Devil's advocate question: How would a free market handle cartels? Monopolies?

[PonRaul88]

I've accumulated quite a few tough questions over the last year, and need your help in answering a few.
Here's one.

How do free markets handle cartels and monopolies?

I've heard the free market blamed for gas prices over and over.
"It's the damn free market that allowed the oil companies to make cartels, and set their own prices! We need intervention!" -Most any Obama supporter

When\if the oil companies do create a cartel and dominate the industry, set their own prices, and stomp out any new competition, how does a free market handle it?

Please inform me.

[ArrestPoliticians]

I've accumulated quite a few tough questions over the last year, and need your help in answering a few.
Here's one.

How do free markets handle cartels and monopolies?

I've heard the free market blamed for gas prices over and over.
"It's the damn free market that allowed the oil companies to make cartels, and set their own prices! We need intervention!" -Most any Obama supporter

When\if the oil companies do create a cartel and dominate the industry, set their own prices, and stomp out any new competition, how does a free market handle it?

Please inform me.

Mises said that such cartels could develop rarely- usually around natural resources- and should be corrected by government.

Ron Paul and Murray Rothbard hold that monopoly's really represent a monopoly PRICE. If we have 1 company running the show in one area, that doesnt necessarily mean that there is a monopoly, it just means that that is the most efficient means of bringing a good to the people at the best possible price. This is true as long as there are no barriers to competition in place. If a monopoly price develops, it is because of government interventions in the market. Milton Friedman got on board this view near the end of his life, as he did with the gold standard.

So basically, when dealing with this issue:

#1 Look HARD for government intervention.(Republican bias for big oil and OPEC)

#2 If there is none, check to see if there are barriers to competition and make sure that there is a monopoly price.(No clear monopoly price regardless given massive inflation and relative to prices in Europe and elsewhere.)

#3 if that fails, you can always fall back on mises and be free market while supporting anti-trust. (not necessary for OIL)

I think that Microsoft is a good example of something that the government bureaucrats thought was a monopoly because it was the only game in town even though their prices were not clearly monopoly prices and there existed free entry in the market. Now there is plenty of competition, it just took time to develop.

[dannno]

A cartel and a monopoly are both inherently non-free-market. If one exists, that means that there are anti-free-market barriers in place.

Cartels limit the supply through an agreement amongst the suppliers not to supply. In a truly free-market, another supplier would step in and supply.

A monopolistic firm sets their prices too high, so in a free market another firm will come in and supply at a lower price and the monopoly is broken.

[PonRaul88]

Hell ya! Great answers! Thanks. I have a few more questions for another time, so keep a look out.

[The_Orlonater]

Monopoly status comes from governmental power.

[Kludge]

A cartel could certainly form around natural resources. But -- it is just supply and demand. Hopefully a new source of the resource will be discovered by a rival able to break the cartel.


All resources are non-essential except food and water, which can easily be obtained.

[Knighted]

I think that it's a more complicated situation than simply closing the case with "monopolies and cartels can't exist in a free market."

I believe a variety of factors would still permit monopolies/cartels to exist in a free market without government intervention. Patent laws (one might argue those would not exist in a free market, but we all know they aren't going anywhere), price undercutting to force competition out, collusion to allow a handful of companies to dominate an industry and keep prices high, name brand awareness, lawsuits with high priced lawyers attacking small business competitors, etc. Once a company becomes a behemoth with large stockpiles of capital, I think it provides them with many avenues to maintain their monopolistic status for long periods of time. Decades, generations.

[Josh_LA]

Conza88 will answer with his expert opinion.

[danberkeley]

Name a monopoly that has come about in a free market!

[Josh_LA]

Name a monopoly that has come about in a free market!

Microsoft, Google, PayPal, Pitney Bowes, De Beers, eBay, Amazon, USPS, Federal Reserve, US Government, Two Party system, YouTube, MySpace, (not all these came from a free market, but even a free market doesn't break their monopoly),

[TastyWheat]

I agree with previous statements that cartels and monopolies are not common in free markets. They may develop over time but they cannot last long if the playing field is truly level. Someone is always willing to offer the same or a better product for cheaper, things like price controls and costly regulations keep up-and-comers from challenging big businesses.

[Malakai]

Alan greenspan wrote an awesome essay on why monopolies only exist because of government special privileges. There would be no forced monopolies without government intervention.

[Working Poor]

I personally can't wait to see solar and other alternative energies gaining in the markets. I think even if a monopoly develops out of it it will crush the oil industry then what in the hell will we have to fight about?

