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    Two words : ONWARDS COMRADES!
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    (Original post by HappinessHappening)
    Wow. That's a great post. :p:

    I still have a couple of questions though:

    1. In an anarcho-capitalist world, what would be done about child labour?
    It would be legal, and as household income rose so that a family would be able to support itself with fewer members working, most would children would stop working. That is what was happening throughout the west before child labour laws were introduced. In the mean time, there is empirical evidence that in the developing world where child labour laws have been imposed or boycotts are imposed on factories that employ child workers, so that they close or replace the kids, child prostitution has risen.

    Imposing child labour laws won't increase household income. It will threaten it. It, therefore, won't decrease demand children have for jobs, it will just restrict the supply. This means children would have to pay a higher price to get an income, which means accept longer hours and worse conditions. It will also mean that the people likely to employ them will be those best at breaking laws, with no concern about law, and probably with lower time preferences, and so no desire to improve the long term viability of the firm. All this means worse conditions for child employees. Banning child labour doesn't mean there will be no child labour. It just means that child labour will be conducted on a black market run by career criminals and gangsters.

    Wouldn't it be in the interests of companies to let working conditions go to hell? Surely you can't be fine with that?
    Of course it wouldn't be in their interest: An employer that let working conditions go to hell would lose his staff to a competitor that didn't. That competitor would then be able to increase output, undercutting the first, and taking his business.

    2. What about support for those out of work? You can't possibly argue that everyone would get by on private charity. That certainly wasn't the case before unemployment benefit was introduced, was it? Are they just left to rot?
    No, there would also be savings and unemployment insurance provided by mutual aid associations (Friendly Societies provided "tramping pay"). Beyond that, periods of unemployment tend to be shorter in freer economies.

    What about homeless people?
    Empirically, homelessness is highest in places where property prices are highest, and places where property prices are highest in places with the toughest planning laws and building codes. Further, rent control laws reduce the availability of new housing. In a free market, the supply of new housing would rise when the demand for it rose, to a point where supply meets demand and everybody who wants housing at a particular price gets it. Competition would also keep this price down.

    Mutual aid schemes, like housing co-operatives, would also help.

    3. I can imagine companies committing fraud on a huge scale. How would you stop companies making cars that were secretly unsafe?
    Secretly unsafe cars don't stay secretly unsafe for long!

    Ford would no longer be obliged to put air bags in their cars, for example.
    There is empirical evidence that suggests that when airbags were introduced, road casualties increased. People had less incentive to drive safely. You see, they protect those in the car, but not those outside it.

    There would be no quality control for food and things like that.
    Sure there would. There would be inspectors, etc, that companies would allow, and pay, to inspect their products in exchange for certifcation that the manufacturer could then advertise. Like the Kite mark here in the UK, or the UL stamp in the US, or like the approvals from the British Skin Foundation for soaps, or the green ticks that the Vegetarian Society provides. You would be allowed to sell goods without this approval, but you would not get as much business if you did (it is scarcely possible to market electrical goods in the US without approval from the Underwriters' Laboratories).

    4. An age old question is that of monopolies. The power of these companies would be almost limitless.
    Monopolies, meaning firms that are able to control the supply of a good, and thereby fix its price, cannot occur on a free market.
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    (Original post by Richard_A_Garner)
    Monopolies, meaning firms that are able to control the supply of a good, and thereby fix its price, cannot occur on a free market.
    I never did economics, but I don't see why any industry with a high barrier to entry... say an ISP, couldn't end up being the only provider in a region. Isn't that a monopoly?
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    I dunno what I am. WHat is this:

    In my world there would be no money and everyone would learn basic carpentry, medical farming and cooking skills which they could further if they find the fields interestnig. We have left of many human emotions so greed doesn't exist. T_T I can only dream

    I'm a capitalist? I dunno, I can't help but spend money, I'm socialised this way and too lazy to rebel.
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    (Original post by Richard_A_Garner)
    Of course it wouldn't be in their interest: An employer that let working conditions go to hell would lose his staff to a competitor that didn't. That competitor would then be able to increase output, undercutting the first, and taking his business.

    Nonsense. Why were working conditions so terrible before laws were introduced? If all firms collectively allow conditions to slide, then there is no longer such a choice for the workers and they have to put up wth it.


    No, there would also be savings and unemployment insurance provided by mutual aid associations (Friendly Societies provided "tramping pay"). Beyond that, periods of unemployment tend to be shorter in freer economies.

    Even if they are shorter, a fortnight without an income could leave people bordering on starvation.


    Secretly unsafe cars don't stay secretly unsafe for long!

    So, what you're really saying is, let people find out for themselves which cars are safe and which aren't by driving them and maybe having an accident? Great.

    There is empirical evidence that suggests that when airbags were introduced, road casualties increased. People had less incentive to drive safely. You see, they protect those in the car, but not those outside it.

    This is complete rubbish.




    Monopolies, meaning firms that are able to control the supply of a good, and thereby fix its price, cannot occur on a free market.

    Yes, they can.
    Bold.
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    (Original post by The Fat Controller)
    I never did economics, but I don't see why any industry with a high barrier to entry... say an ISP, couldn't end up being the only provider in a region. Isn't that a monopoly?
    No. There is an upper limit to the price it can charge for its service, that being the cheapest price at which it would become worth while for an ISP in another region to start operating in that region, or for a new firm to start up. Of course, what might also happen is that people simply stop using ISPs.

    More technically, this means that there is inderect and potential competition. The potential competition is the competition that would rise when the dominant firm starts operating inefficiently enough. The indiract competition is the competition that comes from using substitutes, although another is competition over time: Present consumption competes with future consumption, for instance.
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    (Original post by HappinessHappening)
    Of course it wouldn't be in their interest: An employer that let working conditions go to hell would lose his staff to a competitor that didn't. That competitor would then be able to increase output, undercutting the first, and taking his business.

    Nonsense. Why were working conditions so terrible before laws were introduced?
    Compared to what? Overall, the answer is "because productivity was low." Worker productivity has to rise for spending on workers to rise, and that means spending on wages and on working conditions.

    If all firms collectively allow conditions to slide, then there is no longer such a choice for the workers and they have to put up wth it.
    How would such an agreement be enforced? If you were an employer and you knew that your competitors were going to abide by an agreement to keep wages lower than they could afford, or to keep conditions poorer than they could afford to make them, you would also know that if you didn't, you could attract workers away from your competitors, increase output, and your competitors would lose business and income to you. Simultaneously,if you didn't know whether your competitors would abide by the agreement, but knew that you would lose out in precisely the way described if you did abide by it whilst they didn't, you would lose out. In both cases, then, your incentive is to break the agreement, and so is the incentive of every other member of the cartel. Denying this analysis means denying that important market failures don't occur.

