Monopolies

monopoly

A frequent criticism of an unregulated free market is that it allows monopolies to occur. The argument is made that without government one company would get control of an entire market. Once that company gets control over the market they will raise prices on that product as high as they want. And because there are no other competitors, the free market is powerless to stop this from occurring. Those who make this argument emphasize the importance of the noble government and how it saves us from the greedy robber barons. This argument is just another long standing myth against the free market. The free market does not need protecting from the government. In a free market the predatory monopoly cannot exist.

Those who argue against the free market point to Standard Oil as an example of how the government stops dangerous monopolies. They will point out that Standard Oil held a huge majority of the refined oil market, and if the government did not come in to stop Standard Oil it would have grown so big they would have held the entire US refined oil market.

Standard Oil had a huge portion, 80%, of their market place. During the time Standard Oil had a monopoly oil prices dropped drastically, from 30 cents per gallon to 5.9 cents per gallon. Standard Oil achieved this by technological and shipping methods that were superior to anyone else in the market at the time. By the time the government took action against Standard Oil for being a monopoly, its competitors had already took 60% of Standard Oils market share.

The reason oil prices fell while Standard Oil held their monopoly is because of the free market. In a free market anyone has the right to compete with anyone else.  In a free market there are no barriers to enter a field. If someone can produce a product people want, then they can sell that product in a free market. If someone could have provided better and cheaper oil people would have bought that oil. The reason that people bought Standard Oil’s oil is because it was the best and cheapest. When other companies were able to provide oil as good and cheap as Standard Oil did, their market share dropped.

Standard Oil was unable to raise their prices to high levels even when they held the monopoly. If they had decided to increase their prices, then Americans would have bought their oil elsewhere. In a free market, nothing prevented others from starting an oil company to compete with Standard Oil. This happened over time, other companies were able to develop technologies that allowed them to produce oil of a similar quality and price as Standard Oil. This caused Standard Oil’s share of the market to drop to 20%.

Some will argue that some resources are too scarce and someone could own all of the resource. The claim is we need government in this case because the market has failed. One person owns all of a resource and has no competitors, so this person can charge whatever he wants for that product. To refute this argument I will use diamonds as an example.

Imagine that every diamond in the world, yet to be mined, is on land owned by one company. That company still could not charge higher than market prices for those diamonds. This is because people are working to create diamonds in labs. If the price of mined diamonds became too high, then people would just buy lab made diamonds. For jewelry you could use diamond substitutes like cubic zirconia. For industrial purposes there are new forms of carbon that are just as useful as diamonds. Just because you dominate a market does not mean you can charge whatever you want. There are millions of people in a free market that can innovate and create new ways to provide products better and cheaper.

The free market does not have a problem with monopolies. In a free market people are free to buy whatever product they want. If you produce the best and cheapest product you can have a monopoly, but if someone creates a better or cheaper product they will start to cut into your share of the market. Government does not need to break up monopolies. The monopolies that exist, exist because that is a product people choose to buy.

 

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