[InPaulWeTrust]

I personally can't wait to see solar and other alternative energies gaining in the markets. I think even if a monopoly develops out of it it will crush the oil industry then what in the hell will we have to fight about?

Control of the Sun.

[angelatc]

Name a monopoly that has come about in a free market!

West Virginia coal mining wages.


Unions are the natural offset when there is essentially no competition for labor in a market.

[sirellyn]

I think that Microsoft is a good example of something that the government bureaucrats thought was a monopoly because it was the only game in town even though their prices were not clearly monopoly prices and there existed free entry in the market. Now there is plenty of competition, it just took time to develop.

There were barriers of competition that Microsoft errected however. Back in the 80's and 90's companies that sold computers could not sell any other operating system on their computer aside from a Microsoft one or Microsoft would refuse to sell them any more products. This is one of the biggest steps that lead to their domination of the market.

It was of course completely illegal to to that, but that particular anti trust lawsuit case was won by Microsoft.

So much of what Microsoft did originally to "get on top" was done illegally. Now they aren't following these policies anymore. And so you see competition. But what do you do about a company who grew initially through illegal means?

[Contumacious]

How do free markets handle cartels and monopolies?

Coercive monopolies are always authorized by the state.

If a company has a non-coercive monopoly then it must be doing the heck of a good job satisfying its customers. So monopolies are not bad per se.

I've heard the free market blamed for gas prices over and over.

Well the market [Speculators] is reacting to the fact that oil supplies are being threatened.


For example, The US invasion of Iraq adversely affected a large supplier. The US/Israel axis is threatening Iran. Venezuela is another supplier but US relations wiith Venezuela - who own CITGO- are very poor.

When\if the oil companies do create a cartel and dominate the industry, set their own prices, and stomp out any new competition, how does a free market handle it?Please inform me.

The trouble with OPEC is revealed by its name: The Organization of Petroleum Exporting Countries.

The best way of dealing with OPEC is to have a NEUTRAL FOREIGN POLICY as Thomas Jefferson suggested.

Otherwise we must find a domestic source of energy or alternate viable sources.

[brandon]

A cartel could certainly form around natural resources. But -- it is just supply and demand. Hopefully a new source of the resource will be discovered by a rival able to break the cartel.

Agreed

All resources are non-essential except food and water, which can easily be obtained.

Disagree.

I think privatization of water is immoral and would not work. Water is not always easy to obtain.

What if there is one river supplying water to a million people? And what if one company buys the top of the river and builds a dam? And what if this company doesn't let any water flow downstream anymore, instead they divert it all through their piping to private storage locations?

They have a monopoly in a free market.

How do you resolve this?

[tremendoustie]

Agreed



Disagree.

I think privatization of water is immoral and would not work. Water is not always easy to obtain.

What if there is one river supplying water to a million people? And what if one company buys the top of the river and builds a dam? And what if this company doesn't let any water flow downstream anymore, instead they divert it all through their piping to private storage locations?

They have a monopoly in a free market.

How do you resolve this?

You have no right to dam up a river that flows through your property, because it impacts your downstream neighbor's property rights, just as you have no right to blow smoke across the property line or chuck garbage bags over.

[brandon]

You have no right to dam up a river that flows through your property, because it impacts your downstream neighbor's property rights, just as you have no right to blow smoke across the property line or chuck garbage bags over.

So in a free market there will be no dams built ever?

[brandon]

You have no right to dam up a river that flows through your property, because it impacts your downstream neighbor's property rights, just as you have no right to blow smoke across the property line or chuck garbage bags over.

And how much water is too much to take? Obviously you said the company at the top has no right to take all of the water. But can they take half of it? Can they take 10% of it? Can a guy living downstream take 1 gallon of water a day, or is he denying that gallon to someone else who lives further downstream?

How will we set the maximum water limit? And how will we enforce it?

[JaylieWoW]

So in a free market there will be no dams built ever?

No, in a free-market the ones affected by the building of the dam would be compensated agreeably for the disruption of their water. If no agreement could be reached there would be no dam built.

[Contumacious]

I think privatization of water is immoral and would not work. Water is not always easy to obtain.

1) Don't move to a desert;

2) But if water is not available in your neck of the woods then you must either dig your own water well or pay the market price charged by a supplier.

[Bossobass]

The best example is Standard Oil.

Grandpappy Rockefeller wrote the book on building a monopoly.

His credo was "Competition is a sin...". The rest of the sentence was, "...because it drives the price down too low". He was clearly a Fascist.

