Under Chicago School economics, will monopolies naturally go away?

Question

I have two questions regarding monopolies in a capitalistic society:

1. According to Milton Friedman and Thomas Sowell, among other Chicago School economists, under purely market forces monopolies will naturally not be sustainable for long. When I'm trying to defend a libertarian state that does not interfere with the free market, monopolies will come up regularly as an example of something that the government will need to interfere with. How viable is the libertarian view that monopolies will naturally go away?

2. All the examples of monopolies that I have found are created by the government, or at least aided by it in large ways. Are there any counterexamples? If not, why not?

Answer 1

There is not an invisible market force that makes monopolies go away. In fact, the longer that a monopoly operates unabated, the more reserve cash it accumulates, the more it refines its infrastructure and process, the more brand recognition it continuously accumulates. So the longer a monopoly exists, the harder it is to compete with it, and the easier they will be able to crush you Rockefeller-style if you attempt to move into their market.

For instance, if a monopolistic corporation were accumulating $13 billion in total equity each year due to net income = $13 billion, and they accumulated a war chest of $130 billion over a 10-year period of time in which they were an unopposed monopoly, then by the time a competitor tried to move in on them, the former monopoly could afford to lower its prices low enough to make negative profit for many years until the competitor folded. Considering that the competitor likely had smaller capital to begin with, the fact that they had to eat substantial training costs to get up and running, the fact that they didn't have an established distribution network, the fact that they didn't have established brand recognition, the fact that they started up with sub-optimal processes; the competitor would be forced to charge higher prices due to inefficiency. In an act of undercutting the competition, the former monopoly may charge $1.90 for an item that costs $2.00 to produce, and can afford to operate at a loss like that for many years; meanwhile the competitor may not be able to produce the item for less than $2.30 due to inefficiency, and likely lacks the capital to operate at a loss, so they can't charge less than $2.30, and may also not get any sales by charging the clearly higher price for an item that is likely lower in quality, not higher. These undercutting tactics are what led to John Rockefeller becoming the richest American in the nation's history, accumulating wealth equal to 1.52% of America's GDP, before the federal government ruled Standard Oil an illegal monopoly.

Having said that, different industries have different barriers for entry. A landscaping business or a snow cone stand can more reasonably try to make a move on an established company. But you can't simply compete with a telecom company like Comcast by laying down your own fiber city-wide. They laid down that fiber back when they were the only game in town, they knew they would have a 100% market share, and they knew they could charge monopolistic prices like $100/month; so the cost-benefit analysis was agreeable to them at that time. But if you try to move in on them by spending $1 billion of your own money to lay down duplicate fiber in a city to try to gain a 37-40% market share at competitive prices like $85/month; the cost-benefit analysis for you is going to discourage you from attempting this. Your profit margins as a competitor are likely not going to cover your loan interest in the way that their profit margins as a monopoly had covered their loan interest. Even if you did try to make a move on Comcast in a single city by somehow borrowing $1 billion, they could just leverage their $8.7 billion net income to undercut you in that city until you fold. They could even give their services away for free in that city until you folded, because the millions of dollars per year that they would lose in the short-term don't even make a dent in their $8.7 billion net income, and once you've folded, they can jack their prices back up and resume making $6 million per year in that city.

Now as far as whether a monopoly is inherently a bad thing... As long as the barriers to entry to compete with a monopoly are substantial, a monopoly can get away with charging far above the cost of production for a product, and people will still pay the inflated price in many cases. For instance, I think Comcast is unethical, I don't want to give them any money, and I still do give them money, because I also do insist on having high-speed internet. In the short-term, the harm of monopoly is that it causes the consumers to lose extra money for no additional value in return, and it becomes one additional variable in the poverty cycle that traps tens of millions (e.g. the extra money they are wasting on patronizing monopolies could have gone towards having a positive balance in their bank account and prevented them from being hit by overdraft fees). In the long-term, the harm of monopoly is that the stakeholders of the monopoly are accruing increasingly sizable wealth, and eventually gain enough resource to own multiple monopolies and/or merge massive corporations together, leading to a few people who own everything. As the wealth inequality gap widens and few people own everything, everybody else essentially becomes economically enslaved and lose significant personal liberty, as well as the ability to gain any economic resources to make any sort of capital investment or business venture. As a Libertarian, that last part would probably bother you, but you probably won't acknowledge that it could happen in the first place if you have unreasonably rigid faith that invisible market forces magically fix everything just because they just do.

