Is this a flaw in the free market?

[Fox McCloud]

I would also point out, that with Rockefeller (I do not know the full history and his association, or lack there-of, with the government), he didn't have a total monopoly; several people that wanted to bust his company up even knew this....one quoted, in particular that it didn't matter how much the price of oil had been lowered, and that even if a barrel of oil only cost 1 penny, he still wanted them broken up simply because they put others out of business.

it's a bad case of wanting competition, purely for the sake of competition.

[FreeMarketEconomy]

This is absolutely correct.

Without the Fed, companies would not be able to capitalize and wipe out competition.

There are some Ron Paul quotes where he talks about inflation caused by the Federal Reserve wiping out the poor and the middle class. This is why monopolies occur, because the "big guy" gets so much capitalization that our currency becomes inflated and hurts the people on the bottom.

The way the free market works is that when someone becomes too comfortable and is making a little too much money, somebody else who is willing to make less money (i.e. be more efficient) is willing to step in and perform the service. This cannot occur if savings are destroyed and we become a society that competes on capital alone.

??

[danberkeley]

My friend told me that in a totally free market, monopolies reign supreme and can raise the prices and lower the qualities of goods. He explained it to me very simply.

...

He seems to have a point, but I am not educated enough in economics to refute his argument.

Does anyone on this message board have an answer to this?

How the hell would he know? Ask him to name a free market monopoly. If he mentions Microsoft, tell him that Microsoft is not a monopoly by definition. Also, one reason why Microsoft made so much money was because the government, via intellectual property laws, copyright laws, and patent laws, gave Microsoft a monopoly. The government also subsidizes Microsoft when it buys MS Windows or MS Office for its computers.

Well, I already did asked him a similar question, and he quickly named John D. Rockefeller's Standard Oil as an example, and how we needed to use anti-trust legislation to break them apart, since the poor and middle class were being pushed around by business tycoons that had more power than the government.

Standard Oil was never a monopoly. Oil companies sprang up all over the place. Also, what harm did Standard Oil do? It reduced the price of oil for over 20 years until it was broken up the feds. It developed over 300 products derived from oil.

[RSLudlum]

"If a well established business enters your area, they can afford to temporarily lower their prices to the point in which the smaller competition cannot compete against it. After this big business takes a minor blow with extremely low prices, all of their competition has left. Now they are free to charge what they want and not provide the best quality they could possibly offer. If a smaller emerging business decides to enter the area during this 'era of high prices', the established business can just repeat the process and get rid of their competition."

There's a good debunking of this myth in Thomas Woods "Politically Incorrect Guide to American History" starting on pg.97 with a section entitled "The myth of 'predetory pricing'" and starts out almost word for word with your friends reply. Appearently there's no 'real world' historical example of a monopoly being able to pull this scenario off. And it is widely debunked in economic literature but then again I'm a little green on economic literature (only have read Hazlitt's "Economics in One Lesson" and with my daughter, Maybury's "Whatever Happened to Penny Candy"; next is "The Road to Serfdom" after I finish Bacevich's "The Limits of Power" and Wood's "Who Killed the Constitution")

[anaconda]

Does anyone on this message board have an answer to this?

It's called "predatory pricing" and I think it is not uncommon. Doesn't mean the market isn't "free." But I think it means that it's not a terribly competitive market. In "perfectly competitive " markets all producers must accept the same price, theoretically. There are a few different types of markets within a free market system, including near-perfect markets (like perhaps wheat), monopolies, oligopolies, etc.

On a grand scale, I heard that the the Saudis kept the price of oil low for several years in the 1980's and consequently bankrupted the Soviet Union, who had depended on revenue from their own oil production.

[NightOwl]

It's called "predatory pricing" and I think it is not uncommon. Doesn't mean the market isn't "free." But I think it means that it's not a terribly competitive market. In "perfectly competitive " markets all producers must accept the same price, theoretically. There are a few different types of markets within a free market system, including near-perfect markets (like perhaps wheat), monopolies, oligopolies, etc.

On a grand scale, I heard that the the Saudis kept the price of oil low for several years in the 1980's and consequently bankrupted the Soviet Union, who had depended on revenue from their own oil production.

That exception proves the rule. The Saudis did that because they had the force of government behind them. The question is whether this crazy strategy can be successfully pursued by a firm on the market, with no state privileges.

And yes, in fact this is extremely uncommon. It's a ludicrous proposition: let's lose money for an indefinite period of time so we can enjoy "monopoly" profits, which in turn will attract more competitors, which will make us have to lose money again while we drive them out, etc. Economist George Stigler said, "It would be embarrassing to encounter this argument in professional discourse."

[idiom]

Microsoft bailed out apple to avoid becoming a monopoly. Linux has crushed all the other Unix competition.
In a lot of markets Microsoft can just refuse to sell their software to PC makers who sell Linux or anything else that might compete.
Microsoft owns Apple so don't think of them as competition, in fact Apple is operating as the competition to Linux.
Novell, Sun, SGI, HP, NeXT, SCO, all pretty much crushed by Microsoft.

However, Microsoft is extremely competitive. They are busy trying to push Sony out of the gaming market at the moment with their XBox platform. However you can't blame them. If consumers cared about improved technology or interactivity they could buy into it easily. But they don't.

The CPU market on the other hand is a completely different story. The GPU market is also, both of these have huge swings in market share every year based on minor technological advantages.

[anaconda]

It's a ludicrous proposition: let's lose money for an indefinite period of time so we can enjoy "monopoly" profits, which in turn will attract more competitors, which will make us have to lose money again while we drive them out, etc. Economist George Stigl

Not ludicrous at all. A firm is valued by the present value of it's profit stream, which theoretically extends many many periods into the future. The present value of larger future increments of profit due to monopoly might easily dwarf the more immediate and temporary profit reduction from sacrifices in revenue. Would depend on the particular situation as to whether the firm in question would benefit. The specter of ruthless predatory pricing warfare would discourage new firms from entering the market in question.