Monopolies and Anti-Competitive Markets, Episode #25

Screen Shot 2016-04-21 at 1.01.28 PM   This week, Crash Course talks about monopolies and competition.  This episode was a mixed bag with plenty to comment on.  Let’s get to it:

Crash Course’s Episode Introduction

Before beginning each episode, the hosts of Crash Course give a quick introduction to the subject of this week’s video, followed by the opening credits.  This week’s introduction was a little confusing:

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Today we’re going to talk about monopolies! Which are terrible, illegal, and only serve to exploit helpless consumers, except when they’re delivering essential services that competitive free markets kind of fail to deliver.

So from this definition we can figure out that 1) monopolies would not occur in a free market and 2) monopolies are good for delivering essential services because free markets fail to provide them.  We’ve already talked about the concept of Market Failures in Episode 21.  In short, sometimes markets, despite being more efficient than the public sector, do not provide certain goods because governments already provide them for “free” (see: tax revenue).  For example, why would you pay for a more efficient private fire department when you’re already forced to pay for one?  The “free” public option distorts eliminates the incentive for entrepreneurs to enter the market.

The Good: Barriers to Entry

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The true power of a monopoly comes from its ability to keep competitors out of the market. Monopolies are able to erect obstacles that economists call barriers to entry.

Most economists would agree that the monopolies themselves cannot erect the barriers to entry;  existing barriers to entry are just a fact of the market.  However, governments can and do create barriers to entry, sometimes with influence from the monopolies.  Crash Course gives a great example of how this is done:

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Imagine a city where there are a limited number of licenses for food trucks, and I own all of them for my fleet of artisanal macaroni and cheese trucks. I also know the mayor, since he’s a big fan of artisanal macaroni and cheese. If I can convince the mayor to ban traditional push cart food vendors, with their shwarma and their bacon-wrapped hot dogs, I’ll have a monopoly on street food.  

I’m not increasing profit by producing more stuff. I’ve influenced government regulations in such a way that anyone who’s hungry, but doesn’t want to enter a building, has to buy food from me. This is sometimes called crony capitalism.

Crash Course’s example does not show the monopolies themselves creating barriers to entry for competitors, but rather using the power of the government regulation to crush competition.

The Bad: Freewheelin’ Monopolies

Monopolies can restrict output and charge higher prices without worrying about competitors. This is why most economists support anti-trust laws that promote competition and outlaw anticompetitive tactics.

This is the quick-and-easy justification for antitrust laws.  However, some schools of economic thought take issue with this.

These schools argue that as a company with monopoly power increases its prices (or restricts supply arbitrarily), the greater the incentive for a competitor to enter the market to provide the good for a lower price.  For example, if Google Search (which has a dominant market share) started charging $1 per search, it would encourage Bing, Yahoo, or a new competitor to move into that market.  This would apply to monopolies as well as oligopolies, so it does not matter how much market share a company has in the market, since there is always the threat of a new competitor entering, even if there are high barriers to entry.

In the above scenario, we are assuming that the companies are functioning in a free market, and that there are not any legal barriers to entry for the other companies.  If there is a law that there can only be so many search engine licenses, this would prevent new competitors from entering the market.

Examples of Bad Monopolistic Behavior