No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eight: Market Structure: From competition to monopoly 181 Some will even decide that they would rather take the money and buy a bass boat and go fishing! Did you ever think that fishing and buying a boat was a substitute for an iPhone? It’s likely not today, but if the price rise is high enough (i.e., by changing relative prices such that the opportunity cost rises sufficiently), many activities will become substitutes to iPhones. As this discussion illustrates, competition is more prevalent than often thought since there is an opportunity cost associated with any purchase. Whatever that next best alternative is for any given purchase, it is also a competitor at the margin . MONOPOLY DEFINED Take a moment to look up the definition of monopoly on the Internet. Depending on the source, you’ll find several features in most of the definitions: one seller, absence of competition, market concentration, ability to exploit the consumer, higher profits, etc. We will not use any of the traditional features to define monopoly in this text, for very good reason. As we’ve seen above, competition is everywhere, even in the case of a “sole” provider. Even if Apple is the only producer of mobile phones, they don’t make bass boats! Absurd? Not when we understand opportunity cost and the pervasiveness of substitutes. Even if we narrowly view the market as just smartphones, absence of visible competition doesn’t mean it’s not a competitive market. Apple knows there are other firms that have the technical capability to produce music devices, and they will continue to improve and keep prices reasonably low to discourage competitors from entering the fray. The real distinguishing feature of monopoly power is barriers to entry . If competitors are free to come and go, most of the benefits of competition are maintained, even if only one firm dominates. If the barrier to entry is simply the excellent product that Apple produces, then that’s a good thing. If, however, Apple is given a legal right (through legislation or public regulation) to be the sole producer of smart phones, then it is possible that many of the ills commonly associated with monopoly power may come to pass (such as restricted output and higher prices). In the real world, there is almost no such thing as a pure monopoly or perfect competition, and there is almost always some barrier to entry for possible competitors. Most sustainable monopolies are the result of government action, ostensibly for the good of consumers. Perhaps the most common are copyright and patent laws, which allow monopoly rights to sell a product for a certain time period to stimulate innovation. A famous example of government granted monopoly was the old AT&T, who had legal exclusive right to provide phone service in the U.S. Once the monopoly was broken, tremendous innovation occurred—cost, quality, and variety of choices all improved. If there is no legal barrier to entry established and enforced by the government, the lure to capture or maintain monopoly profits will drive competitive behavior on the part of entrepreneurs. Without government restrictions on competition, consumers will benefit from either lower prices or higher quality (or some combination of both). Barriers to entry: obstacles that prevent new potential entrants from competing in a given market.