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Competition and Monopoly: A Refresher

Lawrence W. Reed

“Gym Now Stresses Cooperation, Not Competition,” blared a headline in the New York Times a decade ago. The story was about an elementary school where “confrontational” games, team sports, and elimination rounds were changed or scrapped so that differences between students’ athletic abilities would be minimized.

Perhaps this is fine for grade-school gym class, but it would make for rather boring Olympic games. And were it imposed on production and trade, it would condemn millions to poverty and early death. Let’s review some fundamental principles.

In economics competition is not the antithesis of cooperation; rather, it is one of its highest and most beneficial forms. That may seem counterintuitive. Doesn’t competition necessitate rivalrous or even “dog-eat-dog” behavior? Don’t some competitors lose?

In my view, competition in the marketplace means nothing less than striving for excellence in the service of others for self-benefit. In other words, sellers cooperate with consumers by catering to their needs and preferences.

Many people think that competition is directly related to the number of sellers in a market: The more sellers there are, or the smaller the share of the market any one of them has, the more competitive the market. But competition can be just as fierce between two or three rivals as it can be among 10 or 20.

Moreover, market share is a slippery notion. Almost any market can be defined narrowly enough to make someone look like a monopolist instead of a competitor. I have a 100 percent share of the market for articles by Lawrence Reed, for example. I have a far smaller share of the market for articles generally.

Not so long ago, XM and Sirius were the only two satellite-radio providers in the United States. For a year and a half the federal government prevented the two from merging, fearing that a harmful monopoly would result. Economists argued that XM and Sirius were competing not only with each other but as two of many companies in a huge media marketplace that includes free radio, iPods and other MP3 players, Internet radio stations, cable radio services, and even cell phones—all of which, along with likely new technologies, would continue to compete even after the merger. Ultimately, economic reasoning prevailed and the merger was allowed.

Governments don’t have to decree competition; all they have to do is prevent and punish force, violence, deception, and breach of contract. Enterprising individuals will compete because it is in their financial interest to do so, even if they’d prefer not to.

Competition spurs creativity and innovation and prods producers to cut costs. You wouldn’t think of stopping a horse race in the middle and complaining that one of the horses was ahead. The same should be true of free markets, where the race never ends and competitors enter and leave continuously.

Theoretically, there are two kinds of monopoly: coercive and efficiency. A coercive monopoly results from a government grant of exclusive privilege. Government, in effect, must take sides in the market to give birth to a coercive monopoly. It must make it difficult, costly, or impossible for anyone but the favored firm to do business. The U.S. Postal Service is an example. By law no one else can deliver first-class mail.

In other cases the government may not ban competition outright but simply bestow privileges, immunities, or subsidies on one or more firms while imposing costly requirements on all others. Regardless of the method, a firm that enjoys a coercive monopoly is in a position to harm consumers and get away with it.

An efficiency monopoly, by contrast, earns a high share of a market because it does the best job. It receives no special favors from the law. Others are free to compete and, if consumers so will it, to grow as big as the “monopoly.” Indeed, an efficiency monopoly is not much of a monopoly at all in the traditional sense. It doesn’t restrict output, raise prices, and stifle innovation; it actually sells more and more by pleasing customers and attracting new ones while improving both product and service.

An efficiency monopoly has no legal power to compel people to deal with it or to protect itself from the consequences of its unethical practices. An efficiency monopoly that turns its back on the very performance which produced its success would be, in effect, posting a sign that reads, “COMPETITORS WANTED.”

Antitrust Law

Where does antitrust law come into all this? From its very inception in 1890, antitrust has been plagued by vagaries, false premises, and a stagnant conception of dynamic markets.

The Sherman Antitrust Act of 1890 put the government on record as officially favoring competition and opposing monopoly without ever coming close to any solid definition of either term. It simply made it a criminal offense to “monopolize” or “attempt to monopolize” a market without ever saying what kind of actions qualified.

The first lawsuit the government filed ended disastrously for the Justice Department: The Supreme Court ruled in 1895 that the American Sugar Refining Company was not guilty of becoming a monopolist when it merged with the E. C. Knight Company. The evidence suggested that the merged companies would have made for a very strange monopoly indeed—one that substantially increased output and greatly cut prices to consumers.

In The Antitrust Religion (Cato, 2007), Edwin S. Rockefeller explains how the self-serving legal community invented sinister-sounding terms for quite natural phenomena and at the same time enjoys a feeling of self-righteousness in “protecting” the public from those evils. Such terms include “reciprocity” (“I won’t buy from you unless you buy from me”); “exclusive dealing” (“I won’t sell to you if you buy from anyone else”); and “bundling” (“Even though you only want Chapter One, you have to buy the whole book.”) Another work I strongly recommend on this subject is a classic by economist D. T. Armentano, The Myths of Antitrust.

In a free market unencumbered by anticompetitive intrusions from government, these factors ensure that no firm in the long run, regardless of size, can charge and get any price it wants:

• Free entry of newcomers to the field, whether they be two guys in their garage or a giant firm that sees an opportunity to expand into a new product line.

• Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force.

• Competition of substitutes. People are often able to substitute a product different from yet similar to the monopolist’s.

• Competition of all goods for the consumer’s dollar. Every business competes with every other business for consumers’ limited dollars.

Bottom line: Consider competition in a free market not as a static phenomenon but rather as a dynamic, never-ending leapfrog process in which the leader today can be the follower tomorrow.