Edit: I would like to add one more point that wasn't originally in this post. The more Libertarian the government, the lower the overall tax rates, and therefore the more rapidly that wealth inequality widens. For some corporations, Libertarian tax codes could lead to the highest-earning corporations paying $3-30 billion less income taxes each year than they currently pay. This would likely lead to more monopolies in the following ways... -Companies with vastly greater net income and war chests have more money to buyout their competition. We have seen mergers and/or acquisitions where AT&T, Time Warner, DirecTV, BellSouth, and T-Mobile have all combined into one corporation. But if you have a corporation with massive revenue, forget about merging, it can outright purchase other corporations the way that Apple has recently been trying to do with Disney. If ExxonMobil wasn't paying $31 billion per year in income taxes, it could afford to buyout multiple Fortune 500 corporations each year, which would lead to its net income climbing by multiple billions per year, making it increasingly easy to buyout even more competitors. -While the most prosperous corporations and their stakeholders would be getting exponentially wealthier, everyone else would be possessing less wealth. I.e. if the top 10 corporations possess 60% of the nation's wealth, then everyone else possesses the other 40%. But if the top 10 corporations possess 90% of the nation's wealth, then everyone else possesses the other 10%. So while corporations like ExxonMobil or Apple would be increasingly hoarding all of the currency in the nation, no one else is going to be able to marshal enough resources to start-up a competing business.

Also, I just want to point out that some of the comments in this thread have attempted to argue that few, if any, monopolies have formed without the assistance of government intervention. But I would prefer to counter that the American federal government has worked to prevent the formation of monopolies since the late 19th century (Sherman Act, Clayton Act, FTC Act 1914, etc.). This is why few examples of true monopolies emerge in America, and therefore why it is difficult to find examples of perfect monopolies in America that either support or contradict either side.

Answer 2

As requested in comments, converting my own comments to a brief answer:

First of all, there's no generic concept of "monopoly" and thus libertarian views on such will vary. The following aspects of monopolistic situations are distinct:

1. "Natural" monopolies

Most frequent argument by proponents of antitrust and those using "monopoly" as argument against libertarian ideas are so-called "natural" monopolies. These are typically things like utility companies.

"The Myth of Natural Monopoly" by Thomas J. DiLorenzo rebuts this view this in detail. In short,

• Nearly every case of "natural" monopoly known is merely a result of government interference - either direct one by granting exclusive rights or contracts; or indirect one by unre-pricing scarce public resources (e.g. right to place infrastructure in public spaces).

2. Monopolies of consumer choice

If a company provides consumers with the product they universally prefer over their competitors (e.g. by price), this is not intrinsically a bad thing that needs to be rectified, since this situation does not lead to any of the tangible problems that are stated to arise out of monopoly.

The moment they start abusing their monopoly by raising prices above what consumers find comfortable, they cease being in a position to be able to sustain that monopoly as a competitor can then enter the market.

(not to even go into an innovation tangent - a competitor may simply come up with a better product that justifies higher price for consumers).

3. Monopolies that enforce their monopoly status by force.

There are claims that Standard Oil did this. I'm not versed enough to be sure if those claims are true; but if they are such actions are contrary to libertarian principles of NAP and therefore would be prohibited regardless of monopoly-angle.

Additional resources (sadly, youtube videos):

• Milton Friedman - Monopoly
• The Robber Barons and the Progressive Era by Tom Woods (Mises lecture)

Answer 3

All the examples of monopolies that I have found are created by the government, or at least aided by it in large ways. Are there any counterexamples? If not, why not?

