 Chapter 5. Monopolies and Cartels The notion of a freed market, or an unhampered market, is a conception of a market operating quickly, spontaneously and unpredictably. It is a market where every person can negotiate the terms of every exchange he makes, and fully owns every good he intends to trade. It is a system of maximally free trade. Taxes, tariffs, quotas, price restrictions, mandated licensure, labour regulation and intellectual property never exist in this market. Everyone is free to copy and remix others' work, acquire cheaper materials, and produce a good in any industry. With the absence of aggressive barriers to entry into any industry, competition becomes fierce and unrelenting. Without occupational licensing, or securities regulations, or taxes by which to abide, even small discrepancies in customer satisfaction can allow newcomers to instantly topple an established giant. Operations that produced the same service indefinitely would be rare and unsuccessful. These dynamic markets organically emerge from the free, spontaneous interplay of people. This environment is vastly different from what exists today. Thus one must relieve himself of prejudice generated by his experience of the current reality, if he wishes to fully comprehend the contrasting merits of truly freed markets. The salient characteristic of such markets is the absence of systemic aggression. Such aggression is what enables consumer and worker exploitation and is indeed worthy of vigorous opposition. Surprisingly the most powerful and destructive perpetrator of systemic aggression is the state itself. To mask this ugly truth, the state has cleverly disguised itself as a protector of the weak, poor, indigent and disenfranchised. Moreover it claims to be a necessary, if not sufficient, institution to carry out this purported role. To complete this deception the state and its sympathisers have taken great strides to indict the unfettered market as the primary culprit of the commoner's tribulations, though the truth is quite the contrary. One manner in which the state inflicts great harm upon us is by its manipulation of competitive markets. Competition In a free market all businesses are competing for consumer patronage. Competition exists between all firms in every industry. For example one who sells ice cream competes not only with Ben and Jerry's but also with movie theatres, as one can always choose not to purchase ice cream and instead attend the movies. This is the true meaning of cost, the foregone next most favoured course of action. Should one choose to spend the afternoon having a Sunday at an ice cream parlor he cannot also spend it at the cinema. One cannot be at both places at the same time. Hence the price and attractiveness of the movie is relevant to one's decision when choosing to buy ice cream, not merely the price and attractiveness of the ice cream. There are two types of competition, active and potential. Active competition is the businesses or competitors that actually exist today. Potential competition on the other hand consists of those businesses or competitors which may manifest should a given business's services or products satisfy consumer demands less and less. Defining Monopoly There is much confusion over what constitutes a monopoly. A common definition of monopoly is a firm that is the single provider of a particular good or service. This definition however is useless for a number of reasons. Defining a monopoly as a single provider implies the smallest differentiation of a product or service could in turn bestow upon the creator a monopoly over its provision. For example Jackie may have a monopoly on purple polka dotted peppermints or Joe on magnolia flavoured popsicles. Even with regards to homogenous goods such as wheat one could still hold a monopoly on Robinson wheat and Joe could hold a monopoly on Joe wheat as the wheat produced could be differentiated by how it was grown, what fertilisers or nutrients were added etc. This definition of monopoly does not yield us any pertinent or useful economic information as it virtually renders everyone a monopolist. Nobody else can offer the unique labour contributions of other people, we are all monopolising our skill sets. The term monopoly itself evokes negative feelings but to what did the term monopoly originally refer? A monopoly originally meant an exclusive privilege to produce or sell a given product or service granted by the king. It was a privilege given to favoured producers or guilds for them to produce without any competition. Should any upstart break from the privilege the king's might would be summoned. Thus a monopoly is a creation of the state. Murray Rothbard explains quote monopoly is a grant of special privilege by the state reserving a certain area of production to one particular individual or group. Very into the field is prohibited to others and this prohibition is enforced by the gendarmes of the state. Using this definition consumers are justified in opposing monopolies as they imply the threat or use of aggression to uphold and maintain and therefore constitute a distortion of natural market dynamics. Without a statist apparatus of compulsion there could be no special grants given to certain businesses. Free entry is the default condition for all industries and as such monopolies created by the power of the state could not exist in a truly free market. Natural Monopoly In the words of Thomas Dilorenzo quote a natural monopoly a single service provider is said to occur when production technology such as relatively high fixed costs causes long run average total costs to decline as output expands. In such