In economics and business ethics, a coercive monopoly is a firm that is able to raise prices and make production decisions without the risk that competition will arise to draw away their customers.[1] A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete with it through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from the possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production.[2]
Coercive monopolies can arise in free market or via government intervention to institute them.[3][4][5] Some conservative think tanks, such as the Foundation for Economic Education, define coercive monopolies solely as those established by the government or via the illegal use of force, excluding monopolies that arise in the free market.[6]
Exclusive control of electricity supply due to government-imposed "utility" status is a coercive monopoly because consumers have no choice but to pay the price that the monopolist demands. Consumers do not have an alternative to purchase electricity from a cheaper competitor, because the wires running into their homes belong to the monopolist.
Exclusive control of Coca-Cola, by contrast, is not a coercive monopoly because consumers have other cola brands to choose from and the Coca-Cola company is subject to competitive forces. Consequently, there is an upper limit to which the company can raise its prices before profits begin to erode because of the presence of viable substitute goods.
To maintain a non-coercive monopoly, a monopolist must make pricing and production decisions knowing that, if prices are too high or quality is too low, competition may arise from another firm that can better serve the market. If the non-coercive monopoly is successful, it is called an efficiency monopoly, because it has been able to keep production and supply costs lower than any other competitor so that it can charge a lower price than others and still be profitable. Since potential competitors are not able to be so efficient, they are not able to charge a lower or comparable price and still be profitable. Hence, competing against a non-coercive monopoly is possible but not profitable, whereas competing against a coercive monopoly is potentially profitable but not possible.
Establishing a coercive monopoly
According to business ethicist John Hasnas, "most [contemporary business ethicists] take for granted that a free market produces coercive monopolies."[3] However, some people, including Alan Greenspan and Nathaniel Branden, argue that such independence from competitive forces "can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises."[1][7] Some point out that a coercive monopolist may "employ violence" to create or maintain a coercive monopoly.[8]
Some[who?] recommend that government create coercive monopolies. For example, claims of natural monopoly are often used as justification for government intervening to establish a statutory monopoly (government monopoly or government-granted monopoly) where competition is outlawed, under the claim that multiple firms providing a good or service entails more collective costs to an economy than would be the case if a single firm provided that good or service. This has often been done with electricity, water, telecommunications, and mail delivery. Some economists[who?] believe that such coercive monopolies are beneficial because of greater economies of scale and because they are more likely to act in the national interest. Conversely, Judge Richard Posner famously argued in Natural Monopoly and Its Regulation that the deadweight losses associated with regulating such monopolies were greater than any possible benefit.[9]
Private coercion
A corporation which successfully engages in coercion to the extent that it eliminates the possibility of competition operates a coercive monopoly. A firm may use illegal or non-economic methods, such as extortion, to achieve and retain a coercive monopoly position. A company which has become the sole supplier of a commodity through non-coercive means (such as by simply outcompeting all other firms) may theoretically then go on to become a coercive monopoly if it maintains its position by engaging in coercive barriers to entry. The most famous historical examples of this type of coercive monopoly began in 1920, when the Eighteenth Amendment to the United States Constitution went into effect. This period, called Prohibition, presented lucrative opportunities for organized crime to take over the importation ("bootlegging"), manufacture, and distribution of alcoholic beverages. Al Capone, one of the most famous bootleggers, built his criminal empire largely on profits from illegal alcohol and effectively used coercion (including murder) to impose barriers to entry on his competitors. However, even private coercive monopolies almost invariably require government support, whether direct or indirect. In Capone's case, the U.S. government created the necessary conditions for a coercive monopoly by outlawing the manufacture and sale of alcohol, thereby enabling unnaturally high profits on the black market, and was not providing the usual service of enforcing trade contracts.[citation needed] Likewise, some corrupt public officials took bribes that ensured that Capone would receive preferential treatment against potential competitors.[10]
Antitrust
The ability of firms in a coercive monopoly to increase their profits through setting prices above competitive levels brings about the need for antitrust law. There are examples in history wherein a firm that is not a government-granted monopoly is claimed to have a coercive monopoly, and antitrust action has been initiated to resolve the perceived problem. For example, in United States v. Microsoft The Plaintiff's Finding of Fact alleged that Microsoft "coerced" Apple Computer to enter into contracts resulting in the prohibition of competition. Eric Raymond, an author and one of the founders of the Open Source Initiative, says "The thing a lot of people somehow missed is that the courts affirmed the findings of fact – that Microsoft is indeed a coercive monopoly."[11]
Another disputed example is the case of U.S. v. Aluminum Co. of America (Alcoa) in 1945. The court concluded that Alcoa "excluded competitors."[1] The ruling is heavily criticized for punishing efficiency and is quoted below:
It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.[12]
However, antitrust law varies across the United States and the European Union. Specifically, in the U.S. monopoly pricing is not regulated. Whereas the European Community (EC) considers excessive pricing as an abuse of dominance and those involved can be fined or subject to prohibitory orders.[13] This difference in regulation highlights the need to level out antitrust laws across the world in order to control this exclusionary and exploitive conduct in coercive monopolies.