As you note, one possibility is that monopolies are not natural and can only create the necessary barriers with government help.

The other possibility is simply that before the company becomes large enough to become a monopoly, it is large enough to be significantly impacted by government action and to afford a lobbyist. So the company hires a lobbyist to protect itself from the government. But once it has the lobbyist, the lobbyist will tend to advocate for favorable treatment from the government, not just an absence of negative treatment. So then the company becomes "aided by it in large ways."

It is difficult to say whether the company would have been able to become a monopoly without government intervention. Every example is going to be able to show government involvement. Because the government is that involved in every company.

Government also creates economies of scale. For example, most companies have a number of people to ensure that they are in regulatory compliance. But it doesn't necessarily take more people for a larger company. It takes more people for a larger government. As such, a larger company can better afford to hire a full staff to learn how to comply with the necessary regulations.

Smaller companies make do with less and are subject to occasionally finding out that they are not in compliance. Then they find themselves with a huge, unanticipated bill (or criminal charges). They often go out of business as a result. This adds risk to their business model, so financing is more expensive for a small company.

Beyond all this, there are other options to handle monopolies than antitrust action. The problem with a monopoly is that it causes prices to be higher and the quantity sold to be lower than the market equilibrium. This creates a loss of producer and consumer surplus and switches some consumer surplus to producer surplus. But regulation also causes a loss of total surplus.

In a Coasean society, consumers and producers could make a bargain that increases the surplus for both back closer to the original level. Such a bargain might be preferable to the regulatory solution, even though it favors the producer over the consumer relative to the pure market solution.

To test these hypotheses, we would need an actual libertarian society. As is, we only test hybrid forms. There's no true communist society where everything is owned by the state. There's no true libertarian society where all law is enforcement of contracts. There are hybrid societies that lean more or less towards one or the other. But hybrids are missing the theoretical ways to resolve conflict that exist in the pure forms.

What we actually have are a variety of market systems where the government sometimes interferes. In some cases, the government interferes a lot. In some cases, it only interferes a little. But even in the communist Soviet Union there was still a black market. And even in the capitalist United States, there has always been regulation.

TL;DR: we don't really know, because we have no examples of a market without government.

Answer 4

What do you mean by counter examples in point 2? Monopolies broken up by the government would be the opposite of examples created by the government. Microsoft of the early/mid 90s is an obvious example here. The tech world would look very different today if Microsoft hadn't been forced to change its business practices. The break up of the phone monopolies is another high profile example.

If, on the other hand, you are looking for monopolies that exist and were not help or hindered by the government, well, that's a pretty high -- and unreasonable bar.

First off, what constitutes a monopoly? 50% control of the market? 75%? 90%? 99%? Only 100% control counts as a monopoly, anything less is considered competition? Then what constitutes a market? There's a lot of food in the world. Do I have a monopoly if I control 100% of the corn market? What about if it is only 100% of one specific breed of corn?

Secondly, the idea that there could be monopolies without government intervention is difficult to fathom because the governments have intervened in everything. It is ALWAYS possible to trace any company back to the government. The discovery of America was financed by the spanish government, after all. If I come up with an invention, get it patented, then create a monopolistic company, is that government intervention? I never would have been able to outcompete the established players without the government enforcing patent law. But, I'm not getting any more help than anyone else with a patent who didn't establish a monopoly.

Finally, the reason that examples of monopolies established without government intervention are few and far between is is both simple and obvious: governments break up abusive monopolies

You need to decide those things before we can come up with examples that meet your criteria. Without that I fear the goal posts will be shifting along far too quickly to come up with a decent response.

All that being said, here are some examples of things that could be considered monopolistic under the following reasonable constraints:

1. > 70% market share
2. Very specific delineations as to what constitutes a market
3. Monopoly wasn't directly established by the government (ie: East India Trading Company-styled monopolies.) but could have benefitted from non targeted government programs.

AT&T was considered a monopoly by ~1910.

