@EmperorNero,
EmperorNero;123334 wrote:The definition they give on wikipedia is what I would call "not being in a competitive market".
I use the word monopoly in it's pure literal sense: There is one seller. I suggest that this is the correct definition.
Sure, but you're not accepting the market behaviour of one seller. What are the consequences of being the only seller in the market? The article you've posted touches on the correct term - monopoly pricing. What you've been asserting so far is that monopoly pricing doesn't exist, that the threat of competition will keep prices competetive. But that would be contradictory to the fundamental principle of business i.e. profit maximisation. There is absolutely no reason for a monopoly to price competetively because of imaginary competitors. It's like you driving at 30 on a 60 road because any minute now, the government might change the speed limit to 30. It doesn't make sense. Every company, regardless of the market structure, follows the principle of optimum pricing - charging the price that will yield the highest profits.
Nice article. But I disagree with this comment: "But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns." This is assuming competitors
can enter the market. The author doesn't touch on any of the barriers to entry that exist in many monopolies. Is the assumption that government protection is the only barrier? This is completely wrong.
Quote:If you used monopoly in the sense of a company having control over the market, then of course what you're saying is right, quite per definition.
But then you're assuming something that doesn't have to be the case. A single seller does not have to have control over the market and there can be a non competitive market with more than a single seller.
Plus the term monopoly would essentially be meaningless, because it always depends on further explanation why the market is non competitive.
We're going to have to agree on the definition of compete. For there to be competition, there must be at least two participants. In a monopoly there is only one, therefore there is no competition. Whether it will remain non-competetive depends on how well the monopoly utilises economic mechanisms of barriers to entry.
---------- Post added 01-29-2010 at 03:02 PM ----------
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The Dream.
By josh0335
Once upon a time, in a land far, far away, there was a young man called Josh. Josh was a successful entrepreneur. He came up with the brilliant idea of diamond bristled toothbrushes. With the tiny fragments of diamond encrusted in the bristles, toothbrushes cleaned better than ever. He got international patent rights so no one could copy his idea. His business exploded and he quickly became incredibly wealthy from a largely un-tapped market. He dominated it and he wasn't prepared to let go. Slowly Josh started doing things to make sure no one would take away his market share.
Being the only seller on the market, Josh fiddled with the price until he found the optimum. He used to sell the toothbrushes for ?10, but he found that he made even more profit by charging ?20. Yes, he lost a few lower income customers but overall he made more money. With growing profits, Josh bought new automated machines and factories to drive down the costs of his production. But Josh didn't pass these savings on to his customer. Oh no, he had a more devious plan.
He secured exclusive contracts with all the major diamond suppliers in the world by paying them above the market value. So diamonds used to cost ?5 each, but he was now paying ?8 each. He could pay them this inflated price from the savings he was making in production. The diamond suppliers were delighted by this new price, and strengthened their relationship with Josh. This new inflated diamond price had terrible effects on other diamond based business, such as jewellery, diamond cutting machinery etc. Many of these other businesses went bust because of Josh's price manipulation, but he didn't care. This was business. This newly inflated price would surely deter any would-be competitors from entering the market. Josh then went on a massive PR campaign, expanding his brand name and cementing his company as the leader in the field (in fact the only one in the field).
Nero, a young entrepreneur had taken a keen interest in the market. One day, he decided to pitch his idea to some investors to see if he could enter the market. Many investors turned him down due to the high risk involved in starting up in the market. The costs were huge either a poor chance of making a return. It slowly dawned on Nero that this was going to be difficult. He had to turn on the charm to secure some investment.
Firstly, he had to get past the patent. It took a whole year and a small fortune to reverse engineer one of Josh's toothbrushes to see how he could modify the technique being used to encrust the diamonds. Nero employed some top engineers to design a toothbrush to work around Josh's patent. This process took so long that by the time the prototype was ready, Josh had innovated a new technique (also patented) which made Nero's design out of date! Nero had come too far to back down. Perhaps he could still sell his out of date, inferior design toothbrush using clever marketing. Unfortunately, he had no money to patent his own design but decided to go to market with it anyway. He knew that by not patenting it, he risked others joining the market and profiting from his ideas, but Nero was a determined young fellow.