Government monopolies
Undisputed examples of coercive monopolies are those that are enforced by law. In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the coercive monopoly status is sustained by the enforcement of laws or regulations that ban competition, or reserve exclusive control over factors of production for the government. The state-owned petroleum companies that are common in oil-rich developing countries (such as Aramco in Saudi Arabia or PDVSA in Venezuela) are examples of government monopolies created through nationalization of resources and existing firms.
The United States Postal Service is an example of a coercive monopoly created through laws that ban potential competitors such as UPS or FedEx from offering competing services (in this case, first-class and standard (formerly called "third-class") mail delivery).[14] Government monopolies also mandate taxpayers to subsidize these firms. Thus, if the government protection the United States Postal Service was lifted and mail delivery could be included in free competition, the number of entrants into the industry would likely increase.[15]
Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In a government monopoly, the holder of the monopoly is the government itself and the group of people who make business decisions is an agency under the government's direct authority. In a government-granted monopoly, the coercive monopoly is enforced through law, but the holder of the monopoly is formally a private firm, or a subsidiary division of a private firm, which makes its own business decisions. Examples of government-granted monopolies include cable television and water providers in many municipalities in the United States, exclusive petroleum exploration grants to companies such as Standard Oil in many countries, and historically, lucrative colonial "joint stock" companies such as the Dutch East India Company, which were granted exclusive trading privileges with colonial possessions under mercantilist economic policy. Intellectual property such as copyrights and patents are government-granted monopolies. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton by the State of New York in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional because of a conflicting inter-state grant to Thomas Gibbons by the federal Congress.[16]
Economist Lawrence W. Reed says that a government can cause a coercive monopoly without explicitly banning competition by "simply [bestowing] privileges, immunities, or subsidies on one firm while imposing costly requirements on all others."[17] For example, Alan Greenspan, in his essay Antitrust argues that land subsidies to railroad companies in the western portion of the U.S. in 19th century created a coercive monopoly position. He says that "with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East."[citation needed] In addition, regulations may be established that place financial burdens on smaller firms that attempt to compete with larger, more established firms that are better able to absorb the regulatory costs.
The state as a coercive monopoly
Economist Murray Rothbard, noted for his espousal of anarcho-capitalism, argues that the state itself is a coercive monopoly as it uses force to establish "a compulsory monopoly over police and military services, the provision of law, judicial decision-making, the mint and the power to create money, unused land ('the public domain'), streets and highways, rivers and coastal waters, and the means of delivering mail."[citation needed] He says that "a coercive monopolist tends to perform his service badly and inefficiently".[citation needed]
These state-owned companies create an issue of setting unrealistic prices for unreliable services. An example of this was seen in Europe during the late 1980s when bank mergers decreased competition in the banking market. As a result, this coercive behaviour allowed them to sustain high interest rates until the early 90s, severely impacting their customers. [18] In addition to moral arguments over the use of force, free market anarchists often argue that if these services were open to competition that the market could supply them at a lower price and higher quality.[citation needed]
Labor unions have been called coercive monopolies which keep wage rates higher than they would otherwise be if individuals competed with each other for wages. Economists who believe this to be the case refer to this as a monopoly wage.[19] This has raised some conversing opinions about the power of unions to contradict antitrust laws. Specifically, collusive methods to increases prices is illegal on public policy standards, but raising labour prices is encouraged.[20] In addition, the unions participating in collective bargaining is applauded for its peaceful dispute settlement tactics, but this can also be seen as prohibited coercive behaviour. Nonetheless, as the intention behind these coercive actions in unions are for the benefit of workers rather than company profits, antitrust laws have not been held against these unions.
↑ Lysander Spooner started the commercially successful American Letter Mail Company in order to compete with the United States Post Office by providing lower rates. He was successfully challenged by the U.S. government and exhausted his resources trying to defend his right to compete.
↑ Simpson, Brian P. (August 2010). "Two Theories of Monopoly and Competition: Implications and Applications". The Journal of Applied Business and Economics. 11 (2): 139–151. ProQuest815978228.
↑ For about six months, Thomas Gibbons and Cornelius Vanderbilt operated a steamboat with low fares in defiance of the law. Gibbons successfully took his case to the United States Supreme Court. The Court ruled in Gibbons v. Ogden that the state-granted monopoly, which conducted some service between New York and New Jersey, was an unconstitutional violation of interstate commerce. Fares immediately dropped from $7 to $3. Folsom, Burton W.The Myth of the Robber Barons. Young America, 2003.
