LOM Weeky Perspectives

Who said monopoly is a bad thing?

Just about everybody has a good thing to say about competition. However, in practice, the very same people always prefer monopoly -- for themselves, of course, and not for others, who are deemed to be better off fighting it out among themselves. The tune changes dramatically if they are the underdogs, having to face monopolistic control that benefits others rather than themselves. Then, they are fervently in favour of greater competition. It is a fair assessment that in modern economic history, people and organisations have always striven for as much of a monopoly position as they can get. The astute economist, Adam Smith, recognised this fact, back in eighteenth century England. Striving to control the market and make big profits are natural motives of economic entities, and the same tendencies are present today as in the past.

Rent-seeking has always been the aim of both individuals and companies. The term refers to the extra profit or income that you can command because of a measure of exclusivity that you possess. If you don't have it, then the iron law of competition will drive down your returns to a normal market average. So there is obviously an intense interest in erecting any feasible barrier to entry. In fact, the goal of attaining monopoly profits is the crucial factor in the process of creative-destruction that has brought us high income-levels, productivity and innovations and has transformed the economic landscape in the past two centuries. This process produces a lot of benefits, despite some nasty collateral damage, which we properly refer to as "destruction". It is not surprising that, given the high stakes, people play this monopoly game by any means possible: fair or foul. The latter approach has little merit and can be counter-productive in terms of long-run growth and efficient resource allocation but is, nevertheless, part of how the real world works.

Entry barriers can be profitably exploited

Putting up barriers by foul means has a long history, and includes closing off markets to competition by government policies or giving singular privileges to particular groups or companies by passing special laws. It can also be created by a combination of businessmen deliberately restricting competition or sabotaging competitors. Many a great fortune during the robber-baron period in the United States was built on just such tactics. The record amply demonstrates that Rockefeller, Morgan and...