A recurring criticism of free markets is the “if we don’t have regulation and allow markets to control themselves, we’ll end up with monopolies.”
This may or may not be true. But those who have this view are under the assumption that monopolies are bad. Some monopolies are bad, but it’s important that we distinguish between the two types so we know which monopolies should be prevented.
The two types of monopolies I’ll define are free market monopolies and legal monopolies.
Free market monopolies are the result of one business taking control of the entire market for their product or service through voluntary transactions with the consumers. This occurs because this business has the best product at the cheapest price. All parties are satisfied in this situation. The reason why there is no competition is because no other businesses can satisfy the customers the way the monopoly can. It’s not that no one else can enter the market, it’s that they’re not good enough to keep up.
Even in a completely free market, these monopolies would be pretty rare and would only exist in the moment. Let’s say there’s a monopoly on, I don’t know, hair combs. One day, you decide that you’re going to start making and selling your own hair combs to friends and family. While your market share is pretty much negligible, a pure monopoly would no longer exist. And let’s say your hair comb operation happens to take off—the monopoly would be over. The monopoly only exists as long as no one can provide their customers with cheaper and better products.
This is why free market monopolies won’t start charging exorbitant prices or start selling shoddy products. Their marketplace power is their quality and price, so when they change it or someone else is able to do better with it, they lose that power.
Legal monopolies, on the other hand, are the result of the state granting the monopoly to the business. The marketplace power does not result from the quality and price. The power comes from the state threatening those who attempt to compete against the monopoly. There isn’t much of a moral justification for this.
A good example of a legal monopoly is the United States Postal Service. No other entity is allowed to deliver mail (mail, not packages) to a person’s door. It’s funny, some people use the Post Office as an example of something that only the government is capable of doing. They don’t acknowledge that delivering mail is the something only the government is allowed to do. Lysander Spooner opened the American Mail Letter Company in 1844 to compete directly against the Post Office. He was able to drive down the price of stamps through competition, but was eventually put out of business. Did the Post Office win back the monopoly by offering better rates and delivery times? No, they achieved it by suing the American Mail Letter Company out of business.
There are other ways to grant legal monopolies to businesses or groups of businesses. Strict licensing laws, for example, allow the businesses already in the market to be protected from new competition that doesn’t have the ability to fork over large amounts of cash for some seal of state approval.
So the question is this: if two or more people voluntarily agree to goods and/or services, why should the transaction be nullified in favor of a state-appointed business? If a legal monopoly is truly the best business out there, why can’t there be some competition to prove that?
People often do think that without these laws there would be monopolies everywhere and everything would be expensive. However, I would add that acheiving monopoly is difficult because of consumer tastes. Companies do not necessarily desire to create the best product at the best price. There are a couple different strategies I remember from college (Michael Porter maybe?) called differentiation and cost leadership. Differentiation looks to create the best product, while cost leadership looks to create the most affordable, and it is pretty much impossible to create the best product at the cheapest price. A few years back when my friend and I were both looking to buy cars, I was looking for the most affordable car that would get me to work and back. My friend, however, wanted a bit more style and a better quality car. I settled on a Hyundai, while he bought a Camaro or something. The Hyundai buyers are not looking for a top quality car, while Camaro buyers are not looking for the cheapest car they can get. Therefore, even without monopoly laws, there would still be companies competing for different different consumer tastes. Many folks driving nice cars wouldn’t be caught dead in the car I drive, but the people who own the car I drive probably would never want to pay for the fancy one. Although this is just one industry as an example, the same applies to several other industries. A diverse consumer pool takes care of the “problem”.
Good points, however, I’d say you are describing substitute goods and not competitors. Hyundai doesn’t compete with BMW, Mercedes, and Lexus. They all make cars, but they are not competitors, and you did mention that. So BMW could have a monopoly in the luxury car market and Hyundai in the mid sized sedan market. But of course other factors go into our decision making other than just price.