April 28, 2010

Monopoly is an absence of competition. When I first studied Economics, I got a strong impression that monopoly was the big, bad, wolf in the free market, an example of failure of the free market to provide the best possible deal for the consumer. Not So. Not in a free Market.
How do you achieve a monopoly? By being the first to produce a new product that people will buy. By serving the consumers. So far, everybody is a winner. The producer makes a profit, and the consumer gets a marvellous new gadget.
How do you maintain your monopoly position? Your profits attract competition which can soon eliminate the monopoly. To avoid this, the monopolist must act as though he already has competition. He must continue to improve his product, reduce his costs and his prices, and keep coming up with new products that people will want. Everybody is still a winner. Potential competition is all it takes to make the monopolist provide the best deal for the consumer.
Each worker has a degree of monopoly, because each worker is a unique person with unique attitudes, aptitudes, skills and experience. I have had the happy experience of getting an immediate job offer more than once because of particular experience in my past employment.
If I could somehow eliminate competition, I could relax and make profit without the insecurity that comes with competition. How? I might use coercion, but that would be illegal unless I could get permission from the government, which holds a monopoly on coercion. This is how the Guilds operated in the middle ages; they were granted a monopoly by the monarch.
In the late 19th and early 20th centuries, labor unions used coercion with the tacit approval of governments. This was an era when Unions could control millions of votes to influence politicians. Later they managed to get laws passed to give them power: to exclude non-members from jobs, to strike without fear of being fired, to picket while on strike.
The 20th century produced dozens of government agencies to regulate commerce. In many cases, commercial interests took control of these regulators to shut out newcomers to an industry, creating cartels of the companies that got there first.
All of these monopolistic arrangements are empowered by Government and give profit to the monopolists at a cost to the consumers. Consumers pay higher prices, often for products of diminishing quality.
Union monopolies often prove self defeating. Increased wages to union workers increase production costs so that their employers can no longer compete, unless the employers also enjoy the advantage of a monopoly, or unless the unions can achieve a monopoly control of labor throughout the industry. In this case the increased cost of production, passed on to the consumer, reduces demand. This means reduced production and layoffs in the industry. In a unionized industry, this meant layoffs among those with the least seniority.
Even unionization of an entire industry can be self defeating if the industry has significant competition from abroad in countries with less union power. For this reason, early efforts to unionize tried to build international unions.
None of these monopolies could exist in a free market, which is driven entirely by the wants of the consumers (That’s you and me). These monopolies are the product of government intervention or collusion. There is, however, a legitimate way to achieve a monopolistic advantage. That way is to excel at competition, to “build a better mousetrap”, and keep doing so.
This is the realm of the entrepreneur (which is simply French for “enterpriser”). If you can find a way to greatly improve on an existing product, or better yet, dream up an entirely new and different product, get the capital and the people to design and produce it, you have a monopoly, for a time, on that product.
This has been an increasingly important way for a company to grow and profit, especially since the mid-20th century. Imitators will spring up, in time, to compete in producing this new product. The secret of success is to keep ahead of the imitators by forever developing newer, better products. In this situation, everyone is a winner, especially the consumer.


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