From: thant@void.esd.sgi.com (Thant Tessman)
Newsgroups: alt.politics.libertarian
Subject: Re: monopolies and the DeBeers diamond syndicate
Date: 6 Oct 92 22:15:47 GMT
Organization: Silicon Graphics, Inc.  Mountain View, CA



I wrote:

> >Competition is widely acknowledged as a market mechanism for lowering 
> >prices.  More often misunderstood, however, is that (in a free market)
> >merely being the only one currently offering a good isn't itself relief 
> >from the *threat* of competition.
> >
> >In response to this, people often argue that there are barriers to
> >market entry, such as startup costs.  But, if a company is the only 
> >one offering a good, what considering a competitor's startup cost 
> >means is that that company has disincentive from raising their price 
> >above what they estimate the startup investors will consider necessary 
> >to recoup their investment in a reasonable amount of time.  So startup 
> >costs are spread over the expected life of the investment.  This 
> >provides an automatic, and, for the established supplier, inconveniently 
> >empirical limit on monopoly profits.


In article <1affaeINN9vi@armory.centerline.com>, mrh@centerline.com writes:

> No.  It only limits monopoly profits as long as there actually is a
> startup that is selling product.  The fact is that at all other times,
> the limit is what the market will bear without competition.  When the
> market is statistically large enough, we should see the behavior you
> describe.  Unfortunately for your argument, many real markets just don't
> have enough players.

I made no assumption about the number of players.  I only made
assumptions about access to markets over time.  You are mistaking my
arguments with status-quo strawmen.  I will concede that at any given
moment the price limit for a monopoly supplier is what the market can
bear without competition.  However, the market is not a static system.
Any attempt at sustaining high profits invites competition and the search
for alternatives.  Any attempt to take advantage of a monopoly situation
more than once (like oil prices in the winter) will also invite
competition and the search for alternatives.  I challenge you to produce
a single example of a sustained monopoly that used no government
assistance and continued to raise prices.  (I will even admit that in
theory it is possible.)  DeBeers is strike one.


> >(If initial capital is still a barier to the creation of a starup, it
> >merely means that that capital is better invested elsewhere.)
> 
> It also still means there is a monopoly charging high prices.

High prices by what measure?  The point of that parenthetical statement
is that unless prices are high enough to invite more than one supplier,
there is no measure by which anyone can claim that the use of government
intervention will provide for consumer satisfaction in that market at
less cost to other markets when looking at the market as a whole.

Remember, the goal is satisfying consumer demand, not guaranteeing
multiple suppliers.  The only thing the government can do to guarantee
multiple suppliers is to artificially raise the cost of the good to the
point where more people can afford to do business in that good.  (And
indeed, this is the way anti-trust works.)  But it is not the way to best
satisfy consumer demand.


> >Another important point is that capital investment for predatory pricing
> >techniques are just as available to startups as to established companies.
> >And it is important to note that the capital pool of the established
> >supplier is not going against a single startup threat, but a constant
> >threat the size of the entire pool of available capital.
> 
> Not at all.  The pool of available capital can back either the monopoly
> or the startup.  There's a strategy called "backing the winner": ever
> hear about it?  It's the exact same reason incumbents in our political
> system have an advantage over the challengers.

In the free market, "backing the winner" means investing where your money
will return the most.  This doesn't means backing the biggest unless
everybody is collectively forced to back only a single investment at a
time.  Although this is the case for politics, it is not the case for the
market.


[...previously addressed noise deleted...]

> >The most damning argument against the supposed threat of predatory
> >pricing is very simple.  Instead of underpricing a competitor at a loss,
> >it makes more sense in terms of risk to just buy the competitor out.
> 
> Correct.  Competition that drops the prices is not in the interest of either
> competitor.  That is how DeBeers was formed.  It need not be a buy out:
> it may also be a merger with proportion of ownership distributed according
> to relative values.  Then both original owners can enjoy monopoly pricing
> without fear of the cheating that can occur when they merely collude.

(Then you acknowledge that there is no such thing as predatory pricing?)
As I pointed out earlier, the competition has no incentive to sell out
(or merge) for less than expected return on the investment.  Buying up
(or merging) becomes an extremely expensive proposition, and one that can
only pay off if the investment can be used to guarantee that no such
other competition can show up requiring yet another buyout (or merging).


[...more previously addressed and unsubstantiated noise deleted...]


> This is nonsense, in a mining monopoly such as DeBeers.  Costs of
> production from DeBeers mines are much lower than other mines because of
> their geology, not because of any competitive effort.  Thus, no matter
> how much capital is behind other mines, DeBeers can undercut their prices
> indefinitely.

Then why do they find it necessary to collude with governments to
forcibly limit supply of alternate sources?  Why do alternate sources
exist at all?  In any event, you cannot use DeBeers as an example of a
free-market monopoly.  Mobutu may have broken his deal with DeBeers in
1981, but you have given us no reason to believe you know anything about
the market conditions.  On the contrary, you have given us reason to
believe that you will make bold and ill-informed statements merely to
back up preconceived economic notions designed conveniently to serve
special interests while simultaneously giving that warm and fuzzy feeling
of control to people who think they know what's best for everybody else.


> BTW, Thant, thank you for an explicitly reasoned post, as opposed to the
> usual libertarian bumper-sticker rhetoric.  This is much more amenable to
> discussion.

Too bad it was lost on you.  I will admit that there are people who will
argue libertarian principles before doing their research, but I've seen
far more bumper-sticker rhetoric and tabloid economics come from you and
others like you than I've ever seen come from libertarians.  The
difference is that your rhetoric is indistinguishable from the bilge that
can be found on the prime-time news.  Popularity does not imply validity.

thant