Monopoly..the favorite game of corporations. When not playing it, or trying to become a monopoly, they like to get onto television shows talking about how much they love free markets.
Why Discuss Monopolies?
Of the people that visit this blog, a large percentage of them arrive at it through a single keyword “monopoly.” This is surprising to us as we did not set about to write a blog about monopoly, however the concept and practice does come up a fair amount in the the topics that we study. The technical definition of a monopoly is where there is one seller and many buyers. A monopsony is the opposite, where there are many sellers and only one buyer. In general the government is a good example of both. That is we have only one federal government, of which we are all consumers of their services. We can chose another provider only by switching countries. In addition, in many circumstances the government is in some circumstances the only buyer of a service and their are many firms attempting to sell to the government.
Signitures of Monopoly Markets
The opposite of a monopoly is a monopsony. However, another An actual or pure monopoly is far less common than a company that lies somewhere on the continuum. The opposite of a monopoly or monopsony is called a freely competitive market. This is where there are many buyers, many sellers, and there are the means to easily getting information about the market. These markets have a signature of having low barriers to entry and are often not limited by geographic boundaries. That is new competitors can enter into the market with relative ease and the product or service being traded can be taken out of a particular geography. Like a pure monopoly, truly freely competitive (or free markets in the common parlance) are actually far less common than monopolies or monopsonies. More than thinking in absolute terms, a more accurate way of thinking of monopoly is thinking of a continuum. On one side of the continuum is perfect competition, or a free market, on the other is a perfect monopoly (or monopsony). Oil companies are towards the monopoly end of the continuum, while commodities markets tends towards the perfectly competitive end of the spectrum. Most industries have some degree of monopoly, or monopolistic competition within them. This is because many industries have large barriers to entry, but furthermore, the people and executives in them, actually work at reducing the competitiveness of the markets they work in in order to increase their profits.
Some examples of this include:
- Frequent flyer miles
- Cash back or bonus credit cards
- Corporate mergers.
While promoted as consumer friendly, in fact these instruments are designed to enhance the power of the seller over the buyer. One important feature of monopolies or of firms with monopoly power is that none of them admit to this economic modality. Instead they propose that they are in favor of free markets, and that they operate in a free market. They do this while working most of their efforts to make the markets they operate in less transparent and less competitive. No company truly in favor of free markets and open competition would roll out frequent flyer miles or bonus credit cards or ever engage in a merger. They fact that they do all these things indicates that they value increasing their personal or firm’s wealth more than they value any principle related to free markets or open competition. Firms like individuals do not want to compete, but rather they want to win. After winning, in a rigged system, it is them commonplace an expected for them to declare that they won fair and square.
Business is much more honest about their desire for monopoly in their internal documents and even in some of their business books. Here are several examples below.
Several books actually discuss how to build your business into monopoly. This
is problematic as is demonstrates business objectives that are actually against the stated public objectives and orientation of companies in their interactions with the media, as well as describing a desired end state that is actually illegal.
Mergers as Supporting Free Competition?
Companies make the assertion that they support free markets even as they apply for the permission from the Federal Trade Commission to engage in mergers. They use different Orwellian terms to justify mergers such as creating “synergies” and enhancing their ability to “serve customers” However, what they won’t say, which is what every economist knows, mergers increase the leverage of the merged company versus its customers and its employees. Furthermore, there is a strong relationship between the customer satisfaction in a market and the number of competitors. Large monopolistic companies can afford to be be unresponsive to customers as they have fewer places to go. This was the original reason for the Sherman Anti-Trust act (primarily targeted towards monopolistic railroads at the time of the act’s passing, but eventually every most of the monopolistic industries in the US)
The Free Market – Monopoly Continuum
Mergers in a very straightforward manner decrease the number of sellers in a market, making it more monopolistic. This is not a perfect state of monopoly. For instance when Mobile and Exxon merged (we are still scratching our heads as to how this was approved by the FTC, as they were at the time the 7th and 9th largest companies on in the country) did not create a perfect monopoly when they merged (there was still Shell, BP and so on) however, this merger increased the concentration of the industry and increased the monopoly power of all the producers.
How Monopolies Became Accepted
The business press speaks very little about monopoly, and the non-business media seems to barely speak of it at all. Monopoly in addition to extraordinary powers of corporations over the individual has become interwoven into the US culture. In a way Americans are proud of their large monopolies and they mistakenly believe that they personally benefit from having such large companies. Competitive implications have been brought up to help buttress this view. For instance when Oracle asked to merge with PeopleSoft (another large enterprise software company), Oracle management pointed out that they needed to get larger to compete with SAP – (a German enterprise software company and the largest competitor in the world.) However, what was not pointed out was what this would do to the many smaller competitors in the market (i.e. would they have to merge to compete with the bigger Oracle). Nor did Oracle discuss what affect this might have on Oracle’s or PeopleSoft’s customers. Oracle, with its already substantial monopolistic power, was considered particularly unresponsive to customers even before they merged with PeopleSoft. One IT manager told us years ago that Oracle was their least favorite vendor to deal with and that their attitude was to simply back up a truck and have the company throw a bunch of money in it.
Therefore, whether you accept market concentration and monopoly power in a way is based upon how the issue is framed. Monopolistic companies hire PR firms to help them frame increasing monopoly power as good for the average consumer and good for internationally competitive US companies. The other highly negative features of monopolies are not a focus, and generally not brought up by analysts. This is because companies fund advertising for the media outlets that follow them, and secondly, Wall Street analysts typically look at potential mergers through the lens of the companies stock. While the stocks of acquired firms tend to go up, the stock of the acquiring firm tends to go down (a reflection of the reduced balance sheet of the acquiring firm), however, mergers generate huge fees for wall street, and long term, Wall Street prefers monopolies, as their profits are generally higher than those firms operating in a more competitive market. In fact, this is a main reason for initiating mergers in the first place. Wall Street assigns a P/e ratio premium to merged companies, therefore mergers and Wall Street are a mutually reinforcing system. The major problem is, like most things devised and supported by Wall Street, mergers are terrible for consumers, workers and for the overall economy. Wall Street has a word for giant unresponsive companies with terrible customer service — if they exist in other countries — “socialist.” However, if fees can be made off of mergers, the new term becomes “synergies.”
With this steady stream of positive information on mergers coming from Wall Street analysts and from media outlets, Americans have tended to buy the official line, that mergers are good for the economy and thus good for them. The old ideas, bred at the turn of the century regarding trust busting have been replaced with a propaganda campaign which has effectively co-opted the typical person.
Conclusion
A lot of things have to change for the challenging of monopolies to occur. First off, Americans need to learn about the history of monopoly and how the larger a company gets, the more it has the ability and tendency to abuse its power. There is far too much “what is good for GM is good for America,” thinking going on. What is good for a company is not good for the country or its people. A good example is wages, all companies prefer lower wages, but are lower wages good for the country. Clearly not. How about pollution. Large industrial companies constantly complain about the socialist environmental regulations they have to deal with. For instance, Exxon would like to dump oil wherever they see fit. Would allowing Exxon to do this be good for the country? Again, clearly not.
There are laws on the books, and the Federal Trade Commission has the jurisdiction to enforce them, but they are not enforced because the FTC has been captured by industry. This topic would need to be much higher on the radar of everyone, and people would need to reduce their overwhelming subordination to concentrated power, which is more reminiscent of feudal Europe than the fighting spirit that inhabited the country at the turn of the 20th century. It is a an entire mindset that has to be changed.