industries the theory goes a single producer will eventually be able to produce at a lower cost than any two other producers thereby creating a natural monopoly. Higher prices will result if more than one producer supplies the market. Some commonly cited examples of these natural monopolies include utility providers such as gas water or electricity companies. The concern regarding the manifestation of such monopolies is that they may charge exorbitant prices with economic impunity. Should they take advantage of their position however there always exists potential competition which may serve to temper their behaviour. For the sake of argument however let us assume that a single provider of a given good or service does arise. As the absence of aggressive barriers to entry into any industry is inherent in free markets the threat of a potential competitor will be much stronger relative to the case in which the state imposes artificial barriers and sometimes even prohibitions on competition in various industries. Let's entertain the worst case scenario. A water company decides to triple its rates without a corresponding increase in the cost of production. How do market participants respond? In the first place future potential customers would be deterred from moving to this town due to these exorbitant rates and current residents are incentivised to move elsewhere. This would of course result in a loss of business for the water company. Moreover the consumer will be incentivised to act more conservatively with his water. Perhaps husbands and wives will take showers together, decrease how often they water the lawn or install rainwater collectors in their backyard. How the conservation is accomplished is irrelevant. Less water will be used and a decrease in the usage of water translates into a decrease of revenue for the water company. Worse yet even if the water company decides to revert back to its original rates its customers may have grown fond of these water conservation efforts and continue their practices nonetheless thereby permanently lowering the income of this water company. However if the water company maintains these exorbitant prices despite the preceding events then a competing water company from the next town over may decide to move in and start operations if the benefit of an alternate provider outweighed the costs and inefficiencies of establishing redundant infrastructure. If in response to the presence of a new competitor the old water company decides to return to its lower rates the customers trust in it will have nevertheless been undermined. Customers may choose to switch over their services to the new water company even if it does charge marginally higher prices so long as it can demonstrate a long history of stable and predictable prices. Furthermore a common practice before developing any land in an area is to make contractual agreements with surrounding utility companies regarding fixed pricing. This type of reassurance would incentivize prospective developers to build homes and businesses on this land. Finally for a water or electric company to have achieved a monopoly status in the first place it would have first been required to gain the trust of their customers and to have provided a more satisfying service than their actual or potential competitors. The likelihood of this company fundamentally changing business practices that made it successful in the first place is relatively low. This is all of course speculative to some degree but hopefully the hypothetical may demonstrate the means by which men and women in the market may effectively deter, prevent and mitigate all activity that is harmful to the consumer. This same line of reasoning may be applied to any other firm that enjoys a large share of a given industry cartels. A cartel is a group of individual firms in like industries which decide to coordinate their practices as a means to maximize profits. These coordinating efforts can take the form of setting production quotas or fixing prices. From this definition one may surmise a few inherent weaknesses of a cartel and why such an arrangement if intended to secure extra profit by maintaining prices above the market rate is almost assured to be temporary and tenuous in a purely free market. The first and most obvious complication in any cartel is determining unanimously amongst the individual members exactly where the prices for their goods or services should be set and or how much each member firm should be permitted to produce. Of course the more efficient members are likely to be the most uneasy about such an arrangement as they would likely resist any restrictions on their own production for the sake of the less efficient member firms. Thus at the soonest feasible opportunity it is likely that these more efficient members will emancipate themselves from the cartel. Further under such an arrangement all the members will be tempted to cheat by either lowering their agreed upon prices or increasing their agreed upon production as a means to secure a larger share of the market outside of officially established lines. Finally even assuming a cartel is able to successfully coordinate the actions of its members and to reconcile all of their disparate interests there would still be the issue of potential outside competition. The main purpose of a cartel is to coordinate with other firms in the same industry so as to generate greater revenue for their services than they could otherwise earn. However the higher the prices or the lower the production limit the cartel sets for its members the more vulnerable the cartel becomes to outside competition undercutting the cartels