Secondly, the diamond suppliers would not supply the diamonds to him, because Josh had signed exclusive rights. So in the end he had to buy the lower grade diamonds. Immediately, he realized he was going to be selling an inferior product compared to Josh. But he was undeterred. He only needed to get his foot in the market. But doing the math, Nero realized things were not so simple. The diamond suppliers were asking for ?7 for each lower grade diamond. This is because Josh had inflated the market price of diamonds by overpaying the suppliers. Producing each toothbrush was going to cost Nero ?9. Altogether it would cost him ?16 to produce each toothbrush. So he was going to have to sell the toothbrushes for ?20.80 to get 30% profit to satisfy his investors. He would have to sell his inferior product at a higher price! This would not do. He went back to his investors and asked for more funds so he could buy machines and a factory to drive down the production of each toothbrush. A few of his investors backed out, saying the risk was far too high. Nero re-mortgaged his house and got a loan from the bank. He bought his factories and managed to drive down the costs of producing his toothbrushes to ?6. Each toothbrush cost him ?13 to produce and he would sell them at ?17 each, undercutting Josh by a whole ?3! Nero was confident.
Alas, come launch day Nero was hit with a devastating blow to the groin. The Financial Times had a front page story saying Josh was launching a new year long sale, with toothbrushes being sold for a mere ?12 each! Nero was shocked! How would he now launch his inferior product at a higher price than the competitor? It wasn't long before Nero's venture came to an end. He was unable to take any market share and was quickly bust. Nero's investors lost huge amounts of money and the bank seized his home. Nero's beautiful girlfriend left him for the dashing rich entrepreneur Josh, and they lived happily ever after.
But there was more to Nero's misery. No one would buy his specialist factory and machinery specifically bought to make diamond toothbrushes. He was further humiliated when he got a call from Josh, offering to buy his factory and machinery for a fraction of the true value. Nero had no choice but to sell and try and claw back some of his losses. After suffering from severe depression, Nero met an old friend, xris. Nero used to think of xris as an evil socialist, but now some of the things he was saying made sense! And together they crusaded for controls on the market and lobbied government. Many other entrepreneurs watched this saga unfold with great interest. If Nero can take on a monopoly, so can we! But it wasn't to be.
The fate of Nero confirmed what most experienced and well-rounded entrepreneurs already knew: that taking on a monopoly with huge capital, innovative ideas, strong brand with customer loyalty, low production costs, predatory pricing techniques and with an incredibly good looking director, was a very bad idea. Nero's adventure was well documented and taught in economics classes throughout the world as a case study. Investors and entrepreneurs dared not take Josh on ever again. Josh went on from strength to strength. He took on new ventures in new markets, and successfully too. He would use profits from his toothbrush business to undercut suppliers in new markets. He didn't care about making a loss, merely crushing the competition. Once the competition was gone, he inflated the supply chain to stop others kicking him out, just like what he did with the diamonds. But he never passed on his savings to the consumer, he charged the monopoly price.
But it wasn't long before other businesses started copying Josh. Other monopolies started inflating their supply chain costs to stop others entering! But then many things became incredibly expensive. People could not buy things and whole sectors were going bust. Companies became incredibly suspicious of their competitors, afraid they would begin pricing wars to kick them out of the market. Investments became a lottery of the worst kind. But like all things, a balance was eventually reached, but at a great cost. People lost faith in how the market functioned. Monopolies started using their money and influence to protect their interests at government level. Oligopolies started to collude with each other, to prevent a destructive price war. Investors were too scared to take on monopolies so competition was reduced, and so society suffered.
The dream had turned into a nightmare.
The End.
