What really is a monopoly, anyway?

Our most recent previous post discusses the common view of monopolies, and we argued that companies are not really "monopolies" just because they dominate an industry (the way Google currently dominates search).*

This statement may have raised some objections in some readers, who have been taught over and over that the above statement is pretty much a definition of a monopoly (and not just in school -- the CFA coursework material defines a monopoly as a single firm taking over an industry, and even uses Microsoft as an example).*

We would argue, however, that a monopoly does not exist unless physical force is used to prevent competition -- and in countries in which the government maintains a monopoly on physical force, this means that monopoly cannot exist without government restriction of competition.

Monopoly does not exist just because one company is able to provide far and away the best service for the best price, because competitors could beat them, if they were able (nobody is stopping anyone from making better search than Google, for example -- it's just that nobody has been able to do it, thus far).

In the previous post, we referenced economist and professor George Reisman, who says, "Rationally understood, monopoly is external to the normal operation of the economic system and is, as I say, imposed by the government or the government's sanction. It is, as it was originally understood, an exclusive grant of government privilege, such as was extended by English monarchs in earlier centuries to the British East India Company and to various guilds of producers or merchants" (377).

He points out a historical example of a situation that many would call a monopoly but was not: "Under the freedom of competition, Alcoa was for many years practically the only seller of aluminum ingot in the United States. Nevertheless, it was not a monopoly [. . .] because its position did not rest on the initiation of physical force, but on its ability and willingness to produce and sell its aluminum at prices that were profitable to it, but yet too low for any potential competitor to be profitable" (378).*

In such a case, the customers are getting the best prices possible. If a company with a "monopoly" dominance on an industry tries to charge too much, then they are just inviting competition to put them out of business -- and competition will arise, as long as the government does not prevent competition. Hence, the assertion that monopoly always includes the government's restriction of competition.

Interestingly enough, the day after we posted our piece on Google, monopolies, and the misguided views of the European Union's anti-trust commission, economist and professor Mark Perry posted the above YouTube video on his excellent Carpe Diem blog.

It is a trailer for an upcoming documentary entitled The Cartel, about a real-life monopoly in the United States: the public education system. Twenty-eight seconds into the trailer, one of the speakers in the film accurately declares, "Education is a business that has a monopoly; when you have a monopoly, you can do whatever you want."

This important distinction about what is and what is not a monopoly is one that all investors (and indeed all voting citizens) should understand.

* The principals of Taylor Frigon Capital Management do not own securities issued by Google (GOOG), Microsoft (MSFT) or Alcoa (AA).

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