    Meanwhile, the high profits that this collective agreement would cause, and the low costs it is intended to produce, would attract new competitors to the industry, either established firms in other industries seeking to expand, or new firms starting up in an industry that this agreement had made attractive to them. The effect of the entry of these firms into the industry would be to increase competition for workers, thus bidding up the amount that firms spend on workers, either in wages or in perks or working conditions until it was equal to the marginal product. At this point costs for firms in the industry would be no lower than they would be if the cartel agreement not been formed, so it becomes pointless and harmless. On the other hand, rather than compete with the newcomers, the cartel could admit them as members. But this would mean that each firm would have to share its income more and more widely. Technically, in either case, the only point at which newcomers stop either competiting or trying to join the cartel is the point at which the marginal firm is making no more than had the cartel never been formed in the first place.

    No, there would also be savings and unemployment insurance provided by mutual aid associations (Friendly Societies provided "tramping pay&quot. Beyond that, periods of unemployment tend to be shorter in freer economies.

    Even if they are shorter, a fortnight without an income could leave people bordering on starvation.
    Really? I have been unemployed now since April, and have yet to recieve anything in welfare from the state. I haven't starved yet, though doing so would probably do me good!

    Secretly unsafe cars don't stay secretly unsafe for long!

    So, what you're really saying is, let people find out for themselves which cars are safe and which aren't by driving them and maybe having an accident? Great.
    Nope, they don't have to have an accident. They could hear about other people having them.

    But I did not say that this was the only alternative, did I? Right now there are inspections for various aspects of car safety [i]provided by a private sector body, in exchange for a fee[/b]: You can see the Kite Mark etched into car windows.

    There is empirical evidence that suggests that when airbags were introduced, road casualties increased. People had less incentive to drive safely. You see, they protect those in the car, but not those outside it.

    This is complete rubbish.
    You are correct. It was laws that required seat belts in cars, not air bags. It is the consequence of what scholars call risk homeostasis.

    This phenomenon was demonstrated most effectively in a controlled study in a major German city, where half the taxis were given improved antiskid brakes. The subsequent study period revealed that the brakes worked as advertised - and that the improved taxis had higher accident rates than the unimproved ones...

    ...Child-proof caps [bottles] are a case in point. One analysis concludes that a few hundred lives have been saved. Another careful study concludes that the introduction of child-proof caps caused an increase in fatal poisonings of children, because people became more careless about leaving containers within reach of children. The best bet is that the net change in either direction is so small that it is impossible to pin down.

    This is an example of the risk homeostasis I mentioned earlier, and it happens frequently. For example, seat belts can cause accidents because drivers become less cautious. In one sense the trade-off is a good one: The net number of injuries and deaths from auto accidents has gone down because of seat belts. Unfortunately, the net number of injuries among pedestrians and people in other cars - innocent bystanders - increases. It is a nice moral question: Is a regulation justified that saves net lives while protecting the negligent, if it also raises the number of nonnegligent people who are injured or killed?
    - Charles Murray, What it means to be a Libertarian

    Monopolies, meaning firms that are able to control the supply of a good, and thereby fix its price, cannot occur on a free market.

    Yes, they can.
    No they can't. The account above of the problems a cartel would face provide one explaination of why (although in the example it is a case of "monopsony," not monopoly). The only way firms in that industry would be able to keep wages down or stop work conditions improving without losing income is if the state a) enforces the cartel agreement, and b) prevents new firms from entering the industry.

    Unfortunately, many forms of regulation have precisely this effect - for instance, stopping firms from competing unless they have a license, or licenses. The minimum wage is another example: Workers can't fix prices high, or they will be undercut by scabs. But if the state enforces a minimum price, then workers can shut out the competition and keep wages above the free market price (i.e. above marginal product). Immigration controls and anti scab laws and child labour laws help this, too.
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    (Original post by Richard_A_Garner)
    No. There is an upper limit to the price it can charge for its service, that being the cheapest price at which it would become worth while for an ISP in another region to start operating in that region, or for a new firm to start up.
    Potential competition might put some pressure on a company with a monopoly over internet access over a region, but why would that mean that that company wouldn't still be a monopoly? :confused:

    Of course, what might also happen is that people simply stop using ISPs.

    More technically, this means that there is inderect and potential competition. The potential competition is the competition that would rise when the dominant firm starts operating inefficiently enough. The indiract competition is the competition that comes from using substitutes, although another is competition over time: Present consumption competes with future consumption, for instance.
    The high costs associated with covering a region with the necessary infrastructure to start a competing company would reduce the problem of potential competition for a monopoly-holding ISP anyway.

    I see the point about substitues though, as there are things like mobile broadband. However for other things like utilities, couldn't localized monopolies easily develop?
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    (Original post by The Fat Controller)
    Potential competition might put some pressure on a company with a monopoly over internet access over a region, but why would that mean that that company wouldn't still be a monopoly? :confused:
    Partly because that is what the word means. Until recently, the word monopoly meant a grant of privilege by the crown providing exclusive control of a trade or industry to its recipient. Being the only firm in an industry was not sufficient to call oneself a monopoly.

    Another is because of the inability to charge a monopoly price or make monopoly profits.

    And lastly, because, if it is subject to competition, actual, or potential and indirect, then the market is competitive, not monopolistic.

    Still, some people might prefer to weaken my claim that monopoly cannot occur on a free market to monopoly would be relatively harmless on a free market.

    The high costs associated with covering a region with the necessary infrastructure to start a competing company would reduce the problem of potential competition for a monopoly-holding ISP anyway.
    But wouldn't that still mean that a firm's marginal revenue is equal to the marginal costs? I mean, logically every industry admits firms until it is no longer profitable to start a new firm in it. That means that every industry in equilibrium is an industry where the costs are too high for a new firm to gain entry.

    I see the point about substitues though, as there are things like mobile broadband. However for other things like utilities, couldn't localized monopolies easily develop?
    I'm not sure how. Again, whilst it would be cheaper to buy gas from the same company most other people buy it from in your community, that means that a local gas company will only be able to keep all that business if it keeps that price down below what it costs other companies to pipe gas in. Moreover, they also have an incentive to keep trying to bring that price down.

    On top of that, you get things like water barrels, generators, log, coal, coke, and peat fires, etc, that the gas or electric or water companies would have to compete with. The higher it sets its prices or reduces service/quality, the more people will turn to these alternatives, or make do without, both diminishing its income.

