fox McCloud]

I would also point out, that with Rockefeller (I do not know the full history and his association, or lack there-of, with the government), he didn't have a total monopoly; several people that wanted to bust his company up even knew this....one quoted, in particular that it didn't matter how much the price of oil had been lowered, and that even if a barrel of oil only cost 1 penny, he still wanted them broken up simply because they put others out of business.

it's a bad case of wanting competition, purely for the sake of competition.

 

[FreeMarketEconomy]

This is absolutely correct.

Without the Fed, companies would not be able to capitalize and wipe out competition.

There are some Ron Paul quotes where he talks about inflation caused by the Federal Reserve wiping out the poor and the middle class. This is why monopolies occur, because the "big guy" gets so much capitalization that our currency becomes inflated and hurts the people on the bottom.

The way the free market works is that when someone becomes too comfortable and is making a little too much money, somebody else who is willing to make less money (i.e. be more efficient) is willing to step in and perform the service. This cannot occur if savings are destroyed and we become a society that competes on capital alone.

??

 

[danberkeley]

My friend told me that in a totally free market, monopolies reign supreme and can raise the prices and lower the qualities of goods. He explained it to me very simply.

...

He seems to have a point, but I am not educated enough in economics to refute his argument.

Does anyone on this message board have an answer to this?

How the hell would he know? Ask him to name a free market monopoly. If he mentions Microsoft, tell him that Microsoft is not a monopoly by definition. Also, one reason why Microsoft made so much money was because the government, via intellectual property laws, copyright laws, and patent laws, gave Microsoft a monopoly. The government also subsidizes Microsoft when it buys MS Windows or MS Office for its computers.

Well, I already did asked him a similar question, and he quickly named John D. Rockefeller's Standard Oil as an example, and how we needed to use anti-trust legislation to break them apart, since the poor and middle class were being pushed around by business tycoons that had more power than the government.

Standard Oil was never a monopoly. Oil companies sprang up all over the place. Also, what harm did Standard Oil do? It reduced the price of oil for over 20 years until it was broken up the feds. It developed over 300 products derived from oil.

 

[RSLudlum]

"If a well established business enters your area, they can afford to temporarily lower their prices to the point in which the smaller competition cannot compete against it. After this big business takes a minor blow with extremely low prices, all of their competition has left. Now they are free to charge what they want and not provide the best quality they could possibly offer. If a smaller emerging business decides to enter the area during this 'era of high prices', the established business can just repeat the process and get rid of their competition."

There's a good debunking of this myth in Thomas Woods "Politically Incorrect Guide to American History" starting on pg.97 with a section entitled "The myth of 'predetory pricing'" and starts out almost word for word with your friends reply. Appearently there's no 'real world' historical example of a monopoly being able to pull this scenario off. And it is widely debunked in economic literature but then again I'm a little green on economic literature (only have read Hazlitt's "Economics in One Lesson" and with my daughter, Maybury's "Whatever Happened to Penny Candy"; next is "The Road to Serfdom" after I finish Bacevich's "The Limits of Power" and Wood's "Who Killed the Constitution")

 

[anaconda]

Does anyone on this message board have an answer to this?

It's called "predatory pricing" and I think it is not uncommon. Doesn't mean the market isn't "free." But I think it means that it's not a terribly competitive market. In "perfectly competitive " markets all producers must accept the same price, theoretically. There are a few different types of markets within a free market system, including near-perfect markets (like perhaps wheat), monopolies, oligopolies, etc.

On a grand scale, I heard that the the Saudis kept the price of oil low for several years in the 1980's and consequently bankrupted the Soviet Union, who had depended on revenue from their own oil production.

 

[NightOwl]

It's called "predatory pricing" and I think it is not uncommon. Doesn't mean the market isn't "free." But I think it means that it's not a terribly competitive market. In "perfectly competitive " markets all producers must accept the same price, theoretically. There are a few different types of markets within a free market system, including near-perfect markets (like perhaps wheat), monopolies, oligopolies, etc.

On a grand scale, I heard that the the Saudis kept the price of oil low for several years in the 1980's and consequently bankrupted the Soviet Union, who had depended on revenue from their own oil production.

That exception proves the rule. The Saudis did that because they had the force of government behind them. The question is whether this crazy strategy can be successfully pursued by a firm on the market, with no state privileges.

And yes, in fact this is extremely uncommon. It's a ludicrous proposition: let's lose money for an indefinite period of time so we can enjoy "monopoly" profits, which in turn will attract more competitors, which will make us have to lose money again while we drive them out, etc. Economist George Stigler said, "It would be embarrassing to encounter this argument in professional discourse."

 

[idiom]

Microsoft bailed out apple to avoid becoming a monopoly. Linux has crushed all the other Unix competition.
In a lot of markets Microsoft can just refuse to sell their software to PC makers who sell Linux or anything else that might compete.
Microsoft owns Apple so don't think of them as competition, in fact Apple is operating as the competition to Linux.
Novell, Sun, SGI, HP, NeXT, SCO, all pretty much crushed by Microsoft.

However, Microsoft is extremely competitive. They are busy trying to push Sony out of the gaming market at the moment with their XBox platform. However you can't blame them. If consumers cared about improved technology or interactivity they could buy into it easily. But they don't.

The CPU market on the other hand is a completely different story. The GPU market is also, both of these have huge swings in market share every year based on minor technological advantages.

 

[anaconda]

It's a ludicrous proposition: let's lose money for an indefinite period of time so we can enjoy "monopoly" profits, which in turn will attract more competitors, which will make us have to lose money again while we drive them out, etc. Economist George Stigl

Not ludicrous at all. A firm is valued by the present value of it's profit stream, which theoretically extends many many periods into the future. The present value of larger future increments of profit due to monopoly might easily dwarf the more immediate and temporary profit reduction from sacrifices in revenue. Would depend on the particular situation as to whether the firm in question would benefit. The specter of ruthless predatory pricing warfare would discourage new firms from entering the market in question.