Luxottica is the world's largest eyewear manufacturer, with some estimates saying the control 80% of the global industry. YKK makes almost all the world's zippers. De Beers controlled almost all the world's diamonds before they got smacked for price-fixing violations. Intel makes almost all the processors. PayPal has 90% of US market share. Google controls about 80% of internet searches. 80% of the corn harvested each year in the United States is Monsanto engineered. I could go on.

Looking at the data, it seems that monopolies will tend to naturally go away, as long as the company doesn't abuse its monopolistic position to maintain its monopoly.

If a company does use its position to maintain its monopoly, well, true monopolies were outlawed in 1890 in the U.S. after Congress passed the Sherman Antitrust Act. Abusive monopolies tend to get broken up by the government. We don't have much data about what would happen over the long term to a company that was abusing its market position to maintain its monopoly.

We really only have one type of example where an entity has complete monopolistic control of the market it is in and isn't broken up by the government: the government itself. The government has complete control on things like land rights, they charge fees for using their land (ex property taxes), and they have a private army at their beck and call to back up their claim on the land. We've seen corporate towns set up in the past and they acted like the government, so the line of what is a company and what is a government isn't exactly cut and dry.

It isn't a perfect comparison, but it is instructive. It would seem to suggest that if a company becomes a monopoly and is willing to do whatever it takes to maintain their monopoly, they'll be able to achieve that goal.

Unless 'revolution and civil war' is a natural process, then I'd venture a guess and say that No, under purely capitalistic forces monopolies will not naturally go away.

Answer 5

All the examples of monopolies that I have found are created by the government, or at least aided by it in large ways. Are there any counterexamples? If not, why not?

Somalia.

Business is based on patronage networks, and tight monopolies dominate the market.

There are no legal or institutional frameworks regulating the market in Somalia, thus market competition is absent and the economy is controlled by patronage networks with close ties to the ruling elite (BTI 2016).

State-building is hampered by large scale corruption and misappropriation of public funds (BTI 2016). There is no developed revenue system in Somalia. International funding and payments made at sea and airports are the main source of revenue for the country, but there is no transparency in the collection or distribution of these funds (BTI 2016). The country’s institutions are dysfunctional, and there are no integrity mechanisms in place to curb corruption. S

http://www.business-anti-corruption.com/country-profiles/somalia

Three companies, Hormuud, Nationlink and Olympic Telecom, cover almost the entire telecommunications market in south-central Somalia, and Nationlink increasingly provides services abroad, notably in the Democratic Republic of Congo, Rwanda and the Central African Republic. Without a regulatory body, new entrants to the market cannot compete with established ones who keep a tight grip on their monopolies. The assigning of frequencies is undertaken under the auspices of the big three and the decision reflects their consensus. The regulating body in Somalia is, therefore, a market commodity, meaning that market share determines regulation, albeit on a consensual basis.

http://www.international-alert.org/sites/default/files/publications/26_section_2_Somalia.pdf

So to respond to the first part - I'd argue monopolies are pretty natural. Some previous examples could include entities such as the Catholic Church, the Knights Templar and the British East India Company that maintained substantial monopolies in their industries despite attempts at government intervention and regulation. One might argue that these monopolies did ultimately fail (except for perhaps the Catholic Church) - but they did so as a result of government intervention - not market correction. Likewise, these actors maintained their monopolies for decades if not over a century.

Hell, you could argue that the entire European Feudal period consisted of local agricultural monopolies, with landlords maintaining private armies and complete economic control of their fiefs.

You might argue that these actors consist of states in their own right but I think that would be a semantic argument. Monopolies are entirely natural and have occurred regularly throughout human history. Likewise, cartel behaviour occurs regularly even in Western markets and is punished by regulators (when they catch it). Hell, Microsoft got busted for anti-trust behaviour in the late 90s, Intel's anti-trust case in Europe is under review, and Qualcomm copped a fine in 2015 for violating China's anti-monopoly laws https://www.nytimes.com/2015/02/10/business/international/qualcomm-fine-china-antitrust-investigation.html and is facing similar allegation in Europe https://www.nytimes.com/2015/12/09/technology/qualcomm-is-accused-of-violating-antitrust-rules-in-europe.html?mcubz=1

I think on the minarchist end of the spectrum there exists a tendency to diagnose regulatory failure as a result of overregulation; or prescribe deregulation as the cure to bad regulation. Many libertarian thinkers take this to the extreme and argue "Hey if there was no regulation, things would be even better!". That pure Utopianism.