    None of this means that monopoly is not a problem in society at the moment. Indeed, most exploitation theories like that of Marx only make sense if an absence of competition, or entry is restricted (otherwise under paid staff could go to a competitor, who would have an incentive to pay them more, and if firms exist to make "surplus value," then logically firms would enter the economy until surplus value was zero, at which point wages would equal the value of the product), likewise with older Ricardian theories that said profit was caused by overcharging consumers. But the source of monopoly, and so of exploitation, is state intervention and regulation, usually introduced at the behest of business.
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    (Original post by Richard_A_Gardner)
    Still, some people might prefer to weaken my claim that monopoly cannot occur on a free market to monopoly would be relatively harmless on a free market.
    ...But the source of monopoly, and so of exploitation, is state intervention and regulation, usually introduced at the behest of business.
    I have sympathy with your claim that the state is often responsible for shoring up monopolies. But to claim that monopolies only exist because of the state is false.

    (Original post by Richard_A_Gardner)
    I'm not sure how. Again, whilst it would be cheaper to buy gas from the same company most other people buy it from in your community, that means that a local gas company will only be able to keep all that business if it keeps that price down below what it costs other companies to pipe gas in. Moreover, they also have an incentive to keep trying to bring that price down.
    Local energy companies had monopolies long before the government got involved in the industry. The same thing probably couldn't be achieved now because distribution has improved (n.b. who owns most of the gas infrastructure? Transco); but the former state of energy monopolies is a perfect example of how you can get monopolies (or at least effective monopolies) in a free market.

    (Original post by Richard_A_Gardner)
    On top of that, you get things like water barrels, generators, log, coal, coke, and peat fires, etc, that the gas or electric or water companies would have to compete with. The higher it sets its prices or reduces service/quality, the more people will turn to these alternatives, or make do without, both diminishing its income.
    People started using gas to heat their oven because the advantages are enormous. This is an example of false economics - you are using what are to a large extent false alternatives to create the illusion of real competition where there is none. Logs and coal may be an alternative, in the same way that you could say you can't have a business with a monopoly on gourmet cuisine in an area because there is a McDonalds down a street - the competition is limited. Business ALWAYS have to compete to some extent because money can be used on anything - but the point is a monopolist can charge £10 for gas which costs it £1 if enough people are prepared to pay £12; whereas in a free market the charge might be £1.50.

    (Original post by Richard_A_Gardner)
    Meanwhile, the high profits that this collective agreement would cause, and the low costs it is intended to produce, would attract new competitors to the industry, either established firms in other industries seeking to expand, or new firms starting up in an industry that this agreement had made attractive to them. The effect of the entry of these firms into the industry would be to increase competition for workers, thus bidding up the amount that firms spend on workers, either in wages or in perks or working conditions until it was equal to the marginal product. At this point costs for firms in the industry would be no lower than they would be if the cartel agreement not been formed, so it becomes pointless and harmless. On the other hand, rather than compete with the newcomers, the cartel could admit them as members. But this would mean that each firm would have to share its income more and more widely. Technically, in either case, the only point at which newcomers stop either competiting or trying to join the cartel is the point at which the marginal firm is making no more than had the cartel never been formed in the first place.
    Fine in theory. Doesn't work like that in practice. Let me give the example of Corporate Legal Services (i.e. commercial solicitors) in London. Until relatively recently (i.e. the advent of Competition Law), the top London firms had a cartel. The partners would all meet together to determine the salaries of the associates (more junior solicitors) to prevent price wars. You couldn't and didn't get newcomers because newcomers can't get top clients - having a sturdy reputation is needed to get much top-level work, and without much top-level work you can't sustain a firm of the size needed to service corporate clients. Noone broke the cartel because it wasn't in their long-term interest. Sure, firms could break it to get better lawyers in the short-run: but they lose out in the long-run.


    The problem running through your entire analysis is that you assume that capital is unlimited. In fact it is often the main limiting factor. People aren't willing to throw endless amounts of money to overcome barriers to entry to break a monopoly where there are business opportunities elsewhere. This is why monopolies and oligopolies are able to use their power effectively; there are countless examples of this throughout history. To say that the free market can always produce satisfactory results because of competition is something of a pipe dream that is often extremely reliant on new technology - there needs to be a balance.
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    (Original post by Richard_A_Garner)
    Compared to what? Overall, the answer is "because productivity was low." Worker productivity has to rise for spending on workers to rise, and that means spending on wages and on working conditions.



    How would such an agreement be enforced? If you were an employer and you knew that your competitors were going to abide by an agreement to keep wages lower than they could afford, or to keep conditions poorer than they could afford to make them, you would also know that if you didn't, you could attract workers away from your competitors, increase output, and your competitors would lose business and income to you. Simultaneously,if you didn't know whether your competitors would abide by the agreement, but knew that you would lose out in precisely the way described if you did abide by it whilst they didn't, you would lose out. In both cases, then, your incentive is to break the agreement, and so is the incentive of every other member of the cartel. Denying this analysis means denying that important market failures don't occur.

    Meanwhile, the high profits that this collective agreement would cause, and the low costs it is intended to produce, would attract new competitors to the industry, either established firms in other industries seeking to expand, or new firms starting up in an industry that this agreement had made attractive to them. The effect of the entry of these firms into the industry would be to increase competition for workers, thus bidding up the amount that firms spend on workers, either in wages or in perks or working conditions until it was equal to the marginal product. At this point costs for firms in the industry would be no lower than they would be if the cartel agreement not been formed, so it becomes pointless and harmless. On the other hand, rather than compete with the newcomers, the cartel could admit them as members. But this would mean that each firm would have to share its income more and more widely. Technically, in either case, the only point at which newcomers stop either competiting or trying to join the cartel is the point at which the marginal firm is making no more than had the cartel never been formed in the first place.



    Really? I have been unemployed now since April, and have yet to recieve anything in welfare from the state. I haven't starved yet, though doing so would probably do me good!



    Nope, they don't have to have an accident. They could hear about other people having them.

    But I did not say that this was the only alternative, did I? Right now there are inspections for various aspects of car safety [i]provided by a private sector body, in exchange for a fee[/b]: You can see the Kite Mark etched into car windows.



    You are correct. It was laws that required seat belts in cars, not air bags. It is the consequence of what scholars call risk homeostasis.

    - Charles Murray, What it means to be a Libertarian



    No they can't. The account above of the problems a cartel would face provide one explaination of why (although in the example it is a case of "monopsony," not monopoly). The only way firms in that industry would be able to keep wages down or stop work conditions improving without losing income is if the state a) enforces the cartel agreement, and b) prevents new firms from entering the industry.

    Unfortunately, many forms of regulation have precisely this effect - for instance, stopping firms from competing unless they have a license, or licenses. The minimum wage is another example: Workers can't fix prices high, or they will be undercut by scabs. But if the state enforces a minimum price, then workers can shut out the competition and keep wages above the free market price (i.e. above marginal product). Immigration controls and anti scab laws and child labour laws help this, too.