Antitrust Policy As Corporate Welfare by Clyde Wayne Crews Jr "Coercive monopoly power does not emerge from the transitory outcomes of the voluntary exchanges that comprise the marketplace. It is hoped that policymakers will come to recognize that government cannot protect the public from monopoly power, because it is the source of such power."
A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.
Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a company takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other companies. If this happens in the presence of a coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the company maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereals, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition. Further work on monopolistic competition was undertaken by Dixit and Stiglitz who created the Dixit-Stiglitz model which has proved applicable used in the sub fields of international trade theory, macroeconomics and economic geography.
In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition causes market inefficiencies, resulting in market failure. Imperfect competition usually describes behaviour of suppliers in a market, such that the level of competition between sellers is below the level of competition in perfectly competitive market conditions.
The Sherman Antitrust Act of 1890 is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author.
In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.
Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise.
Predatory pricing is a commercial pricing strategy which involves the use of large scale undercutting to eliminate competition. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss. The aim is to force existing or potential competitors within the industry to abandon the market so that the dominant firm may establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law; the act of pushing for antitrust measures or attacking monopolistic companies is commonly known as trust busting.
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, held that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibrium because of the existence of potential short-term entrants.
In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of the gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.
Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship". It often occurs in imperfectly competitive markets because it exists between two or more producers that sell goods and services at the same prices but compete to increase their respective market shares through non-price measures such as marketing schemes and greater quality. It is a form of competition that requires firms to focus on product differentiation instead of pricing strategies among competitors. Such differentiation measures allowing for firms to distinguish themselves, and their products from competitors, may include, offering superb quality of service, extensive distribution, customer focus, or any sustainable competitive advantage other than price. When price controls are not present, the set of competitive equilibria naturally correspond to the state of natural outcomes in Hatfield and Milgrom's two-sided matching with contracts model.
Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets.
In United States antitrust law, monopolization is illegal monopoly behavior. The main categories of prohibited behavior include exclusive dealing, price discrimination, refusing to supply an essential facility, product tying and predatory pricing. Monopolization is a federal crime under Section 2 of the Sherman Antitrust Act of 1890. It has a specific legal meaning, which is parallel to the "abuse" of a dominant position in EU competition law, under TFEU article 102. It is also illegal in Australia under the Competition and Consumer Act 2010 (CCA). Section 2 of the Sherman Act states that any person "who shall monopolize. .. any part of the trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony." Section 2 also forbids "attempts to monopolize" and "conspiracies to monopolize". Generally this means that corporations may not act in ways that have been identified as contrary to precedent cases.
In competition law, before deciding whether companies have significant market power which would justify government intervention, the test of small but significant and non-transitory increase in price (SSNIP) is used to define the relevant market in a consistent way. It is an alternative to ad hoc determination of the relevant market by arguments about product similarity.
Baxter's law is a law of economics that describes how a monopoly in a regulated industry can extend into, and dominate, a non-regulated industry. It is named after law professor William Francis Baxter Jr., who was an antitrust law professor at Stanford University. As Assistant Attorney General, he settled a seven-year-old case against AT&T with by far the largest breakup in the history of the Sherman Antitrust Act, splitting AT&T up into seven regional phone companies in 1982.
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. As a form of coercive monopoly, government-granted monopoly is contrasted with an unregulated monopoly, wherein there is no competition but it is not forcibly excluded.
Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), is a 1992 Supreme Court decision in which the Court held that even though an equipment manufacturer lacked significant market power in the primary market for its equipment—copier-duplicators and other imaging equipment—nonetheless, it could have sufficient market power in the secondary aftermarket for repair parts to be liable under the antitrust laws for its exclusionary conduct in the aftermarket. The reason was that it was possible that, once customers were committed to the particular brand by having purchased a unit, they were "locked in" and no longer had any realistic alternative to turn to for repair parts.
The history of United States antitrust law is generally taken to begin with the Sherman Antitrust Act 1890, although some form of policy to regulate competition in the market economy has existed throughout the common law's history. Although "trust" had a technical legal meaning, the word was commonly used to denote big business, especially a large, growing manufacturing conglomerate of the sort that suddenly emerged in great numbers in the 1880s and 1890s. The Interstate Commerce Act of 1887 began a shift towards federal rather than state regulation of big business. It was followed by the Sherman Antitrust Act of 1890, the Clayton Antitrust Act and the Federal Trade Commission Act of 1914, the Robinson-Patman Act of 1936, and the Celler-Kefauver Act of 1950.
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