I remember taking the street car into the city when I was 8 years old. The street cars in Pittsburgh were routed everywhere. In our neighborhood, the tracks were on their own terrace, parallel to the main street into town, so they didn't interfere with traffic.

They were emissions free and not as prone to wrecks or mechanical breakdown because the operator only had a 'go' pedal, no steering wheel, gear shift, transmission, exhaust system, breaks, etc.

After WWII, GM (controlled by Rockefeller, and grown to the largest auto maker by Rocky's playbook) and Esso (S.O.: Standard Oil) lobbied to replace that system with busses. This required a HUGE government investment in tearing out the tracks, paving the streets, scrapping the overhead lines and the cars themselves, purchasing the new busses and building the fueling infrastructure.

This added tremendous pollution, tax increases and traffic problems, and, since GM and Esso were handed the government contracts, it added huge profits to those companies.

Virtually all citizens were against the busses vs keeping the street car system, for the obvious reasons mentioned above.

One shadowy deal that SOCAL struck back in the 1930's changed the face of urban America for ever. The Firestone Tire and Rubber Company, Phillips Petroleum Co., Mack Truck and General Motors collaborated on a project with SOCAL called National City Lines. The tram systems in the urban US were suffering from under-investment and often crippling debt repayments so National City Lines stepped in across the States to liberate the populous from their cheap and cheerful old 'streetcar' systems. They were replaced with motor buses or they were gradually closed down completely.

The demand for motor cars soared returning massive profits for all involved in the deal. By 1940 General Motors alone had been responsible for the disposal of more than 100 urban streetcar operations. In the late forties the consortium was found guilty by the federal grand jury under anti-trust (anti-competitive) legislation but the $5,000 fine was laughable. It did not even amount to the annual profit returned from the conversion of a single streetcar.

In August 1974, Richard Nixon resigned as President of the United States of America and Vice President Gerald Ford ascended to that position. One of Ford’s earliest responsibilities was to nominate a new Vice President of the country: and he named Nelson Rockefeller. This led to a series of hearings in the Congress, before his ultimate confirmation.

PROBING THE ROCKEFELLER FORTUNE

A Report Prepared for Members of the United States Congress
November 1974


Summary

Evidence collected from a variety of public documents indicates that the Rockefeller fortune, although nominally distributed among many individual members of the Family, is actually coordinated under a central management. We have identified a number of persons, who, as employees of the Rockefellers, not only advise the Family on its personal investments but also represent its collective interests on the Boards of Directors of dozens of major corporations. This coordination of capital resources also appears to include moneys held in trust funds, moneys held by tax-exempt philanthropies set up by the Family, and even some moneys of non-Family institutions.

The picture of an enormous concentration of economic power, which follows from this evidence, stands in sharp contradiction to the usual public image - and the recent Congressional testimony - which the Rockefellers have presented. It is hoped that many questions raised by this report will be taken up in continuing investigations by the Congress.
___________

The gross result of this research is a list of over 1000 corporate interlocks for Rockefeller Family and Associates. The list is so huge that we refrain from publishing it in its raw form for fear of simply drowning the reader. We sought, instead, some way of choosing and representing the essence of this tabulation without all of its detail.

For example, the first entry in the table reads "General Motors (2)." This means that we have found two cases of a director of General Motors Corp. who also a director of a company that has a Rockefeller Family representative on its board. (These two interlocks with General Motors happen to be with Chase Manhattan Bank and with S.S. Kresge Co.)

IMHO, there has only been a shadow of free enterprise in America that exists in small businesses only, which are kept small by the control of investment capital, buyouts, tactics that starve out, lobbying for regulations that hinder the growth of and worse, against their successes.

Witness the Fiscal 2008 federal budget. The Small Business Administration was alloted $400 million after years of successive cuts. It literally requires the hiring of a consulting firm just to fill out an SBA loan application. This despite the fact that small businesses account for more than 1/2 of GDP and employment in the US.

OTOH, :

In August [2005], Bush signed into law the notorious energy bill - granting $14.5 billion in tax breaks and incentives to the energy industry.

on October 7 [2005], the House of Representatives passed a bill that would give federal insurance to oil refiners whose expansion projects are delayed by lawsuits or red tape.

Bosso

[danberkeley]

West Virginia coal mining wages.


Unions are the natural offset when there is essentially no competition for labor in a market.

I gather there isnt any immigration into West Virginia. Also, I dont see how "wages" themselves can be a monopoly.