    You are making a mistake here in thinking that most businesses are in competition for staff. This is only true for a minority of people who have both specialized skills and decent experience. Generally it is people who are in competition for employment. If my job is rubbish, which it is, I don't just go and get a new job. My employer wouldn't care if I did, and other similar jobs wouldn't be any better in terms of pay or conditions. My option is to change career altogether, which requires training and financial investment. In a totally free market, it would be even more expensive to change career, and wouldn't attract government support, so while of course staff can move around, you're theory really overplays the relevance of that- ultimately humans are a cheap commodity in a free market.

    Also, of course monopolies are possible in a free market - companies tend to get bigger via merger and acquisition. Look at any mature market and you can see a tendency towards monopoly. At first you have many small companies, then soon you are left with two or three, who are prevented from forming a monopoly by state intervention.
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    (Original post by nikdc5)
    You are making a mistake here in thinking that most businesses are in competition for staff. This is only true for a minority of people who have both specialized skills and decent experience. Generally it is people who are in competition for employment. If my job is rubbish, which it is, I don't just go and get a new job. My employer wouldn't care if I did, and other similar jobs wouldn't be any better in terms of pay or conditions. My option is to change career altogether, which requires training and financial investment. In a totally free market, it would be even more expensive to change career, and wouldn't attract government support, so while of course staff can move around, you're theory really overplays the relevance of that- ultimately humans are a cheap commodity in a free market.
    You are assuming that the status quo is a free market, which is a little odd.

    Beyond this, assuming it was a free market, the fact that many other jobs would not pay better or have better conditions does not prove that employers are not competing. Quite the opposite, it proves that the economy is in equilibrium, and what they spend on the marginal worker is equal to that worker's marginal product. When employers compete for workers the worker cannot bid his pay or conditions up ad infinitum. He can only bid it up to as much as his labour is worth. This could suggest that if no employer is willing to offer better, then your labour is not worth better, not that there is collusion.

    Also, of course monopolies are possible in a free market - companies tend to get bigger via merger and acquisition.
    Why does this imply an ability to control the total supply of a good or service and thereby fix its price? In fact, it doesn't. There are humourous examples of attempts by big businesses to establish such control by precisely the means you point out: Rockefeller, for instance, wanted to control the supply of oil, so hewould get Standard Oil to buy up competitors. Of course, this basically, in practice, meant that Standard was paying people to go into competition with it! One enterprising fellow realised this, and would open an oil refinery and then threaten Standard with a price war unless they bought him out! He got quite rich doing this until eventually Standard gave up.

    Look at any mature market and you can see a tendency towards monopoly.
    OK, I choose Kebab shops.

    At first you have many small companies,
    Check.

    then soon you are left with two or three, who are prevented from forming a monopoly by state intervention.
    Wait, no check here. There are thousands of kebab shops, and yet you say there should be only two or three. Something is not right here. That is because you are wrong: what you describe will only occur if there are sufficient economies of scale, or if diseconomies of scale are not greater. Firms expand until they reach their optimal size, beyond which costs excede revenue, or growing larger does not result in a larger income - a fact that implies that if a firm doesn't go broke by growing bigger, it is because it is more efficient when it is bigger, and benefits customers and others more by being big.

    Of course, if these costs or diseconomies of scale represent no loss to the firm because they are externalised, then it will grow. This would occur if the firm recieves subsidies from the state. On the other hand, if its income was greater because it had a monopolistic privilege, i.e. it was protected against competition, then again it would not suffer losses by growing bigger. This would again be the result of state intervention restricting competition from new entrants or enforcing certain standards amongst established firms. Just about every single form of government regulation has this consequence, which implies that where you see monopolies in the real world, it is because we do not have free markets, not because we do.

    And the state intervention you talk about is rarely enacted at the behest of consumers. All anti-trust cases in the US have been introduced at the behest of competitors against the plaintiff. Likewise with the EU on Microsoft, likewise with BA against Virgin, and whatever the former state airline was in Ireland against Ryanair. This would lead one to suspect that the state intervenetion that occurs here is not to protect against monopoly, but to ensure it, as struggling firms use it to restrict the actions of an efficient competitor.

    Take this example: Suppose that were a supermarket to open near a small town its cheap prices would lead to all that town's high street businesses losing customers and going broke, leaving only the supermarket supplying the town. So the high street businesses, and some of their customers, successfully lobby local government to refuse planning permission to the supermarket. Now, is this monopolistic, or is it protection against monopoly? If the local government had granted planning or building permission, the supermarket would have ended up as the exclusive supplier to the town. On the other hand, the actions of the high street business owners are entirely motivated, and would have the consequence, of penalising an efficient competitor in order to keep prices and profits high, at the expense of consumers (since the consumers, by hypothesis, would have abandoned the high street firms for the supermarket if they could, otherwise the problem wouldn't have arisen).

    Plainly it would be accurate to say that the high street firms would be the monopolists in this case, even though there are many of them, precisely because they prevent competition.

    Real life examples like this come from the US: There are many, many yellow taxi cabs in New York, or Philadelpia. And yet taxi-cab drivers are monopolists. Why? Because in order to become a taxi-cab driver you have to be licensed and have a medallion, and the city government restricts the number of medallions in circulation. People can buy them from each other, but new ones cannot be introduced. The effect has been that a medallion will actually cost you much more than a taxi-cab will, thereby restricting entry into the industry, and protecting established drivers from new competitors, making it relatively easy for them to cartelise.

    This establishes a monopoly proper, such that, even though there are loads of firms, they restrict total supply: Taxi-drivers in New York have had a history of discriminating, not serving poorer areas, the ghettos, not picking up black customers, etc. etc. They can withold supply without fear that somebody else will pick up that business.

    Likewise, something like what you described above about three firms arising where once there were a few occurred a few years back in the steel industry in America. Firms were able to grow as you describe, undeterred by costs exceeding revenue... why? Because president Bush raised steel tariffs against European steel. You can see that after he did that, the American steel industry became more consolidated and the number of firms fell. Because they were protected against competition from foreign steel suppliers, they were able to charge higher prices, that coverred the greater costs of being bigger. Again, state intervention caused what you describe to occur.
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    First off, there is no "d" in my surname.

    (Original post by jacketpotato)
    I have sympathy with your claim that the state is often responsible for shoring up monopolies. But to claim that monopolies only exist because of the state is false.
    So you say. The seventeenth century jurist Lord Coke said,

    A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise . . . to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or cor*porate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade
    In other words, by this definition, monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group. Entry into the field is prohibited to others and this prohibition is enforced by the gen*darmes of the State.

