7/04/2011

The continued irrational fear of a free market monopoly

There is a piece over on pcworld.com titled, "AT&T/T-Mobile: Why this New Monopoly is Bad for Consumers" that serves as a good example of the extremely common misunderstanding of monopolies. I think it is important to highlight some distinctions of the different types of monopolies that can exist and what one means by using the word, monopoly. I am going to posit that when the overwhelming majority of the time one refers to a monopoly they think of one giant firm whom has total dominance in their respective industry, and use this power to exploit the consumer. The irony of this is that in reality the only monopoly that has ever existed that behaves in such a manner is the government or government-created monopolies.

Thomas Dilorenzo and Dominick T. Armentano, drawing on the lessons of Ludwig Von Mises and Murray Rothbard, have both successfully demonstrated that the traditional education on monopolies (as taught by government-run schools no less!) is almost exactly backwards from reality. I highly recommend the works linked to above if one is not already familiar with this topic. Standard Oil is a great example of a monopoly that allegedly harmed consumers and emerged via the free market. Upon examining the evidence, we find that Standard Oil has reduced the price of kerosene from 30 cents to 6 cents at the height of their "monopolistic powers", and their market share was decreasing at the time Anti-Trust legislation was filed! Not exactly that scary image of an oil company charging outrageous prices for their product, at the expense of the helpless consumer, after all.

When you combine this flawed education of evil free market monopolies that plagued society before the benevolent government reluctantly accepted the power of regulator and antitrust enforcer to save the helpless consumer from annihilation, with the interaction with a real monopoly, it is not surprising to find most people support government breaking up perceived monopolies.

When I referred to a real monopoly, I am referring to interactions with the government in any capacity. Ironically, this is the type of monopoly that is harmful to the consumer, and whom will continue to thrive no matter what the consumer says or does, or how terrible the product they produce is. A few examples would include the DMV, Secretary of the State as it pertains to getting business licenses and so forth, the IRS, and on and on. In all of one's personal interactions with these agencies of a monopoly in the classic sense of existing in spite and directly exploiting the consumer, the people feel that exploitation and know it to be true. If you want to open a business you need to go to the local government office and apply for a license. How much is that license? Well it depends on what state you are in, type of business etc. But there is no choice here. There is only, "pay us this sum that we have declared, or your business will be shut down."

The DMV I think speaks for itself as a model of a monopoly that exists in direct defiance to the consumers' preferences. The IRS decides how much of your income they will take this year and if it so pleases them they can modify that amount to a greater or lower degree the next year. You have zero say in this process. That's to say nothing of the atrocious wait times at the various offices, the delay in handling of the paperwork, the "you need to wait in that line to fill out X form so you can come back in Y line to get the permit to be allowed to apply for the Z license" and so on.

So in a very real sense, people have a very good "feel" for what an exploitative monopoly is like. And not surprisingly, they don't like it at all! Couple this with decades of propaganda of how the free-market had many even worse monopolies such as Ma Bell, Standard Oil, etc. it is not surprising that one supports government destroying any business that poses the threat of reaching the dreaded monopoly status.

However, it is a tragic mistake to look towards the most destructive and powerful monopoly in all of human history, the government, as the entity which determines when and whom is deemed a monopoly and thus use their power to destroy the alleged monopoly. (If you want to talk about a monopoly, how about the agency that can use violence legally to order you around!) If we look at the article I mentioned by pcworld.com at the top of this piece, we see the author is calling for the merger between AT&T and T-Mobile to be stopped as such a merger would result in a monopoly and consumers would suffer. The irony to me is that he then cites the fact that the new AT&T and Verizon would then have a whopping 80% of the market share! Now there is no doubt that is enormous. However if your argument is that this will result in AT&T being a monopoly, its probably not the best tactic to add in the market share of their rival company, Verizon, when calculating their total market share. You know because, kind of by definition, the problem with monopolies (in theory) is that there are no alternative choices.

Furthermore the author even notes that there are several additional companies in existence, but all are too small to be of note. Well that's the nice thing about free market competition. It forces companies to behave in a consumer friendly manner. I can't imagine a better boon for these smaller cell phone competitors than for AT&T to unleash their mythical monopoly powers of abusing their customers. Seems like a dream scenario for the other 20% to gain a few extra points of the market share, eh?

There is something else in that article that I want to address now, the author writes:

What's the short term effect? Verizon Wireless, the carrier I use, has ended smartphone all-you-can-eat data plans, in favor of tiered data plans, much to the immense consternation of their clientele. Why make their clients unhappy, you might ask? Because they can.

Again ignoring the fact that the author is calling AT&T a monopoly while simultaneously referring to their competitor Verizon (which currently has more market share than AT&T, the alleged monopoly!) the above paragraph really taps into a popular sentiment of consumers. Namely, extremely successful companies impose their will on consumers. Now this is irritating to see. Private companies, like Verizon and Apple, exist and rise to power only because of how efficiently they meet their consumers needs. Put differently, they achieved such enormous success by improving the lives of virtually every person on the planet. What else can you call it when a person whom finds out they are rolling out a tiered data plan, responds with shocked indignation? I mean really how greedy are these bastards? You mean I can't use my wallet sized portable computer virtually anywhere on the planet to access and download an unlimited amount of information from the Internet? How come there is never any emphasize the other way? Like oh my god, my phone is more powerful than the most powerful consumer computer was a mere 10 years ago and I can take it anywhere and download an unlimited amount of data from an unlimited number of sources on planet earth for 99 bucks a month!!

Let's remember what and why these firms got so powerful in the first place. And it is not because they make their consumers unhappy, as the author suggests. Such a statement is not only absurd on its face, in reality, all of modern civilization has been built on the precise opposite. Firms making their consumers extremely happy, better than their competitors. I hope one takes pause at the suggestion that those companies whom succeed mightily in making our world richer, should be destroyed as their reward. Let's ponder what such a world would look like if taken to its logical conclusion. And if your imagination isn't up to the task, feel free to read up on the enormous success of communist Russia. No free market monopolies there, I promise you that!

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