Wednesday, April 28, 2010

Capitalisms natural state is monopoly? What a crock

I turned on talk radio yesterday (not something I normally do as I am a podcast listener most of the time). I turned it to the “progressive” radio station. The host made this statement

“The natural state of unregulated capitalism is to foment monopolies, because as a company grows it buys up its competition and in cases where it can't, it will use tactics like predatory pricing and other tricks to drive its competition out of businesses. This is why we need government regulations to prevent this from happening”.

I was thinking about this all day and still cannot wrap my head around his statement. I understand his theory, but it seems to have no basis in reality. There are many businesses that do not have much in the way of government regulation and very few of them seem to even have as few as a few dozen major players in the field. The only exception I could think of was Microsoft and its desktop Operating Systems, and Microsoft seems to lose market share everyday. For the most part it seems that the industries that have a few dominant players are the most regulated industries, electricity, cable, telephone, banking, airlines, etc.

If the talk show hosts theory is correct, then wouldn't McDonald's have used its market share to kill off all other fast food restaurants? Wouldn't Comaq or HP have monopolized the computer industry, wouldn't KC Original Barbeque Sauce have eliminated all the other hundreds of BBQ sauce choices? Wal-Mart would have eliminated all other grocery, clothes, and drug stores.

His theory really falls apart when you look at reality, the problem is that there are too many people with too many different tastes all demanding different products and services and they place different amounts of preference on different things, some might prefer low prices to good customer service, others want more selection, others want high quality products, even if the price is higher and the selection is lower.

The other problem is with big business itself, as any business grows it becomes more slow to respond to the demands of its customers, it becomes more bureaucratic, this creates a downward spiral that is the reason that one time kings in their respective fields are now hardly even on the map, Sears, IBM, Woolworth's, and others. If the theory of capitalism's natural progression towards monopoly without government interference then you would expect these companies to still be king, because they would have continued to use their power to crush all the competition as it tried to rise up.

The exceptions you see are in fields like the cable company, the telephone company, the electric company, and the like. What these companies have in common is not their natural tendency towards monopoly, but rather the government's propping up of their monopolies. These companies have worked with government at various levels to use the force of government to keep competition out.

Some stifling of competition is more obvious than others, but is is almost always there when you see a few companies with a hold on the market share. It may be as obvious as the government contracts with the electricity providers, or as hidden as the regulations that have made it virtually impossible to open a new tire manufacturing plant, or as I mentioned in my post below about the high cost of a liquor license.

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