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From: nrh@inmet.UUCP
Newsgroups: net.politics
Subject: Re: monopolies unstable?
Message-ID: <2028@inmet.UUCP>
Date: Sat, 9-Mar-85 02:43:19 EST
Article-I.D.: inmet.2028
Posted: Sat Mar  9 02:43:19 1985
Date-Received: Mon, 11-Mar-85 05:19:16 EST
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Nf-ID: #R:mit-vax:-482300:inmet:7800324:000:4194
Nf-From: inmet!nrh    Mar  7 14:11:00 1985

>***** inmet:net.politics / mit-vax!oaf /  3:27 pm  Mar  6, 1985
>Context:  nrh@inmet attributing to dmck
>    >As it happens, I do believe that monopolies are not stable unless
>    >given special, generally government-based protection.  As Daniel McK.
>    >points out, such monopolies leave themselves open to "cracking"
>    >if they charge rates over their marginal costs -- if, in other words,
>    >they get greedy.  
>Forgive my naivete, but it strikes me that monopolies can get nice and
>greedy and not be destabilized.  I recall stories of Standard Oil driving
>out competition by giving it away free until the competitor dropped dead,
>then raising prices.  Also of Bell Telephone doing the same.

Odd, then, that you DON'T recall stories of Cornplanter Refineries
growing at amazing rates while competing with Standard Oil, nor
of the man who built 3 refineries, knowing that Standard Oil would
be forced to buy each one to try to maintain their slipping monopoly, and
overcharged Standard Oil.  Not a bad way to make a living, for all that
it reminds me of Ex-PFC Wintergreen in Catch-22.

For a very brief and very libertarian look at the Standard Oil
"monopoly", consult "The Machinery of Freedom" by David Friedman.

>
>Whether the stories are true is immaterial.  

Here we agree -- anecdotes, except as counterexamples, are
fairly useless in discussions about how political things work.

>The point is that when
>analyzing at anything but the surface level, monopolists/oligopolists
>can easily distort a "free market" to their liking.  

It is certainly true that they have done this, but it tends to be
either a very short-lived distortion (as they say in NASA,
"Stressed structures have a way of unstressing themselves") or
they use economic power to get political power and remove the
freedom of the market.  This last is the part that libertarians
wish to stop from happening.

>They have economies of scale, 
>they can survive a drought (like giving it away for free), 
>they can integrate vertically and horizontally, hence squeezing others
>out of starting up, etc.

Taking your points in turn:  they also often have DIS-economies of scale.
This is why large bureaucracies are a liability, but seem inevitable in 
large companies.  

They can survive a drought, but smaller companies may come and go -- leaving
at the beginning of the drought and starting up again after.  Further
the new competition need not be all that small (AT&T vs. IBM).

As for giving it away, Cornplanter came up with a nice solution for that --
they arranged it so that they could sell to a fairly large area.  Remember,
the large monopolist has more customers than the small one.  The small
one need only beat the price by a little, and lose a little money --
the large company must try and match that price, and if the price is
at or below cost, the amount of money he'll lose will be much, much,
greater than the small company.  If he tries to support his losses
locally by selling at higher prices in other areas, he runs
two risks -- first that the small company he's trying to drive out
of business will advertise to customers in the area he's charging
more to, second that he'll encourage new companies to spring up
in the higher-charged area.

As for horizontal and vertical integration, this may or may not be
worthwhile.  Remember the diseconomies of scale problem, and one other
point: once vertically integrated, the monopoly no longer has
a cheap way of getting cheaper parts from "upstream" -- it must
improve its own operation, rather than relying upon competition -- 
notoriously harder to do.  

>What am I missing, gentle readers?  The flamacious economic discussions
>here seem based on sand, living as they do on assumptions of hypothetical
>societies and systems.  Is this really where it's at?

Hmmm.....  I suspect you missed the "Standard Oil" discussions, and
my challenge to find non-state-supported and stable monopolies.

By the way, I don't mean to duck your suggestion that
the Bell system was a monopoly, but it certainly
was a state-supported monopoly, so it's covered by the
phrase in my original note about "special, generally government-based
protection".