This isn't really accurate - weak legal and institutional frameworks just as often (if not more often) lead to bad outcomes. Otherwise failed states would be just as likely to descend into libertarian utopias as they would civil war. I can't think of an instance where this has ever happened.

Ultimately, monopolies are a feature, not a bug, of heteropolar world orders.

Answer 6

  Friedman was wrong because he assumed that competitors could offer same or better product without regard for infrastructure and technical debt. Typical example would be Microsoft de facto monopoly in the OS marker for personal computers (PCs) . Although we now have basically free OS like Linux (non-market forces !) , even they could not budge Windows from the top. Reason for that is of course existing software written exclusively for Microsoft OS. Any software company in PC market would first and foremost aim to develop product that could run on Microsoft Windows, with Linux being distant afterthought. Therefore, anyone who would want to develop competing OS would be in huge disadvantage because existing infrastructure is hard to replace and in reality although it doesn't legally belong to Microsoft, it is effectively under Microsoft control.

  Only way to break this pattern is to develop something entirely new that would eliminate need for monopolized product. In our case, in time, it is possible that let's say tablets would replace PC's , therefore making entire concept of PC OS obsolete. But, barring that, in technical fields (and most of the market today is technical), without government intervention monopolies would naturally form, quite opposite of Friedman's claims. Note that in case of mobile devices, Google would most likely form monopoly with their Android OS, despite efforts of companies like Apple.

Answer 7

I'm amazed that Facebook, possibly the world's largest monopoly, was not mentioned in this discussion. It plays on a global playing field, in what was (and to a large degree still is) completely unregulated territory and the results are obvious: it is becoming impossible to communicate with people without consenting to Facebook owning the information exchanged. While there are other social networks out there, the service that people are looking for is not "a social network", but a channel to communicate with their family and friends, which are more often than not already present on Facebook, and only on Facebook. In all salient aspects, Facebook looks to me like undeniable evidence that in a nearly completely unregulated environment (regulations now lag decades behind technology), a monopoly only grows stronger. To the detriment of service users, of course, as the monopolist has very little incentive to look after their interests.

While changes in regulation or significant technology advancements (e.g. blockchain-powered social networks) may change the game sufficiently to rock its position, without significant changes in environment, the monopoly is likely to thrive.

Answer 8

Well, yes and no. It's not a simple binary true/false thing. Let's look at a few monopolies, that weren't created due to government action. Some follow Friedman's model, and some do not.

The tech industry.

For much of its life, the tech industry has had a single dominant player, it's the nature of computing equipment and software. Or, it was... In the 1960's and 1970's, it was IBM. In the late 80's to late 2000's, it was Microsoft and Intel.

In both cases, the companies acted like monopolies, betting that the legal system wouldn't be able to equate the technical issues involved with monopoly behavior - a bet that turned out to be correct... for a while.

In both cases their monopoly status is what led to their losing their dominant position - they thought they owned the market, and tech changed faster than they could. IBM was brought down by its own creation, the personal computer, while Microsoft was done in by the mobile revolution, which evolved too fast for their entrenched corporate culture to adapt to. (plus, users were weary of BSD's and three finger salutes...)

Today, the closest we have to tech monopolies are Facebook and Google, although both are experiencing problems due to their semi-monopoly status, so even that may change. Both are facing a backlash for selling their customer's habits and interests. Facebook has discovered the perils of trying to become an unedited news source... bet they didn't see that one coming.

