On Dec 24, 5:29 am, Fred Weiss
papertig.com> wrote:> On Dec 24, 1:47 am, Lysander
comcast.net> wrote:
>>>...When the whale oil prices
>> went up, JD was sitting on a gold mine and a virtual monopoly in the
>> new fuel source. The market works. Although in this case, imperfectly.
>> A monopoly was not desired.
>
> I've been reading and enjoying your posts on this topic - and mostly I
> agree. On this small point I don't.
>
> The market in fact worked brilliantly in regard to Rockefeller and
> precisely how it should have. Rockefeller never "sat on a gold mine"
> and then voila one day he had "a monopoly". He had 100's of small
> competitors, most of whom he gradually put out of business by
> introducing significant efficiencies into the production and
> distribution of oil, enabling him to constantly lower the price which
> his competitors could not meet. Over a period of years he lowered the
> price of oil by 90%%! That's how he *acquired* a (near) monopoly -
> about 90%% of the market. He never had an actual monopoly which in
> strict terms is only possible with gov't interference. Rockefeller
> became what should be called a "market dominator".
>
This is true. As is the case technology is what causes growth and
makes us better off. The superior technology did help to buy off
competitors. My only reason for an imperfect working is that somehow a
monopoly, more likely oligopoly, was created when more competition
would have been preferred. Oligopoly is probably the better term.
There were some oil companies that were not part of Standard oil. I
think the life cycle and endogenous growth literatures do makes us
rethink the assumption that forms of competition other than perfect
are always bad. People credit Romer a lot for the new growth ideas of
how monopolies, monopolistic competition actually, may be good but it
goes back to Schumpter. Funny, I realize the trade offs between static
efficiency and growth. However, sometimes I find myself in the simple
undergraduate first micro course thought pattern of monopolies are
inefficient and always bad. It was a bad thought habit from way back
that I suppose I have not fully broken. It was clear even before
graduate school that with negative externalities imperfect competition
might be preferable. We have the tension between true growth from new
ideas and suffering the temporary and sometimes permanent monopolies
and oligopolies it presents. The life cycle literature shows us that
after a long period that an industry has existed, it is much too
costly to add new entrants because of the overwhelming amount of catch
up they need to do in technology.
> Incidentally, he was profitable all along the way. He did not lower
> prices simply to put his competitors out of business. He lowered
> prices because the efficiencies he introduced enabled him to and he
> made a fortune doing it.
>
Very true. Predatory pricing is a myth. Even if they could undercut
the prices and take a loss to drive out competition what stops the
next guy from trying. If predatory pricing were to exist it would be
very much like a fixed exchange rate system. To defend the exchange
rate you have to reserves when the pegged currency is appreciating.
People make speculative attacks on the currency if the reserves drop
to where it is questionable if the fixed exchange rate can be upheld.
The same thing goes here. You have to have cash reserves to predatory
price. Note cash reserves not "wealth" due to the value of stock you
hold. That would take a huge fall if you predatory price. People look
at the losses from predatory pricing and say this guy can't stand to
lose much more I think I can enter now. Also what prevents deeper
pockets from entering and letting the other guy take losses until the
monopoly stops predatory pricing or is out of business due to losing
too much money. There is an assumption that a monopolist will take
losses but the competitor will not or can not.
This is why predatory pricing is bunk. Pretend JP Morgan saw that the
huge profits in oil and wanted to enter. He goes in and Rockfeller
cuts prices to cause Morgan losses. Does Morgan suddenly say I quit I
can't afford losses. No Morgan would say lets see how long he can do
that. I am a rich man and I learned from railroads that he who is the
last one standing has huge profits. It suddenly would become a battle
who can take the most losses and Morgan might win if Rockfeller
suddenly says I have enough and what stand losing my fortune to keep
someone out of this business or if Rockfeller is dumb enough to lose
everything and go broke trying to keep Morgan out. Predatory pricing
proponents like to pretend the competitor is Joe Blow with a start up
company who had to take loans out to start the business and not
another huge business with a ton of retained earnings who is willing
to lose a lot to get monopoly status. They assumption there is
asymmetry towards risk and willingness to take losses between the
incumbent and the potential competitor. Very rich people and
successful companies enter new markets every day. Polaroid is using
the technology from digital cameras to enter the market for plasma
screen TVs today. Entrants are not always some guy in rags trying to
make riches.
In theory this can not work because the monopolist would only spend
the rent, the extra profits from monolopizing, to defend the monopoly.
The competitor would also be willing to loose up to rent to get the
monopoly, drive the other guy out of business. All it would take is
someone rich enough and willing to take the losses the monopoly would
dish out to break the monopoly.
