Moms Monopoly, Part III

Sam: Mom, I’m going to ask you one last tricky question about economics. Can you explain about competition and antitrust laws? Why is the government opposed to trust?

Mom: It’s not trust in the sense of relying on someone’s faithfulness or honesty. A trust in this definition is like a conspiracy to control an industry and create a monopoly.

Sam: Oh! What’s a monopoly?

Mom: First, you have to think about the free market system we learned about earlier. In a free market, buyers and sellers make lots of transactions. Prices, supply, and demand conditions interact and adjust themselves naturally according to the market expressions of people’s changing wants, what the firms offer, and many other variables.

Some economists, however, think that for the free market system to work right, things have to stay perfectly balanced. They believe, in essence, that no firm should do better than its competitors and start to get bigger and more powerful. They want all firms to remain more or less equal in terms of their share of the market for their respective industries. This is called a perfect competition model.

But nothing is perfect in the real world, and when a firm becomes larger and stronger than the others in its industry, it’s said to have a monopoly. There are various definitions of monopoly, but they all have to do with having a large share of the market.

Take hamburgers for an example. If Hallie’s Hamburgers got really popular and the H.H. Company made a lot of money, maybe H.H. would buy McDonald’s, Roy Rogers, Burger King, and Hardees. Then H.H. would be so big, it supposedly could control the price and supply of hamburgers to benefit just the H.H. Company. Since only little comer hamburger stands would now be competing with H.H., some economists believe that H.H. could wipe out these last competitors by lowering prices temporarily. After wiping out all competition, H.H. could then raise the price of hamburgers sky-high, limit the number available, pay hamburger cooks poorly, and even pay beef farmers poor prices.

That’s the fearful picture of monopolies which gave rise to antitrust laws. Some people think a free market economy always turns into a nest of evil monopolies and has to be regulated by government. In fact, there’s a big statue in Washington representing the idea of rampant markets being controlled by a benevolent government.

Sam: A statue about that?

Mom: Yes. In front of the Federal Trade Commission building on Pennsylvania Avenue, there’s a statue of two huge, muscular draft horses straining forward, and a giant nude man reining them in. The title of the statue might well be “Man Restraining Trade.” Sam: Whoa. Mum: Exactly.

Sam: But back to Hallie’s Hamburgers. If the H.H. Company got so mean and made their hamburgers so expensive, people would make their own hamburgers at home or switch to tunaburgers or hot dogs! Also, people would start to hate Hallie’s and might boycott them.

Mom: You’re right. The existence of substitutes is one of the arguments against the theory of market failure, which is what some people think even a partial monopoly represents. In almost every case there’s at least one alternative to the product the monopolizing firm supplies. Sometimes it’s an imported product.

Also, as you said, people may reduce their demand for the product because of price or even because of bad publicity, tending to make the firm behave itself. So the market process can bring monopolies back into line. In the long run, some other firm would arise to compete with any monopolizing firm. The only firms that get to hold on to a monopoly are those to which government gives special privileges such as licenses, tariffs, and other bar-tiers to entry.

Sam: So have antitrust laws been a good thing?

Mom: They approach problems in the wrong way. Very often, antitrust suits have been brought by losing competitors, so you could say that the laws have been helping weak companies at the expense of efficient, well- run companies. Sometimes big firms may be better able to accomplish things than small separate companies. People can benefit from the efficiency of a big organization; its reduced costs can be passed on to consumers.

Sam: Then government should just leave trade alone.

Mom: Maybe. You can see the flaws in the perfect competition model on which the antitrust laws are based—unreal assumptions like all hamburgers tasting alike, all hamburgers selling at the same price, all buyers and sellers having perfect, complete knowledge of the market, and so on. Government shouldn’t interfere just because a firm is successful.

There’s a lot of pressure on politicians to eliminate even short-term negative consequences of market concentration, rather than waiting for competition to correct them. Some of these consequences are hard to accept, like restricted choice when one finn provides most of a product or service, or effects on a specialized labor force when there is basically only one employer. But the free-market argument is that the medicine society takes for these headaches makes it sicker in the long run, since government regulation also restricts choices and affects those specialized labor forces, and not always in the intended ways.

Anyone who’s experienced in business knows that profit-seeking can lead unscrupulous people to very harmful acts. So society as a whole has to exert some control, but laws should be against misrepresentation or infringement of property rights, not against sheer size and success.

Maybe a true free-market system is something people will manage at a future higher level of mental and moral development. But at present many people even in America lack the educational background to operate effectively in a free market. But that’s an argument in favor of educational improvement, not against free markets.

I guess I’m pretty much a free-market supporter. I do think the government is doing too much now, and particularly, doing the wrong things. It comes from understanding things wrongly. Depicting trade as a dumb animal is the wrong image for that FTC statue. The market is an expression of collective human intelligence.

Sam: Mum, I think you have a monopoly on this conversation.

Mom: But such a beneficial monopoly! Didn’t you learn a lot?

Sam: We’ll have to get the Federal Mum Commission to restrain you!

Mom: Then you can erect a statue of yourself holding onto my apron strings and call it Kid Restraining Lady.

Sam: Oh, Mom.