Daily Archives: January 3, 2011

The logical end of a free market is monopoly

The logical end of a truly  free market, that is, a market without any state interference,  is monopoly .The reason is obvious:  competition tends to reduce the number of competitors through the natural process of success and failure and the takeover of one firm by another.  In some trades this does not create an obvious  serious anti-competitive difficulty because the initial capital investment is small and entry to the trade within the reach of many. But entry to a considerable and growing number of areas of manufacturing and service provision is too expensive for all but a few. 

In a significant minority of trades starting a business from scratch is practically impossible for any one individual or even a group of private investors.  The car industry is a first rate example, the number of companies now being small (and becoming smaller) compared with the number of even 40 years ago. Moreover, many of the car companies which do still exist do so only because of state subsidy and protection.

Because the natural end of a truly free market is monopoly the self-proclaimed laissez faire believers have introduced the most potent of state interferences into the market, namely, anti-monopoly laws. However,  anti-monopoly laws operate within the constraints of other laissez faire sanctioned interferences with the market such as patent rights and limited liability and widely differing national taxation and social welfare schemes.  In addition, anti-monopoly legislation generally  only effectively attacks the problem from one end. A company can  be prevented from growing its market share by taking over other companies but there is normally no meaningful restriction on a company growing its market share simply by expanding the existing company.  Microsoft and the domination of Windows is a classic example.  Those limitations  alone means anti-monopoly laws  are  limited in what they can achieve  and situations of oligopoly if not monopoly commonly arise.

But even where expansion is by takeover or merger,   experience shows that those charged with applying the legislation allow very large parts of a market – 25% or more – to be held by a single company. The consequence is that a market which would seem to be an obvious candidate for competition, for example, food and domestic supplies retailing, can easily  come to be dominated by three or four  major players (as is the case in Britain).

 There are also those products which are either natural monopolies because of the physical location of their infrastructure – railways, roads, the utilities such as gas – or which are inevitably going to have few entrants in the field because of reasons of cost, for example, aerospace, motor cars, ship building. Finally, there are those rare markets which are dominated by one company simply because of the nature of their business. The classic example of this is Microsoft and their Windows operating system.

The upshot of anti-monopoly laws,  state-granted privileges such as patents and the failure of anti-monopoly laws in practice is an economic ideology which is incoherent and a practical situation of markets which are neither free in the sense of being without state control or free in the sense that there is meaningful competition.  

 Microsoft and Windows – a natural monopoly

 In South Park: The Movie, there is a glorious scene where, under martial law, Bill Gates is executed for falsely promising that Windows 98 would be “faster,  easier to use and more reliable”.  Many long-suffering Windows users doubtless wish that life had imitated art in that instance.  Yet despite widespread dissatisfaction  Windows remains the overwhelming dominant operating system.

 At first glance it might seem that operating systems should be just the type of product which is open to fierce competition because software is a market which potentially has low entry costs. It is true that most areas of programming are competitive – within the constraint of the dominant operating system (OS) –  but operating systems are the odd man out. The reason is simple. Once a single OS gained dominance, the chances of any other system effectively competing were very small.  This is because the weight of programs available to run under the dominant OS soon became much greater than those which could be run under any other OS.  Thus, it becomes inefficient to choose any other OS.  That in turn means most of the software is written in a way to make in “friendly” to the dominant OS systems’ users. This further excludes OS competitors and the software to run under them because users, especially employers, do not want to spend the time training their employees on completely new systems, converting data etc.

The consequence is that Microsoft still has a stranglehold on the pc market.  Moreover, if anyone wants to write any other software, they are constrained by the practical need for it to run under the Microsoft OS if they wish to reach the mass computer user market.

 The near monopoly has lasted a long time.  It has done this despite considerable attempts by both rivals and the US government to diminish their market position. Windows’ dominance  looks secure for the foreseeable future.

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