The Big Bad Firm and Other Stories

Note, the title of this post was for the literary quality only, because there are no other stories, just The Big Bad Firm. Didn’t want to disappoint you!

I have noticed that one of the major problems people have with the free market, is their fear of monopolies. And I do want to point out that if you believe the government should create laws and regulations to prevent monopolies, you do not believe in the free market. You might be a believer in the quasi-free market, but not the real thing.

So, what is it about monopolies that scare people so much? I don’t know for sure, but some people seem to be afraid of Walmart taking over the world as much as Al Gore fears global-warming. Because this is a main argument against the free market, I try to keep track of the arguments against government regulations, so I can show people that we don’t need the government to fix this “problem” that has, ironically, never actually happened yet.

And now I will offer 5 arguments against anti-trust laws, and the like.

1) In the case of an only horizontal monopoly, the companies that sell to the “1 big firm” (i.e., gasp, Walmart!) would not want a monopoly to be created. Why? Because if Walmart has a monopoly they will eventually raise prices, and since the demand for many of their products is elastic, not as many of them will be sold. Walmart will manage to make a profit because of the increased price, but the companies that sell to Walmart will not profit. Example: Tomato Soup, just a random product I thought of. Let’s say that in the competitive market, one can of tomato soup sells for an average of $1.50, okay? If you want the name brand one, a bit more, the cheap one, a little less. Let’s say that a Walmart brand makes the soup, but they have to buy the tomatoes from somewhere, right? Let’s say, from Tomahto Inc., and I am not sure where Tomahto Inc. is based, or where they grow their tomatoes. I really couldn’t care less about tomatoes, so I don’t pay attention to where they are grown. But to keep going. Walmart takes over all the brands of tomato soup on the market. However, they have not taken over Tomahto Inc. Tomahto Inc. know that Walmart will sell the can of tomato soup at $2.00 or more once they completely take over the market. Is this good or bad for Tomato Inc.? They get paid .75 for the tomatoes it takes to make one can of soup. So, now that Walmart has created a monopoly in the tomato soup market, Tomahto Inc. is still getting .75 for each can, but Walmart is charging $2.00 + and making a nice fortune. Most people really don’t have to live on tomato soup, maybe some strange people are addicted to it, but for the most part, if the price goes up to $2.00, people will buy less. In economic terms, the demand for tomato soup is elastic. Now that the price is at $2.00, people only buy 1.5 million cans, not 2 million. So, obviously, Tomahto Inc. has lost a good profit, because they’re only getting .75 x 1.5 million, not x 2 million. But Walmart is making money because of the high price they are charging. Going back to before Walmart has monopolized the market, would Tomahto Inc. want Walmart to monopolize the market?

I know someone is going to ask, “why didn’t Walmart take over Tomahto Inc., and solve all their problems?” Well, yes, in this case, Walmart could have done that, but when you multiply that by every product Walmart sells, it becomes rather clear that it is nearly impossible for Walmart to monopolize the market, horizontally and vertically, by taking over every step of production.

2) If the 1 big firm as a  horizontal and vertical monopoly, it cannot  measure opportunity costs and accurately figure the productivity of production, as there is no outside market to compare it with. This was the argument of Mises against socialism, and against the “1 big firm.” If the world were socialized, and the government controlled every factor of production, it would eventually implode. The reason the USSR lasted so long is because they could look at the free world to measure productivity. Without the consumer “voting” so to speak, on where capital should be allocated, and what is most valuable, it is impossible to know if a capital good is being used for the best ends.

3) This argument is based on F.A. Hayek’s “problem of knowledge.” There is so much knowledge in the market that the bigger a firm is, the less it can keep up with constantly changing demand and preferences in the market. People are always changing their value scales, preferring milk to yogurt, and then cottage cheese to yogurt, but only if cottage cheese is under a certain price, but then…it goes on and on. A localized firm can provide products to its consumers because it is better able to deal with the localized knowledge, i.e., if a number of citizens in a certain town decide that yogurt is bad for them because of an article someone published in the paper, then the firm can quickly respond to that and provide cottage cheese because they know people are avoiding yogurt. Multiply this by the millions of towns in the US, and then think of what would happen if Walmart took over the world…it would be impossible for them to respond to the changing demand in a way that satisfied the consumers.

4) Only the government can truly keep out competition. Only the government can force people to support the 1 big company. In the free market, people can compete with the 1 big firm even on a very local market. Go back to our Walmart and Tomahto Inc. example. If Walmart started charging $2.50 a can for tomato soup, assuming that they did take over Tomahto Inc., then what would stop people from growing their own tomatoes and making their own soup? Or selling tomatoes from their backyard to neighbors and friends, effectively undermining Walmart’s monopoly? The only way Walmart could keep people from doing that is by partnering with the government and making it illegal for people to grow their own food. We know that would never happen though. Hey, wait…what about H.R. 875, the “Food and Safety Modernization Act of 2009″? I thought that would open the door for government regulation of backyard gardens. But then again, I might be wrong. So only big business AND the government working together can create a true monopoly.

5) We can distinguish between competition pricing and monopoly pricing in charts and graphs, but what is the difference in the real world? We don’t know. No one really knows, the definition is subjective. So it is very impractical to attempt to distinguish between the two in the market. Let’s say I decide to start a business selling tomato soup, and I sell it at $1.10, cheaper than anyone else on the market. Is this competitive pricing? Of course everyone wants to offer a lower price for their good. But maybe I am planning to drive everyone else out of business and create a monopoly. Who knows? Who can tell the difference? The answer is, there’s no easy answer, it depends on subjective opinion. So what does it even matter, to talk about anti-trust laws, because we can’t define the difference between competitive pricing and monopoly pricing.

I hope that has helped you understand why the free market does not create monopolies, and why the last thing we need is more government regulation!

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