What About Monopolies?

Bryan Cheang

Bryan Cheang

Bryan Cheang is a graduate student at King’s College London in the Department of Political Economy. He researches into the political economy of development and also applied economic policy. He is currently researching into the development strategies employed by the city-states of Hong Kong and Singapore.

One of the main criticisms levelled against the free market is the concept of market dominance, or market power. Free markets are great, but they often lead to the accumulation of power by certain firms, who end up as monopolies, or so the argument goes. One firm may eventually end up gobbling other smaller ones, and then proceed to exploit consumers with exorbitant prices. A few small firms may also come together to form a cartel, to the detriment of market competition.

In such situations, many would recommend the need for government regulation, either to break up these big firms, or pass legislation to protect consumers at the mercy of corporations.

From a free market perspective, it is important however, to distinguish between two types of monopolies: free market monopolies, or political (coercive) monopolies.

 

 

There are indeed some firms who may become dominant in a genuinely free market, though they are extremely rare. Such a firm may have attained its position either by sheer innovation, or by serving its consumers so well that no other firm can hold a candle to it. One common example that comes to mind would be Standard Oil led by John D. Rockefeller. At the time, they had a monopoly on oil, and due to the management genius of Rockefeller and his company’s effective strategies, him and his colleagues became rich.

Such free market monopolies should not be vilified, but rather, celebrated. This is because the monopoly position they have gained is due to their constant ability to remain responsive to consumers and fending off every competitor, and should a firm withstand such challenges, then it deserves our utmost praise.

 

 

Most monopolies in history however, never emerged in the process of free and open competition, but rather, received a grant of privilege by government. One of the earliest examples of this was the East India Company, who received a monopoly privilege from the British Crown to operate in the world of trade. In more contemporary settings, many taxi companies around the world enjoy the protection of their local governments through a system of occupational licensing, designed to block off competitive innovation posed by new upstarts like Uber.

The monopoly position of such firms is gained through political means, which do not, and cannot be to the benefit of consumers and society. As such, they should be rightly opposed.

Yet, the solution to such political monopolies is not more state regulation, but rather, to reduce the artificial-political barriers to entry erected by the government in the first place. Once these barriers to entry, which may include subsidies for favoured firms, licensing regimes, state-owned enterprises with special rights, are eliminated, new entrants may enter the market, or pose a serious enough threat to keep incumbents competitive.

Antitrust laws, which are rules that have been enacted to combat monopoly power, have themselves been ineffective and at times, subject to capture by the very firms they seek to regulate. This reflects the long standing concern of free market economists, that government regulation, even for the best intentions, tend to backfire or fail.

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Bryan Cheang

Bryan Cheang

Bryan Cheang is a graduate student at King’s College London in the Department of Political Economy. He researches into the political economy of development and also applied economic policy. He is currently researching into the development strategies employed by the city-states of Hong Kong and Singapore.