I have been teaching economics at the university level for twenty-five years. Easily the most often-asked questions relate to monopolies. The questions are often put in the following form: “In an economy free of governmental regulation, wouldn’t a firm or group of firms obtain a monopoly over some vital resource or product? And won’t the monopoly then exercise its power by raising prices?”
The issues most often revolve around the oil industry and the famous Standard Oil Company antitrust case. The history of Standard Oil, students frequently tell me, proves that monopolies exist in free markets — and that they do raise prices arbitrarily — and that this is precisely why we need antitrust laws.
Are monopolies truly an inherent problem in a free market? And do we need antitrust laws to combat them?
The clearest definition of monopoly is one seller, with the law prohibiting competitors from entering the market. Local telephone and cable-television companies are examples — they are usually provided a monopoly by their local governmental officials — that is, they are made the only provider of the service in a certain locale — and competition is prohibited by the local governing body. Obviously, this is not a monopoly arising in a free market since it is the government not the market that is dictating the number of suppliers. The best way to get competition in these types of activities is to remove the legal restrictions on market entry — which, by the way, is happening in some cable-television markets, which has resulted in a decrease in prices.
Some domestic firms are monopolies or new-monopolies because our government restricts foreign firms from competing against them. Again, these monopolies are artificial — that is, caused by government — and can be eliminated by ending all tariffs and import restrictions.
Some business organizations spend years, even decades, earning consumer support. They produce innovative products which find favor with consumers; and they price their products correctly. The result is that they earn a significant share of the market. Competitors and left-wing university professors are prone to call such firms “monopolies.” But they are mistaken — the market-share positions that these firms earn are entirely a consequence of efficient firm management and consumer satisfaction. And nothing is more deserving of praise than a business that is able to increase its market share in a free and open market.
Ah, but won’t firms that have earned high market share use their “power” to restrict output thereby raising prices? They might attempt to do that. But that sort of behavior will quickly attract competitors from both within and without the industry. Thus, the result will be that consumers will increasingly turn to other suppliers. Indeed, nothing will encourage competition more than a dominant firm acting “dumb.” Therefore, dominant firms are far more Rely to attempt to lower their costs and prices in order to maintain their market positions. And that of course, is precisely the sort of competitive behavior we consumers want!
But can’t firms collude and fix prices in free markets? The answer again is — they are free to try. Certainly there have been numerous instances of firms attempting to “stabilize” markets through price-fixing agreements. But most credible college professors will inform their students that historically such attempts have been abject failures. For while there are incentives to fix prices, there are even stronger incentives to cheat on price-fixing agreements — that is, incentives to continue competing for higher revenues. Most of the classic antitrust conspiracies have had little effect on market prices. The myth that firms historically have succeeded in fixing prices is exactly that — a myth.
Let’s go back to the Standard Oil “monopoly.” Haven’t we been taught that Standard Oil monopolized in restraint of trade? Isn’t this the prime example that is provided in support of antitrust laws? The little-known truth is that when the government took Standard Oil to court in 1907, Standard Oil’s market share had been declining for a decade. Far from being a “monopoly,” Standard’s share of petroleum refining was approximately 64% at the time of trial. Moreover, there were at least 147 other domestic oil-refining competitors in the market — and some of these were large, vertically integrated firms such as Texaco, Gulf Oil, and Sun. Kerosene outputs had expanded enormously (contrary to usual monopolistic conduct); and prices for kerosene had fallen from more than $2 per gallon in the early 1860s to approximately six cents per gallon at the time of the trial. So much for the myth of the Standard Oil “monopoly.”
Should people be concerned about monopolies? Of course they should. But we must understand the true source and causes of monopolies — governmental barriers to free and open competition. The solution to the monopoly problem, then, lies not in antitrust laws (which should be repealed) but in the repeal of all governmental barriers to free and open trade.