    Likewise, one of the first American economists, Francis Wayland says,

    A monopoly is an exclusive right granted to a man, or to a monopoly of men, to employ their labor or capital in some particular manner.
    Again, according to this definition a monopoly is a privilege granted by the state. In 1624 parliament declared “all monopolies are altogether contrary to the laws of this realm and are and shall be void.” They were objecting to the rush of precisely these sorts of grants by Queen Elizabeth.

    Another early American economist, Arthur Perry, writes "A monopoly, as the derivation of the word implies, is a restriction imposed by a government upon the sale of certain services." Again, a monopoly is a privilege granted by the state.

    James Wilson, in 1784, during the banking debates (the so called currency wars), says "A Monopoly is an Allowance by the King by his grant, Commission or otherwise to any Person &c whereby any Person &c is sought to be restrained of any Freedom or Liberty which he had before; or hindered in his lawful Trade." Again, a state intervention.

    In Blackstone's Commentarries on the Laws of England, Blackstone writes "a license or privilege allowed by the king for the sole buying and selling, making, working, or using, of anything whatsoever; whereby the subject in general is restrained from that liberty of manufacturing or trading which he had before." Again, a monopoly is, by definition, a state granted privilege.

    Local energy companies had monopolies long before the government got involved in the industry. The same thing probably couldn't be achieved now because distribution has improved (n.b. who owns most of the gas infrastructure? Transco)
    You do know that in the US many towns and cities have only one provider of gas by law? That it is illegal to compete with them?

    ; but the former state of energy monopolies is a perfect example of how you can get monopolies (or at least effective monopolies) in a free market.
    How so. Many people may object to the above classical definitions of monopoly, preferring an etymological one: "mono" meaning one, or single, and "polien" meaning seller, so that a monopoly is when you only get one seller of something. But this definition is not as clear as you might think: After all, I am the only seller, by law, of Richard garner's labour. Does this mean that I am a monopoly? Every firm becomes a monopoly by this definition.

    Of course, the fact that I am the monopoly supplier of Richard Garner's labour is not considered a problem, because my labour can be substituted easily by that of another monopolist. But in that case we move from every firm being a monopoly to no firm being a monopoly, since every supplier of everything in a sense competes against every other supplier of anything: Bakers compete against yacht makers.

    People started using gas to heat their oven because the advantages are enormous. This is an example of false economics - you are using what are to a large extent false alternatives to create the illusion of real competition where there is none. Logs and coal may be an alternative, in the same way that you could say you can't have a business with a monopoly on gourmet cuisine in an area because there is a McDonalds down a street - the competition is limited. Business ALWAYS have to compete to some extent because money can be used on anything - but the point is a monopolist can charge £10 for gas which costs it £1 if enough people are prepared to pay £12; whereas in a free market the charge might be £1.50.
    A free market is one without state intervention. If the cost of the next firm to enter the industry, after the marginal firm, is greater than £10, then present supplier is, in a sense, selling below cost, even though his cost is less than £10, surely. Customers are getting gas at less than it would cost somebody else to supply it. In the mean time, that £9 difference between £1 and £10 is that somebody else's incentive to try to produce gas for less than £10, and their signal that they would be able to sell it if they do.

    Fine in theory. Doesn't work like that in practice. Let me give the example of Corporate Legal Services (i.e. commercial solicitors) in London. Until relatively recently (i.e. the advent of Competition Law), the top London firms had a cartel. The partners would all meet together to determine the salaries of the associates (more junior solicitors) to prevent price wars. You couldn't and didn't get newcomers because newcomers can't get top clients - having a sturdy reputation is needed to get much top-level work, and without much top-level work you can't sustain a firm of the size needed to service corporate clients. Noone broke the cartel because it wasn't in their long-term interest. Sure, firms could break it to get better lawyers in the short-run: but they lose out in the long-run.
    It is illegal to practice law for a fee without a license. You have to pass the Bar exam, costing thousands and thousands of pounds, and then be able to start a firm. You case proves my point entirely: A cartel is only enforcible when the agreement can be enforce or new entrants can be shut out. Occupational licensure, amongst other things, does precisely that (such licensure in this case is some of the worst, like medical licensing, in that the licensing authority is made up, to a large extent, of precisely those against whom the new entrant would be competing, and also because new law schools and the number of places they offer is decided by the licensing authority, as it is in medical licensing).

    The problem running through your entire analysis is that you assume that capital is unlimited. In fact it is often the main limiting factor. People aren't willing to throw endless amounts of money to overcome barriers to entry to break a monopoly where there are business opportunities elsewhere. This is why monopolies and oligopolies are able to use their power effectively; there are countless examples of this throughout history. To say that the free market can always produce satisfactory results because of competition is something of a pipe dream that is often extremely reliant on new technology - there needs to be a balance.
    I don't assume that capital is unlimited. I assume that it will be invested in opportunities that are profitable. The forming of a cartel to keep prices up makes entry into that industry profitable. Therefore people have an incentive to provide capital for new entrants (which do not, of course, have to be start up firms, but can already be established firms in other industries). Likewise, attempting to gain a monopoly by buying out competitors makes it profitable to start up firms to sell to the monopolist. Because it is profitable, profit seeking investors will back it, etc. etc.

    If a firm whose economies of scale are such that it gets all the business in a region raises its prices above what it costs for others to supply gas in that region, investment in doing so becomes profitable. This is precisely the point: Inefficient operations by one agent make efficient operations profitable for others, and unprofitable for the inefficient firm. So long as this is the case, there is an incentive to invest.
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    I just wanted to say that Richard Garner is kicking ass in this thread, and that if I could rep him again already I would.
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    (Original post by DrunkHamster)
    I just wanted to say that Richard Garner is kicking ass in this thread, and that if I could rep him again already I would.
    You're fine with child labour too?

    When I told him that a fortnight without work could leave a family starving his response was: well, I've been without work and I'm fine so you're wrong. That's not really 'kicking ass' in my view. He probably doesn't have a family to look after.
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    (Original post by HappinessHappening)
    You're fine with child labour too?

    When I told him that a fortnight without work could leave a family starving his response was: well, I've been without work and I'm fine so you're wrong. That's not really 'kicking ass' in my view. He probably doesn't have a family to look after.
    I wouldn't say that I'm fine with child labour, just that I recognize that in some situations it can be better than the alternatives. If the alternative is that the children starve or are forced into prostitution, then yeah, I'm all in favour of child labour. Now you may say that children shouldn't have to work, and I might well agree with you; but the way to make kids better off is to open up more choices to them, not close off some of the ones they do have. This is an article on the historical decline of child labour which you may find interesting; the main point is that it was already significantly in decline as the population grew richer.

