Society must understand that “natural monopoly” is not the economic boogeyman it seems to think it is. Far too many individuals (and politically motivated groups, as well) are pushing the narrative that government intervention in the economy is essential to prevent predacious corporations from taking over entire industries, and using their monopoly power to financially harm consumers indefinitely thereafter.
To make such a claim is to deny basic economic principles, evidenced both logically through theoretical frameworks as well as historically through past examples of attempted monopolization. In fact, propagators of this falsehood often ignore the fact that it is governments who create monopolies, oftentimes at the expense of the very consumers who fund their maintenance through the taxes they pay.
“Regulation may be justified where uncompetitive market structures or anti-competitive conduct lead to inefficient outcomes in the economy. This may occur when there is a monopoly, or a small number of sellers can limit supply in the absence of substitutes or maintain prices higher than would occur in a competitive market.”
This notion, coming straight from the Australian government themselves, is a glaring example of the economic illiteracy plaguing the minds – and pockets – of society.
Are monopolies possible in a free market?
The most principled economists largely agree that harmful free-market monopolies simply cannot occur. Thomas DiLorenzo summarizes this economic principle as follows: “The enduring forces of competition — including potential competition — will render free-market monopoly an impossibility.”
Regardless, many people fervently defend this fabrication. Claims of free market monopolies potentially arising are spouted relentlessly at advocates of free markets, and are often upheld despite elaboration to the contrary. Such claims are especially ironic because the solution they pose to this non-issue – government intervention – oftentimes results in the very outcome they intend to prevent in the first place.
Mike Holly explains: “For more than three centuries, most of America has aimlessly suffered through disguised, evolving and perverse forms of authoritarian economies created with government policies favoring monopolies and ineffective regulation: mercantilism before 1900, then socialism until the 1970s, and corporatism since.”
Why this misconception continues to stand against all reason remains unapparent, but only one conclusion is for certain: harmful monopolies cannot form under a free market.
Competition “regulates“ the actions of producers, so harmful monopolies cannot form amongst them like many are led to believe.
Franklin Giddings elaborates: “…competition in some form is a permanent economic process. … Therefore, when market competition seems to have been suppressed, we should inquire what has become of the forces by which it was generated. We should inquire, further, to what degree market competition actually is suppressed or converted into other forms.”
Competition is a fluid constant within the free market. Even when it seems as if a monopoly is beginning to form, the threat of competition – of some market share being taken back from the monopolist – lingers. This implied threat, so to speak, prevents potential monopolists from acting erratically or to great detriment of consumers.
How market forces prevent harmful monopolies
Even if a full monopoly is theoretically established, it can only be maintained through offering better and/or cheaper goods/services compared to potential competitors. Any deviance from this, or in other words any “harmful” behavior, is sure to be met with competition from entrepreneurs seeking a share of the market in that particular industry or an industry that could substitute it.
Chase Rachels further explains the role of competition: “…even small discrepancies in customer satisfaction can allow newcomers to instantly topple an established giant.”
With the constant threat of competition, even an established monopolist is discouraged from partaking in harmful practices. Gaining an understanding of the law of competition makes obvious the fact that a harmful monopoly forming under a free market is nothing more than a whimsical falsity.
Even the commonly cited examples of historical free market monopolies serve as evidence that they cannot easily become predatory towards consumers. John D. Rockefeller’s Standard Oil Company nearly achieved a monopoly before competitors eventually swiped away some of their market share, and it wasn’t until after this occurred that the government began enforcing antitrust laws to further hinder Standard Oil and other similar companies with significant shares of the market.
David Weinberger explains Rockefeller’s undergoings: “By 1874, his share of the petroleum market jumped to 25 percent, and by 1880 it skyrocketed to about 85 percent. Meanwhile, the price of oil plummeted from 30 cents per gallon in 1869 to eight cents in 1885. Put simply, Rockefeller increased production and lowered prices while creating thousands of well-paid jobs along the way.”
While Standard Oil was advancing toward a monopoly, they were only able to do so by creating value for both the consumers of their products and their employees. There is absolutely no logical reason to suspect this trend would not continue as Standard Oil’s market share continued to increase. Weinberger explains further:
“Standard Oil did precisely the opposite of what monopoly theory maintains—it reduced rather than raised prices, it increased rather than cut production, it lost rather than ‘controlled’ market share, and it paid its employees more rather than less than its competitors—yet the theory that Standard Oil engaged in ‘predatory practices’ and ‘exploited’ consumers has prevailed in our history books.”
Partaking in such consumer and worker friendly business practices is precisely the opposite outcome of the alleged harmful monopoly Standard Oil is accused of achieving.
Weinberger also speaks to the effect of antitrust on Standard Oil’s market share: “Furthermore, and also in contradiction to monopoly theory, Standard Oil’s share of the market had declined from close to 90 percent in the late 1800s to about 65 percent at the time of the court’s ruling.”
This proves that antitrust was irrelevant to the loss of market share held by Standard Oil, as the competitive forces of the market had already begun to leech into the playing field, once again to the advantage of consumers.
There isn’t a mere shred of evidence to suggest any other future threat of monopolization would be handled by the workings of the market any differently than this one, as when operating under a free market, all businesses are still ultimately subject to the law of competition. Historically, this law has always prevailed – and will always continue to – because it is axiomatic in the nature of the market.