[Kludge]

I've written a few times about "flowing resources" -- resources which flow through multiple parcels of property. Basically, I believe you own whatever is on your land and may do with it as you please -- so long as you don't violate any "rights".

Now, dumping is something altogether entirely. It occurs when you add something to a flowing resource. Adding pesticides to the water on your land which makes up a river would not be permitted unless all landowners agree (or possibly government...).

[Knighted]

I've written a few times about "flowing resources" -- resources which flow through multiple parcels of property. Basically, I believe you own whatever is on your land and may do with it as you please -- so long as you don't violate any "rights".

The argument i've seen before regarding violations of private property in a free market (ie: a factory producing massive amounts of pollution that affects everyone's air quality) tends to come to the conclusion that people could file lawsuits or sue the company for violations of private property and, as a result of that, everything would be hunky dory in the free market. But the average joe does not have anywhere near enough money to hire the slick tongued lawyers to argue their case that the massive corporations do, nor the influence. This would shift the odds in the favor of megacorp. How would you resolve this apparent contradiction to the infallibility of the free market?

[Contumacious]

The best example is Standard Oil.Grandpappy Rockefeller wrote the book on building a monopoly.

BS.

At its peak Standard Oil of NJ controlled 80% of the market. Standard Oil was responsible for bringing down the price of a gallon of kerosene from 50¢ to a nickel. So much for it being a predatory monopoly!!!!!!!!!!

[Kludge]

How would you resolve this apparent contradiction to the infallibility of the free market?

Ain't no war but the class war...


If a law is clearly broken, the police should be brought in to settle the dispute and the gov't should prosecute the corporation and well... hopefully there won't be any loopholes for the lawyer to find in civil court.

[Bossobass]

BS.

At its peak Standard Oil of NJ controlled 80% of the market. Standard Oil was responsible for bringing down the price of a gallon of kerosene from 50¢ to a nickel. So much for it being a predatory monopoly!!!!!!!!!!

I don't post BS. What American isn't aware that anti trust prosecution determined that Esso was a monopoly through criminal acts?

Try a bit more research before you spew.

At it's peak, it controlled 95%. The link below contains the factual account of how Rocky cheated, bribed, conspired and otherwise blocked and then drove nearly all competition out of the oil refining/distribution business, after which he raised prices as his costs fell.

It's based on the government's investigations as well as further research done at the time up to publication. 50 pages worth reading.

Excerpts from The Trust Problem In The United States published 1921:

It is certain, says the Commissioner, that under free competition, there would have been a sufficient increase in the value of by-products to permit a greater reduction of the margin between crude and illuminating oil than the Standard made.

To quote from the report of the Bureau of Corporations, "the Standard has consistently used its power to raise the price of oil during the last ten years, not only absolutely but also relatively to the cost of crude oil"

To quote from the report: "The evidence is, in fact, absolutely conclusive that the Standard Oil Company charges altogether excessive prices where it meets no competition, and particularly where there is little likelihood of competitors entering the field, and that, on the other hand, where competition is active, it frequently cuts prices to a point which leaves even the Standard little or no profit, and which more often leaves no profit to the competitor, whose costs are ordinarily somewhat higher."

However tempting the prices, independents hesitated to enter Standard markets. And no concern had been able during the period down to the dissolution of the Standard Oil Company in 1911 to develop a business of such a size. The Standard had been able to keep competition localized and scattered, and thus subject to its control.The wonder is, indeed, that competition was not entirely destroyed, unless perchance this was not desired by the Standard from a fear of drastic governmental action.

It is apparent that the profits of the Standard Oil Company have been enormous. For the ten years ending in 1906 these profits averaged almost $60,000,000 per year, while the dividends averaged nearly $40,000,000 per year. The $20,000,000 of undivided profits were ample to provide for any extension of plant. Much of the $40,000,000 in dividends therefore went into other industries — naturally into those allied with the oil industry. Inasmuch as all industries depend on transportation and as the railroads are large buyers of oil products, intimate affiliations with the railroad companies were well worth cultivating. We find, therefore, that the Standard Oil capitalists became large shareholders in railroad companies. We find also that the Standard Oil interests went into the gas and the electric lighting businesses. The Consolidated Gas Company of New York City, for example, was once, if not still, a Standard Oil affair. We find these same interests in the steel business, notably as large stockholders in the United States Steel Corporation. We find them interested in copper, the Amalgamated Copper Company being a notable example. We find them in the glucose business, particularly in the Corn Products Refining Company. We find that they have even invaded the banking field.

Bosso