Ken Silva is a ConservativeHome College Columnist winner. He studied Economics and Politics at Kent State University.
It never fails - whenever a large corporation purchases a competitor, there is always fear that the corporation is on its way to becoming a monopoly.
The reaction was no different last Monday when Google Inc. bought Motorola Mobility for $12.5 billion. But is fear of monopolies justified? And if so, should the government step in and protect society? To answer these questions, one must understand the nature of monopolies.
There are two types of monopolies in an economy: the natural monopoly and the coercive monopoly.
The natural monopoly obtains its position by having an advantage over its competitor—it may be exceptional at keeping its costs low, it may serve the customer better than any competitor, it may have special access to certain natural resources and capital, or it may have a combination of these advantages. In contrast, the coercive monopoly obtains its position through government privilege. It may benefit from direct government privileges—e.g. subsidies, tax breaks, protective tariffs, etc.—or indirect privileges such as a licensing or regulatory system that makes entry into the marketplace more difficult.
Coercive monopolies do much more harm than natural monopolies for the following reason: coercive monopolies do not have the same economic incentives to please their consumers that natural monopolies have. If a natural monopoly serves its customers poorly, there is always the risk that another company will enter the market and take away its business. The coercive monopoly has no such risk; it does not matter nearly as much if it serves its customers poorly because it is sheltered from competition by the government.
For example, consider a coercive monopoly such as the U.S. Post Office. The Post Office is a coercive monopoly because, among other reasons, the government pays its employees’ pensions and it is the only organization allowed to deliver first-class mail. If simply the reputation for long lines and poor service is not a strong enough argument against the Post Office’s ability to serve customers, consider the fact that it lost $3.1 billion in the third quarter of 2011—that is over a billion dollars a month.
Contrast a coercive monopoly like the Post Office with a natural monopoly such as Microsoft. Microsoft has been considered a monopoly by many for the last two decades, and has even been subject to antitrust charges from the government. Yet despite all of the criticisms directed toward the company, the fact is that it has created millions of jobs and innovative products for the world. And just like any natural monopoly, Microsoft is always vulnerable to competition—proven by the fact that it has recently been losing market share with the emergence of other operating systems and mobile devices.
The government can easily correct the damage done by coercive monopolies by simply removing government favors and barriers to entry in the marketplace—e.g. subsidies, tariffs, special tax breaks, etc. However, the government is very inept at regulating natural monopolies. Antitrust laws, the tools that the government uses to regulate monopolies, often end up doing more harm than good—businesses often petition government officials to use antitrust laws to take out their competition even when the consumer is perfectly satisfied, as in the case of Standard Oil in the early 1900s.
Thankfully, the market has a way of taking care of natural monopolies on its own. The more a monopoly continues to dissatisfy its customers or reap excess profits, the larger the profit opportunity for a prospective competitor becomes, and thus the larger the chance that the monopoly will be broken becomes—look at Microsoft’s diminishing market share again for a present day example. And if the monopoly is maintained through superior prices and service, there is no economic problem anyway.
So should government protect society from monopolies? Yes, and it can do so by eliminating all coercive monopolies and allowing the free market to flourish.