The Free Market Monopoly Myth

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Graph of a Monopoly

We hear it often, the free market causes monopolies. The reason for the monopolies and oligopolies present in our economy is because of the free market. Democrats like Robert Reich preach this all the time ( I mention him because he is a prominent figure in blaming corporate greed for inflation and he blames this on the oligopolies and monopolies).

Before we dive into this discussion, we must first define a monopoly. A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.

The problem with people blaming it all on the free market is that it is not true. Kel Kelly explains this in his book The Case for Legalizing Capitalism

The higher the profit, the more competition is invited into the market, as long as other firms are permitted to freely enter the market. the more firms that enter the given market, the more likely the existing firms will lose market share. Therefore, not only do existing firms (or a would-be monopolistic firm) try to prevent possible competitors by keeping the selling prices of their products not too far above costs, but they continually try to find ways to reduce their costs. For if existing firms remained inefficient, they would lose market share to new entrants who would come to take advantage of the fact that they could make larger profits by producing with lower costs than the current firms, while maintaining the same selling price, or even lowering the selling price. As long as even a sole competitor has the threat of a new competitor, it will sell for as low a price as possible, which it could achieve more easily with economies of scale that come from increased production.

For the sake of argumentative purpose, we will assume that a monopoly arises in a free market. This may happen only if they are the first one’s to introduce the product or they somehow drive out every single competitor in the market (obviously this last won’t happen but whatever). A monopoly will only persist is the provider is more efficient than its rivals are. When the government gets involved in the economy and protects businesses, efficiency suffers as a result. But obviously, this is not what a free market does.

The reason natural monopolies don’t take over in free markets is specifically because monopolists don’t prefer to sell their goods at a competitive price. This creates an opportunity for entrepreneurs to chip away at their market. There are three scenarios in which competition occurs against an established company. They either lower prices, buy out the competition, or improve their product. Improvements in product are not guaranteed to successfully sway consumers, so they need to cut their price until the competitor exits the market. They can do so at a loss, but only for a limited amount of time. The other option is to buy out your competitors as they appear, but this presents an even bigger problem as anyone with a minimal amount of business sense will see that simply setting up shop is a big payday when every firm gets acquired meaning that you constantly have to spend more and more money to retain your monopoly. Eventually, in every scenario, you run out.