    As for your other point, I don't think you realize sufficiently the amount of support that was historically provided by the friendly societies and other voluntary organizations. The point was that working people virtually all joined these kinds of insurance schemes for the purpose, among other things, of guaranteeing enough to survive on in the event that they lost their job, were disabled, etc. So for the majority of people, this kind of situation simply wouldn't arise; they made sure of that themselves.
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    (Original post by Richard_A_Garner)
    17th century definitions of a monopoly
    Listing 17th century definitions isn't very helpful because the concept meant something completely different back then. To try and argue that a monopoly can only come from the state by definition isn't particularly helpful for your case. You and I both know what each other mean by "monopoly" here. Playing semantic games with 17th century and earlier definitions doesn't actually address what can happen in free markets and whether it is a good thing.

    (Original post by Richard_A_Garner)
    I am the monopoly supplier of my labour
    A sole buyer or supplier is a technical monopoly. We don't object to monopolies just because they are monopolies. We both object to monopolies because of the distortive influence they have on markets - i.e. because of their overwhelming market power. This is how all modern regulatory agencies including the Competition Commission define monopolies. The CC uses a supplier with >25% market share of a given industry or sector which is able to use and abuse that market share.

    You do know that in the US many towns and cities have only one provider of gas by law? That it is illegal to compete with them?
    Yes. And I disagree with it. You've avoided the point by creating a straw-man. To say that some states somewhere do something worse is not an answer to the problems thrown up by the free market.

    A free market is one without state intervention. If the cost of the next firm to enter the industry, after the marginal firm, is greater than £10, then present supplier is, in a sense, selling below cost, even though his cost is less than £10, surely. Customers are getting gas at less than it would cost somebody else to supply it. In the mean time, that £9 difference between £1 and £10 is that somebody else's incentive to try to produce gas for less than £10, and their signal that they would be able to sell it if they do.
    To say that the the monopoly provider is in some sense selling below cost does not really describe what is going on. Barriers to entry are magnifiying

    You are making the naive assumption that barriers to entry are readily surmountable. They are not. In our theoretical gas market, it simply is not worth another firm putting in the massive investment needed to compete with a current monopoly provider. The new provider will look at the effect his competition will have and budget accordingly. If he enters this market, the monopoly is likely to lower its prices to £1.50. The amount of capital and risk needed to build something like gas distribution infrastructure is absolutely enormous - a £1 to £1.50 potential price for a new entrant isn't anywhere near enough.

    It is illegal to practice law for a fee without a license. You have to pass the Bar exam, costing thousands and thousands of pounds, and then be able to start a firm. You case proves my point entirely: A cartel is only enforcible when the agreement can be enforce or new entrants can be shut out. Occupational licensure, amongst other things, does precisely that (such licensure in this case is some of the worst, like medical licensing, in that the licensing authority is made up, to a large extent, of precisely those against whom the new entrant would be competing, and also because new law schools and the number of places they offer is decided by the licensing authority, as it is in medical licensing).
    You're making an entirely different point. What I said would remain exactly the same regardless of licensing requirements. The cartel I was talking about was simple collusion on what employees get paid - nothing to do with licensing. For another example, how about oil. There are certainly no state licensing requirements for OPEC. Or perhaps the way in which Major League Baseball colluded to limit baseball players' salaries.

    Now, cartel agreements are not enforceable in this country so you can't blame the state. The simple fact is that cartels will occur where it is in people's interests to form them; and they will not be broken where it is in people's long-term interests to keep them. You can see it in poker. Your earlier comments to the effect of "cartels will always be broken" are simply fantasy.

    n.b. for the record the number of law schools and number of people doing law courses is no concern of the licensing authorities. In fact, the majority of people doing the Barristers' course never actually find a job, and there are a sizeable number of solicitors who take the course and can't find a job at the end of it as well. Licensing is not the limiting factor here. Of course under a classic economic analysis wages would go down to accomodate this and reach an equilibrium. In fact this actually does not and hever has happened.

    I don't assume that capital is unlimited. I assume that it will be invested in opportunities that are profitable. The forming of a cartel to keep prices up makes entry into that industry profitable. Therefore people have an incentive to provide capital for new entrants (which do not, of course, have to be start up firms, but can already be established firms in other industries). Likewise, attempting to gain a monopoly by buying out competitors makes it profitable to start up firms to sell to the monopolist. Because it is profitable, profit seeking investors will back it, etc. etc.
    No, a forming of a cartel does not necessarily make an industry profitable. It may be very profitable for the people in it. But it may not be very profitable for people trying to enter the industry. Entering a industry which sways towards larger businesses is extremely risky - you need very very very significant marginal returns to attract investors to put up the necessary capital. Where the barriers to entry are significant, a unregulated monopoly can build up very significant margins above anything approaching what it could charge in a competitive market. This is why you can't directly apply GCSE/AS-level classical economics in real life. At least not until you've done A2 and learn that MR = AC for individual companies is somewhere different to S = D in the general market.

    If a firm whose economies of scale are such that it gets all the business in a region raises its prices above what it costs for others to supply gas in that region, investment in doing so becomes profitable. This is precisely the point: Inefficient operations by one agent make efficient operations profitable for others, and unprofitable for the inefficient firm. So long as this is the case, there is an incentive to invest.
    You are using broad terms like "incentive to invest" to cover what is really going on. Yes of course there is an incentive to invest in a profitable industry. The point is whether it is worth doing so. Clearly a monopoly can't just charge whatever it likes because there comes a point where others get involved. But it can certainly get away with charging a hell of a lot more than the good would cost in a competitive or regulated market - the more barriers to entry, the higher the potential returns need to be. Where the barriers to entry are very high, you need enormous potential returns to entice investors in. It is this margin which monopolies and cartels can exploit.
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    (Original post by Richard_A_Garner)
    Partly because that is what the word means. Until recently, the word monopoly meant a grant of privilege by the crown providing exclusive control of a trade or industry to its recipient. Being the only firm in an industry was not sufficient to call oneself a monopoly.
    Isn't that just an old fashioned or narrow definition of monopoly used by some subset of philosophers? I mean you're quoting people from the 1700s, while the web definitions differ, and I grew up playing Monopoly, a game from 1935. The etymology of the word makes a reasonable definition in my mind, if you categorize sellers into groups. For example, Microsoft is the sole supplier of Windows, but it isn't the only firm that makes and sells operating systems.

    Another is because of the inability to charge a monopoly price or make monopoly profits.
    I don't understand why, for example, the sole established ISP in a region could not make monopoly profits. Why couldn't this ISP charge above the equilibrium price if entry of a competitor into the market relied on a new firm laying it's own fiber optic cable and infrastructure. Why would a railway company that covered a whole region have to worry about potential competition, when any potential competitor would be discouraged, since they'd have to pay to lay a whole new set of tracks?