For more content on monopolies, be sure to check out the video below:
What causes harmful monopolies?
It is government intervention in the economy – not the competitive forces of the free market – that often results in harmful monopolization. Mike Holly speaks on this: “Today, the eight major industrial sectors, controlling about 92 percent of the economy (GDP), are dominated by special interests receiving preferential political policies.”
The government dip their hands into nearly every sector of the economy, oftentimes creating and upholding harmful monopolies in the process. One particularly glaring example of this is certificate-of-need laws (CON) laws.
Matthew D. Mitchell describes their effect as follows: “While the original hope was that CON laws would restrain healthcare costs, increase healthcare quality, and improve access to care for poor and underserved communities, a large body of academic research suggests that CON laws have instead limited access, degraded quality, and increased cost.”
CON laws inevitably trend toward the monopolization of hospitals in a region. By artificially restricting the supply of hospitals and hospital equipment, the government has effectively granted existing hospitals a monopoly over the provision of medical services.
If hospitals were allowed to compete freely, prices would lower as quality is made higher, as is naturally the case when firms are forced to compete in order to attain a profit rather than receive it in the form of a handout from the state.
Another flagrant example of harmful government monopolization is drug patent laws. This is explored by Benjamin Williams, who states: “In the US, monopoly pricing through patents restricts access to life-saving drugs for millions of lower-income individuals, and individual property owners are prevented from utilizing their own property and skills to offer the same drugs at competitive prices.”
This is not only a financially harmful monopoly, but a physically harmful one as well, as it allows drug companies to charge exorbitant prices without fear of being undercut by a competitor. This once again goes to show that it is not free markets that are the problem; rather they are the solution to harmful government monopolization.
Understanding that it is governments – not free markets – that create harmful monopolies is monumentally essential in order to harbor a comprehension of basic economic principles.
Addressing the predatory pricing myth
Interventionist proponents of the free market monopoly theory often cite so-called “predatory pricing” as a means by which harmful natural monopolies might form, but this is nothing more than an asinine farce. This position is summarized by Thomas J. DiLorenzo in his article titled “The Myth of Predatory Pricing” as follows:
“The predatory pricing argument is very simple. The predatory firm first lowers its price until it is below the average cost of its competitors. The competitors must then lower their prices below average cost, thereby losing money on each unit sold. If they fail to cut their prices, they will lose virtually all of their market share; if they do cut their prices, they will eventually go bankrupt. After the competition has been forced out of the market, the predatory firm raises its price, compensating itself for the money it lost while it was engaged in predatory pricing, and earns monopoly profits forever after.”
While it appears to make a bit of sense on paper, this position bears no merit when analyzed under even the smallest degree of scrutiny. First, no company could possibly know how long they would need to take losses in order to bankrupt all of their competition, so this would be a highly risky move that is likely to – ironically – result in the bankruptcy of the predatory firm.
Next, what is to stop competition from returning to the market the moment the predatory firm begins to raise prices again? The answer is nothing. Another simple solution to overcome this absurd business strategy would be for a competing firm to simply buy up all of the products of the predatory firm at their reduced cost and then sell them at or above the market rate for a profit.
All of these solutions are easily deduced using only a shred of logical analysis. DiLorenzo explains further:
“The theory of predatory pricing has always seemed to have a grain of truth to it–at least to noneconomists–but research over the past 35 years has shown that predatory pricing as a strategy for monopolizing an industry is irrational, that there has never been a single clear-cut example of a monopoly created by so-called predatory pricing, and that claims of predatory pricing are typically made by competitors who are either unwilling or unable to cut their own prices.”
The evidence, both logically deduced through knowledge of economic principles as well as historically through past attempts at predatory pricing, is heavily stacked against the proponents of this idea. While it can be attempted, there is not a morsel of evidence to suggest predatory pricing could ever realistically lead to a monopoly that harms consumers, as it is only government, not free markets, that can create harmful monopolies.
Government intervention creates harmful monopolies, while competition disallows harmful monopolies from forming under a free market. This is the essential truth of the law of competition, which is precisely the reason monopolies are unable to harm consumers in a free market. This is further evidenced through historical examples like Standard Oil Company, which actually serves to further prove free market monopolies cannot do harm, rather they oftentimes benefit consumers in their – alleged – attempts to monopolize.
Only governments can be responsible for the creation of harmful monopolies due their tendency toward interventionism, as is proven through their enforcement of policies such as CON laws and drug patents, whereas a healthy dose of competition would undoubtedly reverse the harmful effects of these monopolistic policies. Counterarguments (such as the claim that predatory pricing will allow for harmful monopolies to arise) are easily debunked through an explanation of the basic economic principle of competition.
Understanding this principle is crucial to understanding economics as a whole. Without grasping the implications of the concepts backing these conclusions, which in this instance is competition, one cannot hope to articulate an argument against free markets.
Sound economic education is crucial to harboring a society with the tools needed to succeed. Without it, harmful policies are bound to infect the lives of all participants in the economy, ultimately resulting in economic ruin if taken to a great enough extreme. For the sake of society’s future, it is imperative that economic cognisance is fostered and fallacious conspiracies are put to rest.
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This article was originally published on Speak Freely, the European Students For Liberty blog.
This piece solely expresses the opinion of the author and not necessarily the organization as a whole. Students For Liberty is committed to facilitating a broad dialogue for liberty, representing a variety of opinions.