prices and taking away its valuable customers. The difficulties of coordinating efforts among independent firms combined with the potential for outside competition renders the consumer unfriendly cartel an unlikely market arrangement. It is important to remember that cartels today do operate outside market forces in an exploitative capacity but they are only able to do so by purchasing and acquiring influence over the state. Only through the application of state mandated price ceilings, price floors, regulations, occupational licensure, minimum wages, taxes and even explicit grants of monopoly over certain industries can a given firm or cartel exploit the consumer. Exploitation of the consumer only exists in this arrangement because the state is able to insulate a given business from market forces by legislation. Conversely in a purely free market the survival of these businesses would be predicated on how well they could satisfy the desires of the consumer relative to existing and potential competition. Where there is choice and an absence of coercive barriers to entry there can be no exploitation. Finally there are no rights violations associated with cartelisation as it merely represents the pooling of resources on an intercompany scale. Having property rights over resources entails the right to pool them with the resources of others in a voluntary manner. Cartel production restriction. One danger often pointed out as being possible in an unfettered market is the act of a cartel restricting production as a means to keep the price of a given good higher than it would otherwise be. The critics of this method are correct insofar as the purpose is concerned to maximise profits. However this is no different than any other market activity. Take rice for example. If a cartel of rice producers in combination creates 200 tons of rice in a year but comes to learn that 100 tons would yield the greatest profit then it will naturally begin to release only 100 tons of rice into the market. This sort of collusion is deemed as predatory by many mainstream economists for had the cartel released all 200 tons presumably the largest supply would have translated into lower prices per unit for the consumer leaving him ostensibly better off than had the cartel restricted their production to 100 tons. If 100 tons is more profitable the rice producers will decrease their production in the future accordingly. The materials and all labour required to produce 200 tons will exceed the materials and all labour required to make 100 tons. The excess resources will now be freed up and available for use in the production of other demanded goods or services. The influx of these additional resources being funneled into more valuable sectors of the economy all other things equal will cause a rise in the overall standard of living. Therefore on net there is no restriction of production. In fact the act of the rice cartel reducing its overall output will have resulted in a greater net production of wealth as this would permit the excess resources to be allocated to more profitable ends. This same line of reasoning is equally applicable to a single large firm which decides to lower its production. Potential benefits of mergers or catalysation. It should be noted that large firms or cartels in freed markets are likely to yield a positive effect for the consumer otherwise they would either dissolve or be out competed by more agile newcomers. One major benefit to consumers is due to economies of scale. This is the principle that suggests that with more resources and capital goods at one's disposal the easier it becomes to maximise the efficiency of productive output. This is true for a number of reasons. The first of which is the possibility of bulk purchasing. Typically buying in bulk yields a lower price per unit of whatever it is being bought because the seller of said bulk good is typically happier with a larger guaranteed purchase at a lower price. Then he is with taking the risk and the extra time of making more sales of smaller quantities at higher prices. Moreover the larger the firm the more it is able to benefit from the division of labour, specialised machinery, lower overhead costs per unit of output, advertising, access to cheaper credit, established lines of transportation and logistics etc. Further with access to greater amounts of capital a cartel or recently merged firm can afford to invest in more productive capital goods which were once prohibitively expensive. Once this firm is able to enjoy the benefits of greater production afforded by the newly acquired capital goods the employees will in turn be able to produce more with the same amount of resources increasing their labour productivity. This would create the tendency to command higher wages for employees and or to offer the consumer lower prices without negatively affecting one's profit margin. The difficulty for any one person to enter into a given industry is diminished in so far as the current providers are not sufficiently satisfying consumer demands by either producing faulty or undesired products and services or by charging prices that are too high. If this is the case there will be a large demand for an alternative. If the number of unsatisfied consumers becomes substantial it would become clear that an alternate provider could make a great deal of money and potentially take many customers from the incompetent ossified firms. To overcome the difficulties of breaking into established markets an entrepreneur who has a spectacular and compelling business model may seek venture capital. There are many wealthy investors who are looking for ways