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  • Jacob: Welcome to Crash Course Economics, my name is Jacob Clifford

  • Adriene: and I’m Adriene Hill. Today were going to talk about monopolies! Which are

  • terrible, illegal, and only serve to exploit helpless consumers, except when theyre

  • delivering essential services that competitive free markets kind of fail to deliver.

  • Jacob: So, are monopolies are good? Or bad? Or?

  • Adriene: Both.

  • [Theme Music]

  • Jacob: When some people hear the wordcapitalistthey picture the robber barons of the 19th century.

  • Cutthroat monopolists, like Andrew Carnegie, JP Morgan, and John D. Rockefeller.

  • They dominated industries like oil, railroads, banking, & steel and would do anything to crush their competitors.

  • After all, in Rockefeller’s wordsThe growth of a large business is merely a survival of the fittest.”

  • Now, it’s true that market economists love competition, but monopolies are the antithesis of competition.

  • In most cases, economists want to prevent monopolies, not celebrate them. Let’s go to the Thought Bubble:

  • Adriene: A pure monopoly is a market controlled by one seller with a good or service that

  • has no close substitutes. But the true power of a monopoly comes from its ability to keep

  • competitors out of the market. Monopolies are able to erect obstacles that economists

  • call barriers to entry. If a company starts offering a brand new product in a market with

  • low barriers, they won’t maintain market power for very long.

  • Take gourmet food trucks. In the last decade, gourmet cooks started moving into the street

  • food business, competing in a market historically associated with lower-quality options like

  • hot dog vendors. These food trucks were a hit. Demand was high and the barriers to entry

  • were relatively low, so more and more competitors jumped in. Now food trucks are kind of everywhere.

  • And that’s exactly how capitalism is supposed to work. People wanted more street food options and profit-

  • seeking entrepreneurs gave them what they wanted. Incentives and competition made society better off.

  • But imagine a city where there are a limited number of licenses for food trucks, and I

  • own all of them for my fleet of artisanal macaroni and cheese trucks. I also know the

  • mayor, since he’s a big fan of artisanal macaroni and cheese. If I can convince the

  • mayor to ban traditional push cart food vendors, with their shwarma and their bacon-wrapped

  • hot dogs, I’ll have a monopoly on street food.

  • I’m not increasing profit by producing more stuff. I’ve influenced government regulations

  • in such a way that anyone who’s hungry, but doesn’t want to enter a building, has

  • to buy food from me. This is sometimes called crony capitalism, and it’s a big reason

  • many economists call for government transparency and accountability.

  • Jacob: Thanks Thought Bubble. Companies don’t have to have a literal monopoly to exercise monopoly power.

  • When a single company has a huge market share in its industry, like Google does in search,

  • they wield a lot of the same power that a pure monopoly would.

  • Now, when few firms have a large majority of market share, it’s called an oligopoly.

  • The market for mobile device operating systems is a good example with Google’s Android and Apple's iOS.

  • The point is that one company doesn’t need to have 100% market shares to operate like a monopoly.

  • In the example of the anti-food-truck ordinance, the barrier to entry was government regulation,

  • but what some other ways companies maintain large market shares?

  • Well, there’s also control of resources, like DeBeers once had 90% of market share

  • in diamonds because they controlled the world’s diamond mines.

  • Another barrier is high start up costs. You may want to build a nuclear power plant to

  • compete with your power company but you need a whole lot of money to get in the game.

  • Adriene: Monopolies can restrict output and charge higher prices without worrying about

  • competitors. This is why most economists support anti-trust laws that promote competition and

  • outlaw anticompetitive tactics.

  • Theyre called antitrust laws because monopolies used to be calledtrusts”. In 1890, the

  • US passed the Sherman Act, named for Senator John Sherman. Sherman argued, “If we will

  • not endure a king as a political power we should not endure a king over the production,

  • transportation, and sale of any of the necessaries of life.”

  • The Sherman Act outlaws any monopolization or attempted monopolization. Court rulings and later laws

  • gave the Department of Justice and the Federal Trade Commission greater authority to prevent monopoles.

  • If the Coca Cola company wanted to purchase PepsiCo, it’d be a tough regulatory sell.

  • In the US mergers and acquisitions need to be approved by the government agencies.

  • Economists call the act of buying companies that produce similar products horizontal integration.

  • Like, AT&T tried to buy T-Mobile, but failed because regulators believed the new company

  • would control too big a share of the wireless communications market.

  • Vertical integration, on the other hand, is when a company directly owns or controls its supply chain.

  • For example, in the 1920s, the Ford Motor Company owned much of the entire

  • supply chain needed to make cars. It owned iron and coal mines, and made its own steel,

  • glass, tires, and even paper in the massive River Rouge factory complex in Michigan.

