Replies

You make some interesting points. While I am willing to concede your points in a number of areas, something comes to mind that you don’t seem to address.

The only "bad" monopolies are those monopolies that are coercive--or, as is referred to in today's economics, those companies with "market power;" i.e., an ability to raise prices to supracompetitive levels. BUT, in a free market, the free flow of capital acts as a check on any company's ability to institute supracompetitive pricing. As a company with market power begins to charge supracompetitive prices, capital will shift to that particular industry because it offers a higher rate of return than other industries--thus encouraging new entrants, which will, in turn, lower prices to competitive levels.

If the monopolistic entity has the “market power” to use predatory pricing to drive out new entrants, it has the power to deny any competitor entry regardless of the capital flow situation. Any market entrant able to withstand such pressure long enough to force the monopoly to return to competitive prices would have to have access to huge amounts of up-front “loss capital.” Such a loss would deny the investors the opportunity to achieve profitability in any reasonable time. In the final analysis, after a successful market penetration, even if enough “loss capital” were theoretically available, the prices would only return to a “competitive” level and the recovery of “loss capital” over any reasonable period would be virtually impossible making the capital return on investment unjustifiable.

More importantly, the concept of cross-elasticity of demand also makes it very difficult for most market players, even if they are to have a "monopoly" in a particular industry, to have a coercive monopoly. Any attempts to raise prices to supracompetitive levels will result in consumers switching to a different, less expensive (but equally useful) product.

This is true only if a suitable, substitute product is readily available and can be available at a cheaper price than the supracompetitive levels charged by the monopoly. The monopolist only need keep the price just below the elasticity point to achieve a market shut out position to new, competitive entrants and avoid the cross flow problem. For example, in theory, carbon fiber technology would be a suitable, cross-elasticity product for steel in many applications. However, steel would have to reach nearly the price of silk per pound for such product elasticity to exist. A steel monopolist need only keep that price just below that level to deny such elasticity and, given the start up costs of new steel mills, could theoretically deny any non-governmentally aided, new entrant a market position. Additionally, there are products for which no alternative product exists.

Having posited the above, please do not assume as have some on this thread, that I am advocating “big government.” I am not, by any means. I merely intend to point out that there are situations that can reasonably be foreseen where pure libertarianism cannot provide a practical answer. My point is, and has been, all along, that while Jefferson was generally right that the best government is the least government, there are situations where some government intervention is a practical necessity.

In response to your comments on predatory pricing, as I noted earlier, it's an interesting idea in theory, but it's been rejected by most legal scholars and economists and has little practical value in the real world for a couple of reasons.

First, leaving aside the difficulties with calculating marginal cost, the main hurdle to predatory pricing is, again, free flow of capital. I think the problem with your example is that you assume only one market entrant. Let's assume, for a moment, an established company ("EC") engages in predatory pricing and drives a new entrant from the marketplace (A large assumption, I think, since I'm not aware of any successful real life example of predatory pricing, ever). Now, since EC has suffered losses over an extended period of time due to its predatory pricing tactics, it will have to raise prices to supracompetitive levels in order to recoup those losses. But, whenever EC prices products above competitive levels, capital will again be attracted to the industry and new entrants will appear: it's a vicious cycle that never allows EC to recoup the losses it suffers in a predatory pricing scheme.

Second, assuming that EC is a public company (a pretty safe bet if we assume EC has market power), and assuming that EC decided to pursue a predatory pricing scheme, investors would be intolerant of an extended period of losses--capital would flow out of the industry and in order to continue operations, EC would have to raise prices back to its marginal costs: competitive levels. Even if predatory pricing were possible--and I'm not saying it is--it's just impossible to get millions of investors on the same page. An extended period of losses would drive away investors. It's just not practical.

Second, to address cross-elasticity of demand, I agree that it's certain a company would attempt to price its product just below the point at which people begin to switch to an alternative, but as a business, isn't that the idea? That's the market price; that's the price people are willing to pay for the product.

While I note that you are correct in saying that there are high barriers of entry in the steel industry, there are also alternatives for the product: titanium, aluminum, and scrap metal come immediately to mind. While I recognize these aren't suitable alternatives in every situation, they are in many, and that's the idea.

But again, all these ideas aren't isolated--if a steel monopolist were charging supracompetitive prices, even if below the point at which consumers would seek alternatives, then capital would flow to the industry and new entrants would appear, despite the high barriers to entry that clearly exist in the steel industry.

While I agree that the government does have a purpose and should do things, it does not need to meddle in the marketplace, and it assuredly does not need to pass antitrust laws for the protection of the marketplace; you only need those for redistribution of wealth.