to earn a positive yield as opposed to having financial capital sit idle. In such an environment investing in an entrepreneur with a solid business plan could prove to be an enticing and lucrative option. Alternatively an entrepreneur may take out loans or sell shares of his company as a means to raise the funds required for its creation. In many cases entrepreneurs are competing with the current incompetent firm or cartel in the same industry. However it may very well be the case that the overall dissatisfaction of how this product or services being offered would generate an impetus for someone to invent a technology that renders it obsolete. For instance the invention of a hydro powered hovercar may render fossil fuel based automobiles obsolete due to lower maintenance costs, cheaper fuel and shorter transit times. Technological developments however do not necessarily have to be in the form of different products which make the former obsolete. They could very well be developments that permit alternate means of production which prove to be far cheaper. There are truly a myriad of ways in which one may take on an incompetent firm in a capital intensive industry. In a free market where there are no aggressive barriers to entry in any industry the threat of economic exploitation via business practices is virtually nil. In fact it is complete economic liberty that is the greatest defence against exploitation and predation. Take for example the notion of predatory price cutting. The idea that any form of price cutting could be predatory is absurd from the start because it implies that some sort of injustice can be committed by a firm deciding to lower the prices of its goods or services relative to its competitors. The owner of any given good or the provider of any service has a right to charge whatever price he wants for whatever it is he is selling and likewise the consumer has the right to either purchase or not purchase whatever is being sold. The common claim is that a large firm will take advantage of its economies of scale and lower its prices to a level that its smaller competitors cannot afford to maintain thereby running them out of business. This cutthroat firm will then proceed to raise its own prices to exorbitant levels that were previously tempered by the presence of competitive forces. Without state support of monopoly privileges however there is always competition whether between firms in other industries or from potential future competition. It is never possible to price one's goods or services without taking into consideration at the very least the potential of future competing producers being attracted by higher selling prices. Furthermore the smaller businesses who can't afford to sell their goods or services at such a low price even temporarily could cease operations and buy up its competitors now cheap goods. A smaller firm could then sit on the inventory until the larger firm decides to raise its prices back to normal levels thus defeating the purpose of starving the small firms. This predatory price cutting would also allow the consumer at least temporarily to enjoy a discount bonanza. The money the consumer saves could then be used to satisfy various other desires increasing his standard of living. This large predatory firm would in the long run be shooting itself in the foot by using such a foolish method to attempt to secure a greater share of the market. Moreover even if the firm is able to offer these prices without suffering any losses then so much the better. The other businesses which fail and liquidate will free up resources to be used by more efficient firms in either the same or a different industry. Once again the result of this would be an overall increase in the standard of living for all consumers. The state as ultimate monopoly. Anyone who would advocate for state intervention as a means to break up and prevent the formation of monopolies whether defined as single provider or exclusive privilege would be caught in a contradiction as the state itself is the greatest and most exploitative monopoly of all. The state has a legal monopoly on the right to use aggression against others in the form of taxation and compulsory edicts legislation. Not only must customers pay into its operation without regard to their consent but they must surrender to the rules its internal processes determine at all times. Additionally the state has a monopoly on the provision of security and has anointed itself as the ultimate arbiter in all conflicts including those conflicts which involve its own agents. It maintains this monopoly by the threat and application of aggressive force and thus meets Rothbard's criteria for monopoly. Agents of the state are motivated by profit and self-interest just like any given businessman. However what separates the businessman from the state is that the former has to persuade you to pay for whatever is being offered whereas the latter demands its citizens pay for its services and unilaterally alters the price and scope of the services offered. Moreover if payment towards an institution the state is guaranteed then its services will tend to diminish in quality and increase in cost. The only thing that tempers the power of the state is its need to maintain perceived legitimacy. Thus if one's aim is to eliminate systemic monopoly exploitation then the perceived legitimacy of the state must be undermined. Various means may be employed to this end including widespread education, social outreach, peaceful parenting, the development of the counter-economy, the use of strong encryption and the formation of free enclaves outside the grip of the state.