    EDIT: Please no one neg me for ignorance, never studied economics
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    (Original post by jacketpotato)
    A sole buyer or supplier is a technical monopoly. We don't object to monopolies just because they are monopolies. We both object to monopolies because of the distortive influence they have on markets - i.e. because of their overwhelming market power. This is how all modern regulatory agencies including the Competition Commission define monopolies. The CC uses a supplier with >25% market share of a given industry or sector which is able to use and abuse that market share.
    Well, for a start, the CC is a giant joke, as is the Federal Trade Commission. You appear to be an economically educated chap, so I assume you are conversant with public choice, and in particular the theory of regulatory capture by special interests. If not, the upshot is very simple: good regulation is a public good, and therefore is liable to be underproduced. In addition, because the benefits to the industry of capturing a regulator are concentrated and the costs to everyone else, usually the consumer, are dispersed, the logic of collective action means that regulators get taken over more often than not. A perfect example is today's CC ruling on the 'aggressive' tactics used by supermarkets towards their suppliers. A commission set up to supposedly protect consumers is using its political muscle to stop supermarkets from... passing on low prices from their suppliers. These things cease very quickly to be neutral judges of whether or not an industry is competitive and turn into the tool of those whose instinct is ironically to suppress competition.

    You are making the naive assumption that barriers to entry are readily surmountable. They are not. In our theoretical gas market, it simply is not worth another firm putting in the massive investment needed to compete with a current monopoly provider. The new provider will look at the effect his competition will have and budget accordingly. If he enters this market, the monopoly is likely to lower its prices to £1.50. The amount of capital and risk needed to build something like gas distribution infrastructure is absolutely enormous - a £1 to £1.50 potential price for a new entrant isn't anywhere near enough.
    It's not clear to me that you can even articulate the supposed problem in this situation. What price should the firm be charging? A priori, there is no way of knowing. A static equilibrium analysis doesn't exactly help, because the example is set up so that it is literally indeterminate what the equilibrium output level would otherwise be.

    You're making an entirely different point. What I said would remain exactly the same regardless of licensing requirements. The cartel I was talking about was simple collusion on what employees get paid - nothing to do with licensing. For another example, how about oil. There are certainly no state licensing requirements for OPEC. Or perhaps the way in which Major League Baseball colluded to limit baseball players' salaries.
    OPEC is an excellent example, because it illustrates precisely how hard it is for a cartel to successfully corner the market: the logic of the situation is that each cartel participant is essentially in a prisoner's dilemma. Cooperate, and the benefits are spread out amongst the members of the cartel. Defect, that is, raise your output level and increase your profit, and provided you can avoid detection, all the benefits accrue to you. The possibility for long-term equilibrium strategies is not great either, because it only takes a single competitor to break the cartel. OPEC's production limits are routinely ignored by its members, and so oil prices are virtually always below profit maximizing levels. There is actually a ton of literature arguing that OPEC, even in its heyday, had very little impact on pricing - competitive pressure did all the work.


    n.b. for the record the number of law schools and number of people doing law courses is no concern of the licensing authorities. In fact, the majority of people doing the Barristers' course never actually find a job, and there are a sizeable number of solicitors who take the course and can't find a job at the end of it as well. Licensing is not the limiting factor here. Of course under a classic economic analysis wages would go down to accomodate this and reach an equilibrium. In fact this actually does not and hever has happened.
    I can't make much sense of your argument here (it seems if it's saying what I think it is, it undermines your entire point elsewhere), but again, there is a ton of literature on the negative effects of occupational licensure on competition. I don't see how you can say that it doesn't cause any issues, just like that.

    No, a forming of a cartel does not necessarily make an industry profitable. It may be very profitable for the people in it. But it may not be very profitable for people trying to enter the industry. Entering a industry which sways towards larger businesses is extremely risky - you need very very very significant marginal returns to attract investors to put up the necessary capital. Where the barriers to entry are significant, a unregulated monopoly can build up very significant margins above anything approaching what it could charge in a competitive market. This is why you can't directly apply GCSE/AS-level classical economics in real life. At least not until you've done A2 and learn that MR = AC for individual companies is somewhere different to S = D in the general market.
    And when you do grown up economics, you realize that static equilibrium models are a bad approximation of reality and an even worse approximation of how reality should be (well, OK, maybe this is an overstatement - a lot of economics doesn't take this into account). It's extremely misleading to compare an 'equilibrium' which assumes that competition has ended with a monopolistic situation where competition is assumed never to take place.

    You are using broad terms like "incentive to invest" to cover what is really going on. Yes of course there is an incentive to invest in a profitable industry. The point is whether it is worth doing so. Clearly a monopoly can't just charge whatever it likes because there comes a point where others get involved. But it can certainly get away with charging a hell of a lot more than the good would cost in a competitive or regulated market - the more barriers to entry, the higher the potential returns need to be. Where the barriers to entry are very high, you need enormous potential returns to entice investors in. It is this margin which monopolies and cartels can exploit.
    You said in your earlier post that there were 'countless' examples of abuse of market power occuring in free-market generated monopolies. Now I won't be harsh and ask for continuum many examples, but I'd genuinely like to see a few. My suspicion is that for the most part they will be extremely unstable and unable to survive in the marketplace, caused by state intervention, the beneficiaries of regulatory capture, or all of the above.
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    (Original post by jacketpotato)
    Listing 17th century definitions isn't very helpful because the concept meant something completely different back then. To try and argue that a monopoly can only come from the state by definition isn't particularly helpful for your case. You and I both know what each other mean by "monopoly" here. Playing semantic games with 17th century and earlier definitions doesn't actually address what can happen in free markets and whether it is a good thing.
    Agreed. It just shows that we have to be clearer on what we are talking about.

    A sole buyer or supplier is a technical monopoly. We don't object to monopolies just because they are monopolies. We both object to monopolies because of the distortive influence they have on markets - i.e. because of their overwhelming market power. This is how all modern regulatory agencies including the Competition Commission define monopolies. The CC uses a supplier with >25% market share of a given industry or sector which is able to use and abuse that market share.
    Exactly. But I have, thus far either defined a monopoly by its ability to produce these bad effects, or by traditional legal views. Others here have said that the ability of a single firm to arise as the supplier of a good makes it a monopoly. But now you have, apparently accepted that merely being a monopoly is not enough to make one objectionable. I'm happy with this, too, if it is still true that monopolies are relatively harmless in a free market, especially compared to attempts to regulate, control, or prevent them.

    Yes. And I disagree with it. You've avoided the point by creating a straw-man. To say that some states somewhere do something worse is not an answer to the problems thrown up by the free market.
    No it is not a strawman since it relates precisely to your claim that GasCo provides proof of your position. That company may have a monopoly, but it is also true that state intervention ensures this.

