The Liberty Papers

Okay, we’ve had an ongoing discussion here at the Liberty Papers about monopolies, markets and Microsoft. The position presented on one side, a position taken by many libertarians and libertarian-conservatives, is that monopolies that are not directly created by government fiat are okay and we shouldn’t see them as bad. They are, in this line of thinking, natural and arise out of very good business practices and market forces. I’m going to argue that this is not the case and that all monopolies, of whatever origin, should be viewed with suspicion and distrust by those who describe themselves as libertarians, classic liberals, anarcho-capitalists, etc. There are, essentially, five types of monopolies.

1. The government created, or legal monopoly. AT&T was a legal monopoly, as are the police and fire departments in most cities. When the government directly intervenes and legally creates a market where only one competitor is allowed, that is a legal monopoly.
2. Natural monopolies are ones that arise because economies of scale, economic efficiencies and capital costs for competitors are such that one one competitor is able to satisfy the demands of the market. In a perfect free market this is impossible.
3. Monopolistic competition occurs when a single competitor in the market is powerful enough to act as a de facto monopoly. For example, at its height, Standard Oil controlled 64% of the oil market although there were more than 100 competitors in the market. Microsoft, today, is a monopolistic competition with control of 90% of the PC operating system market and more than 90% of the desktop office suite market. Companies in this position are able to take actions to maintain their position that a non-monopolistic competitor could not.
4. Coercive monopolies occur when competitors use activities that violate the principles of free market. Coercion is aimed at hiding information from the market or influencing consumers and competitors in order to maintain a dominant position in the market. It is often difficult to distinguish between good business practices and coercive practices.
5. Local monopolies exist when only one resource for a specific product exists in a given area, but not within the market as a whole. For example (and I’ll discuss it further down), Starbucks is a local monopoly at the Sacramento International Airport.

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I’m reading The Undercover Economist by Tim Harford, as I mentioned over at Eric’s Grumbles yesterday. The interesting thing, and Harford makes a compelling case for it, is that scarcity is the driving factor in all markets. If the cost of a product is high, yet it seems like the cost to produce it is low, look for the scarcity in the market, whether natural or artificial. The more scarcity, the higher the price that the consumer will pay, regardless of the production cost.

For example, suppose there were some sort of boundary around a city that would prevent the city from growing. As the number of people seeking to rent/own property in the city increased, the scarcity of the land would also, because the city couldn’t acquire more land. The landlord may have bought the land for $1,000 and be able to sell it for $10,000, for example, because there are more people who want the land than there are pieces of land to sell. In the real world, London has a so-called Green Belt around the entire city that acts as a boundary to the city’s growth. It also has the highest commercial and residential rents in the world, higher than Tokyo, San Francisco, Hong Kong and Manhattan, even though all four of those cities have natural barriers causing scarcity.

Scarcity of a resource, whether that resource is buyers or sellers, drives the cost. But so does the marginal value. That is, if it costs more to acquire the resource than it would cost to create it yourself, then buying the resource is not worthwhile. The example used in the book is farmland. If there is a lot of undeveloped land and only a few farmers, the rent will be low. The resource is not scarce and the marginal value is very low. If there is a lot of farmers and no undeveloped land, the rent will be high. The resource scarcity is now reversed and the marginal value is high.

Why bring all of this up? Well, in the debate over whether Microsoft is a monopoly and whether that is good or bad, I mentioned scarcity and was asked what that had to do with anything since we clearly don’t have a scarcity of operating systems. Since there are a multitude of operating systems and, comparatively, not that many buyers, the buyers should be able to drive the price down. They are scarce, not the resource. However, Microsoft and the OEM’s (Dell, Compaq, etc.) created artificial scarcity, so that there were fewer operating system choices for the same number of customers. At this point I’m not arguing whether this is good or bad. Just pointing out why the operating system market is artificial.