Many years ago, changing tech spawned monopolies by nature (the telephone and essential telephone lines) or by happenstance (the auto spawned the Standard Oil monopoly). In both cases, the government broke up the monopoly, requiring both Standard Oil and AT&T to sell off the bulk of their company to competing entities.

Public utilities.

These are services that are considered essential to citizens, they simply must have it to function, but the nature of the service is such that direct competition isn't practical. In years past, those utilities were water, electricity, rail, and telephone. It simply isn't cost effective to have multiple power and water companies with multiple water and electric lines to every home, so the government allows them to operate as monopolies, regulated as public utilities.

Monopoly by buying the competition.

There can be monopolies by acquisition - airline buyouts are closely watched by the government to insure that one company doesn't own enough of the air travel industry to exercise monopoly power. Even if this were to happen, and one group were to control the bulk of airlines in the US, people would start finding alternate forms of travel when the price rose, so this example sort of follows Friedman's model. Hyperloop, anyone?

And, the joker in the deck.

Finally, we have a sort of utility in the US, in that it is an essential service for citizens, even though it isn't run by one company. In recent years, costs have skyrocketed far in excess of normal inflation, one of the characteristics of an essential monopoly that is unregulated. That is health care. Technically, it is not a monopoly, but right now, it is acting like one, with huge price increases for a service that is definitely essential to life, with no corresponding increase in the quality of the service. The customer has no choice but to pay the higher prices. (or die, maybe)

What a coincidence, that all health care providers seem to raise their prices by the same amount, at the same time, when advancing tech suggest their service should be getting less expensive, not more... like most other industries.

Back to the original question.

In some cases, such as the tech industry, monopolies resolve themselves when the monopolist gets comfortable, sits back on their laurels, and tech changes run right past them. This is where the Chicago model works, albeit not for the reasons they thought it would.

In some cases, such as water and power, the monopoly is allowed but regulated out of necessity. And fast moving tech may eliminate that as it did with telephones - imagine electric power following the cell phone model, where the only monopoly allowed is the company that maintains the power lines. Power generators would be in a competitive market - whomever offers the lowest price.

Finally, we have the puzzle of health care in the US. It isn't a pure monopoly, yet costs have run amok in the last 10-15 years. It doesn't really follow any economic model, other than vaguely following the expected results of an unregulated essential utility. I wonder what the Chicago economists make of that?

Answer 9

1. I'm not too familiar with Milton, but I have met his son and read his book, The Machinery of Freedom http://www.daviddfriedman.com/The_Machinery_of_Freedom_.pdf , and I think I have a good enough grasp of his argument, and he is representative enough if the Chicago School, for me to offer the following as an answer (although I could be wrong, and probably am at the very least missing some details of his position):

He believes that most monopolies are supported by the government, and the conditions for forming natural monopolies are rare. In the case of a natural monopoly, his position is that the more a monopoly raises its prices, the more value there is in competing with it. He rejects the idea that a monopoly can drive away competition by lowering prices below profitability, arguing that as long as the monopoly holds the majority of the market share, this strategy will cost them more than it will cost their competition (the monopoly is selling more volume than the competition, and is therefore losing more money overall). Once the monopoly holds less than the majority of the market share, they aren't a monopoly anymore. Thus, a monopoly can charge only a small amount over its actual costs. Trying to crush a competitor in one region by using profits from other regions requires raising prices in those other regions to cover the loss in the first region, leaving it vulnerable to the original competitor, or other competitors, competing against it in those regions. [/end my attempt at summarizing David Friedman's position]

Empirically, it is difficult to find example of natural monopolies making significantly more than their costs over a long time period. Pointing out that a monopoly will have a large war chest is not as compelling as it may seem; if a monopoly is truly lucrative, a competitor trying to take their business away is going to have backing from the whole capital market. There is the issue of start-up costs; a monopoly can charge a premium that reflects the cost of entry, but there is a limit, and their premium largely reflects them recouping their start up costs.

2. It depends a lot on what you consider "government", "monopoly", and "aid". Pretty much every organization is going to be affected by government one way or another.