    To say that the the monopoly provider is in some sense selling below cost does not really describe what is going on. Barriers to entry are magnifiying
    I didn't say it was selling below its costs, only that it was selling below the costs of alternatives.

    You are making the naive assumption that barriers to entry are readily surmountable. They are not. In our theoretical gas market, it simply is not worth another firm putting in the massive investment needed to compete with a current monopoly provider. The new provider will look at the effect his competition will have and budget accordingly. If he enters this market, the monopoly is likely to lower its prices to £1.50. The amount of capital and risk needed to build something like gas distribution infrastructure is absolutely enormous - a £1 to £1.50 potential price for a new entrant isn't anywhere near enough.
    Why is any of this a problem? It still implies that the dominant firm is selling gas to customers more cheaply than anybody else could, and that if they attempt, it will benefit the customers even more by waging a price war?

    Incidentally, predatory pricing is usually more successful in breaking open "monopolies" than establishing them. McGee, in his classic article on Standard Oil, wrote,

    Both the predator and prey lose wealth. The bigger firm with more sales will take a bigger absolute loss. The smaller firms can often shut down production of that item and wait out the return to higher prices, letting the predator take the greater losses. But whether or not the prey can take that action, it still is clear that below-cost selling as a predatory tactic is not as smart as it is alleged to be.
    On tactic Standard were accused of was predatory pricing in one area whilst subsidising losses that occur there by raising prices alswhere. The trouble is that this tactic doesn't make sense, either, since it would result in the firm taking a loss in both places: It loses faster than smaller competitors in the region it cuts prices in, and loses in the region it rises prices in as the high prices attract new competitors there that undercut it. Testimony in the courts in the Standard Oil case show that whilst it threatened this sort of action, its competitors knew the plan's weaknesses and threatened the appropriate retaliation. The threats never materialised.

    One of the few times predatory pricing has been successful has been precisely because smaller firms make losses smaller in absolute terms than the larger firms: Ryanair engaged in predatory pricing against Ireland's state airline, and successfully broke its monopoly.

    You're making an entirely different point. What I said would remain exactly the same regardless of licensing requirements. The cartel I was talking about was simple collusion on what employees get paid - nothing to do with licensing.
    If the employers colluded to keep pay down, they would attract new firms into the industry to hire employers at the higher pay.I don't know if licensing would prevent this, since employers might not need to be licensed lawyers. They usually are, though.

    If employees collude to fix prices high, then they attract new competitors to undercut that high price. Unions call them scabs. Licensing would prevent this. Or a minimum wage law.

    For another example, how about oil. There are certainly no state licensing requirements for OPEC.
    Correct. And Milton Friedman, if I recall, suggested that state intervention during the seventies during the OPEC price fixing prolonged the high prices.

    Or perhaps the way in which Major League Baseball colluded to limit baseball players' salaries.
    Are you saying that there are not restrictions that new teams would have in competing for those players, or state granted advantages to established ones that given them advantages? Aren't most teams heavily subsidised, susidies that new firms, sorry, teams would not get?

    Now, cartel agreements are not enforceable in this country so you can't blame the state.
    Yes they are. As I said, numerous forms of regulation have the effect of enforcing cartel agreements and enabling price fixing (the classic example is in Friedman's Capitalism and Freedom with the example of the AMA control over licensing, but other examples exist too).

    The simple fact is that cartels will occur where it is in people's interests to form them; and they will not be broken where it is in people's long-term interests to keep them. You can see it in poker. Your earlier comments to the effect of "cartels will always be broken" are simply fantasy.
    No, they are not. Take another example that seems to fit your impossibility situation, due to high capital outlay, etc: Competing railroads. Railroad operators frequently tried to "pool" together to fix prices. The first case in the East, sponsored by New York Central, had been tried as early as 1874 by Vanderbilt; this pool lasted six months. In September 1876, a Southwestern Railroad Association was formed by seven major companies to voluntarily enforce a pool. IT collapsed in early 1878, less than two years later. JP Morgan formed the Interstate Commerce Railway Association in January of 1889 to cartelise railways and control frieght rates in the West. By March there was a rate war going, and by June rates were back to the level they were at before he intervened.This changed when the state intervened, creating the ICC. This regulation was introduced at the behest of the major railroad operators, and the commision quickly became run by the railroads, such that the head commissioner, when he left the commosion, did so for a job with JP Morgan. The solution, from the railroad's perspective, was to have rates legally set by the Commission, which they ran.

    So here we have an example of an industry with a relatively few operators, entry into which required huge capital contributions, and yet efforst to maintain cartels collapsed. Milton Friedman writes,

    Such collusion or private cartel arrangements are therefore constantly arising. However, they are generally unstable and of brief duration unless they can call government to their assistance. The establishment of the cartel, by raising prices makes it more profitable for outsiders to enter the industry. Moreover, since the higher price can be established only by the particpants' restricting their output below the level they would like to produce at the fixed price, there is an incentive for each one sperately to undercut the price in order to expand output. Each one, of course, hopes that the others will abide by the agreement. It takes only one or at most a few "chiselers" - who are indeed public benefactors - to break the cartel. In absence of government assistance in enforcing the cartel, they are almost sure to succeed fairly promptly.
    This is precisely what happened in the case of the railroads, as members of cartels would sell rebates to break their quotas. State intervantiion made doing this illegal, thereby helping enforce the cartels. Denying that members of cartels have these incentives is precisely the same as denying that recipients of public goods have incentives to free ride, leading to public goods being undersupplied - so denying that cartels are unstable does not aid defenders of state intervention.

    No, a forming of a cartel does not necessarily make an industry profitable. It may be very profitable for the people in it. But it may not be very profitable for people trying to enter the industry. Entering a industry which sways towards larger businesses is extremely risky - you need very very very significant marginal returns to attract investors to put up the necessary capital. Where the barriers to entry are significant, a unregulated monopoly can build up very significant margins above anything approaching what it could charge in a competitive market. This is why you can't directly apply GCSE/AS-level classical economics in real life. At least not until you've done A2 and learn that MR = AC for individual companies is somewhere different to S = D in the general market.
    Well, I have never done a GCSE course, or A level, though I could probably blag it. I am sell taught in this. Much of this analysis I have used wouldn't apply "classical" or neoclassical thought either. The essentail reading on monopoly that would support my position is this. However, if you want a neoclassical position that might address your concerns, from somebody who is also a skeptical anarcho-capitalist, like David Friedman (i.e. willing to seek problems with his own positions and explore them), I would recommend this piece by Bryan Caplan.
 
 
 
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