The Economics Book

97

Whatever renders a

larger capital necessary

in any trade or business,

limits the competition

in that business.

John Stuart Mill

INDUSTRIAL AND ECONOMIC REVOLUTIONS

does not matter if there is a monopoly
as long as there are no barriers to
entering and exiting the market—
the mere threat of competition
means that the monopoly will set
the price at a competitive level.
This is because a higher price
might attract new entrants to the
market, who would take market
share from the monopoly. For this
reason prices may be no higher
under a monopoly than in a market
with many competing firms.

Natural monopolies
One argument that began to take
shape during Marshall’s lifetime is
that some monopolies are “natural”
because of the enormous cost
advantages of having a single firm.
Many public utilities are natural
monopolies, including telephone
networks, gas, and water. The
fixed cost of setting up a network
of gas distribution pipes is huge,
compared to the cost of pumping
an extra amount of gas.

This idea led to an acceptance

of national monopolies in the

public utilities in many countries.

Even so, governments began to

intervene in these markets to

counteract the possible monopoly

effects. The problem is that in the

case of a natural monopoly,

the fixed costs are so high that

compelling the firm to charge a

competitive price might make the

firm unprofitable. Solutions to this

problem include the wholesale

nationalization of industries or

the establishment of regulatory

organizations that place limits

on price increases, helping

consumers but also ensuring the

economic viability of the industry.

Mainstream economists argue

that monopolized markets fall short

of the perfectly competitive ideal.

This view has led to government

anti-trust policies, which seek

to move markets toward

competitiveness. This has meant

the introduction of measures aimed

at preventing monopolies from

abusing their market power,

including the breakup of monopolies

and the banning of mergers of firms

that would create monopolies.

The modern Austrian School,

including US economist Thomas

DiLorenzo (1954– ), are critical of

this approach. Both argue that real

market competition is not the

passive behavior of perfectly

competitive firms operating in a

state of equilibrium. It is about

cut-throat rivalry between an often

small number of large businesses.

Competition takes place through

price and non-price competition,

through advertising and marketing,

and through large firms innovating

and creating new products.

Slightly apart from this school

of economists, Austrian economist

Joseph Schumpeter (p.149) also

stressed the dynamic potential

of monopoly as firms compete to

create new products and dominate

entire markets because of the

potential profits. What economists

agree on is that true competition

is good for consumers. It is less

certain whether or not monopoly is

incompatible with this. In the early

20th century German economist

Robert Liefman claimed that

“only a peculiar combination of

competition and monopoly brings

about the greatest possible

satisfaction of wants.” ■

In 1998, the US pharmaceutical

industry asserted its monopoly on

an AIDS drug by taking legal action

against the South African government,

which had been buying cheaper,

generic versions of the drug.

Operators work the switchboards of
the AT&T company in New York in the
1940s. Because of the company’s size
and dominance, it was considered to
be a natural monopoly.