  • Vertical integration is complicated, and it’s not always illegal. When a company just expands

  • its business to insource part of its supply chain, that’s usually not subject to antitrust regulation.

  • Companies can run into some trouble when they try to vertically integrate via mergers.

  • Antitrust regulations can also prevent companies from making anticompetitive deals with their suppliers.

  • In the late 1990s, Microsoft was accused of pressuring PC manufacturers to pre-install

  • Microsoft’s web browser, Internet Explorer, and exclude their main browser competitor, Netscape.

  • Regulators busted them, and almost busted up the company.

  • Even Toys R Us! It’s gotten in trouble for conspiring with toy suppliers, like Hasbro

  • and Mattel, to stop the manufacturers from selling certain toys to other stores.

  • So monopolies and monpolistic behavior are bad, right? Well, it turn out that sometimes

  • theyre useful. Look at patents. A patent grants an inventor exclusive rights to profit

  • from a specific product or process.

  • In the US, it is actually written into the Constitution. Patents and other intellectual property rights

  • encourage innovation. Pharmaceutical companies spend billions of dollars each year developing drugs,

  • and patents allow them to recover those research and development costs and, ideally, earn profit.

  • A patent essentially guarantees their right to be a monopoly, but not forever.

  • After a certain amount of time, usually about 20 years, a patent expires, which lowers the barriers to entry.

  • Competition moves in, prices fall, and companies look for something new to patent.

  • Intellectual property law and patents are really complex. And Stan, he’s actually done a whole series about 'em.

  • Jacob: Natural monopolies are special situations where it is more cost effective to have one

  • large producer rather than several smaller competing firms.

  • The best examples are public utilities in markets such as electricity, water, natural

  • gas, and sewage. They may be privately owned or publicly owned but either way, they remain

  • a monopoly because the government limits competition.

  • I mean, if there were three competing electric power companies in one city, that would mean

  • building three different power plants, and running three sets of power lines through the streets.

  • The result would be higher costs. So, in this case, it would be cheaper to have one

  • electric company because they have economies of scale. The monopoly can still raise prices

  • and abuse its position, so the government often regulates prices and fees.

  • Now, of course there are debates over when the government should interfere and which

  • markets justify natural monopolies.

  • Nike has about 90% market share in basketball shoes, but it’s not a natural monopoly.

  • It’s a non-coercive monopoly. There are plenty of other shoe manufacturers and people

  • aren’t forced to buy Nike shoes. So there’s no reason for the government to get involved.

  • But that’s not always the case. Up to the 1970s AT&T was given natural monopoly status,

  • which gave it nearly complete control of the telephone industry.

  • In 1974 an antitrust lawsuit was filed by the Department of Justice, and the end result

  • was the largest corporate breakup in American history. AT&T dissolved in seven regional

  • telephone companies, and other companies like Sprint and MCI quickly jumped into the market.

  • This process called deregulation, and it’s happened in many markets from delivering mail to airlines.

  • Adriene: So let’s step back, here. Why are so worried about monopolies? Well, a lot of this has to do with pricing.

  • For one, monopolies can charge more for their products than they could if the market was competitive.

  • They can also engage in a practice called price discrimination. Price discrimination

  • is the practice of charging different consumers different prices for exactly the same product.

  • In fact the earliest regulation of railroads came about because they were engaged in price discrimination.

  • They charged different rates to haul freight. This gave an advantage to

  • companies that shipped more freight and helped to force smaller producers out of business,

  • creating even more monopoly power in the economy.

  • But price discrimination isn’t just for monopolies, and it’s not always illegal.

  • To pull off price discrimination, a business needs to be able to segregate the market

  • based on consumerswillingness to pay.

  • The airline industry does this using time: charging those that book early less than those that book late.

  • A price-sensitive student might only be able to pay $200 so she books a seat weeks or months in advance.

  • A time-sensitive businesswoman that needs to be at a board meeting tomorrow,

  • might be willing to pay $800 for that same type of seat on the same flight.

  • The point is, charging a single price wouldn’t generate as much profit as charging different prices.

  • Price discrimination happens more often than you might think.

  • Discounts based on age or occupation are good examples.

  • Price discrimination works best when firms have a large share of market power.

  • If there were hundreds of airlines it is unlikely that any one of them could price discriminate without losing customers.

  • Like a lot of things we look at here at Crash Course, monopolies and pricing are complicated.

  • Generally, competition is a good thing. Except when it isn’t. Thanks for watching. Well see you next week.

  • Crash Course Economics is made with the help of all these fine people. You can support

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  • help keep Crash Course free, for everyone, forever.

  • Thanks so much for letting us monopolize your time for the last ten minutes or so.

Jacob: Welcome to Crash Course Economics, my name is Jacob Clifford

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Monopolies and Anti-Competitive Markets: Crash Course Economics #25

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    Jane posted on 2016/09/18
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