by Stonemason » Thu 15 Jul 2010, 10:42:04
$this->bbcode_second_pass_quote('ralfy', 'A')ny free market will not last because eventually some will have more wealth than others and will be working with others who also have lots of wealth to maintain their dominance. They will try to gain more wealth through combinations of manufacturing and casino capitalism. But because they also depend on others to buy their goods and services while keeping costs low, they'll try to keep wages low while increasing credit. This basically describes the current global free market capitalist system in place.
There has never been a free market. So to use current examples of mixed economies with 'crony/state/corporatist capitalism' would be counter-productive to the correct understanding of the theoretical "free market".
The thought that came to mind while reading your post is that cartels are extremely hard to maintain in a free market, and not only that, don't do much good for the cartel.
$this->bbcode_second_pass_quote('David Friedman', 'W')hen the monopoly is shared by several firms who make up a cartel, the difficulties may be even greater.
A cartel is strongest in an industry where there is almost a natural monopoly. Suppose, for instance, that the optimum size of a firm is such that there is room for only four firms large enough to be efficient. They agree to raise prices for their mutual benefit. At the higher price the firms, which are now making a large profit on every item sold, would each like to produce and sell more. But, at the higher price, the total demand for their product is lower than before. They must in some way divide up the total amount of business.
A firm that sells more than its quota can greatly increase its profit. Each firm is tempted to 'chisel' on the agreement, to go to special customers and offer to sell them more at a slightly lower price 'under the counter', without letting the other members of the cartel know about it. As such chiseling becomes widespread, the cartel agreement effectively breaks down; this seems to be what happened to many of the short-lived cartels formed at the beginning of this century. 'Chiseling', of course, is what the other cartel members call it; from the standpoint of the rest of us it is a highly desirable form of behavior.
If a cartel manages to prevent chiseling among its members, it, like a monopoly, still has the problem of keeping new firms from being attracted into the industry by the high prices and consequent high profits. Even where there is almost a natural monopoly, such that any new competitor must be very large, this is difficult.
The obvious strategy of the cartel members is to tell any potential competitor that, as soon as he has sunk his capital into constructing a new firm, they will break up the cartel and return to competition. The new firm will then find himself the fifth firm in an area with room for only four. Either one of the firms will go broke or all will do badly. Either way, it does not look like a very attractive speculation. That strategy will work as long as the cartel does not raise prices much above their market level. When it does, a profitable counter-strategy becomes available. The potential competitor, before investing his capital in building a new firm, goes to the major customers of the cartel. He points out that if he does not start a new firm, the cartel will continue to charge them high prices, but that he cannot risk investing money until he has a guaranteed market. He therefore offers to start the new firm on condition that the customer agrees to buy from him, at a price high enough to
give him a good profit but well below the cartel's price, for some prearranged period of time.
Obviously, it is in the interest of the customers to agree. Once he has signed up a quarter of the total business, he builds his factories. Either the cartel restricts output still further, keeps its prices up, and accepts the loss of a quarter of the market, in which case the newcomer may eventually expand, or it competes for the customers the newcomer has not already tied up. Since there is only enough business to support three firms, one of the four goes broke.
Although an artificial monopoly or cartel may be able to influence prices slightly, and although it may succeed for a while in gaining additional profits at the cost of attracting new competitors, thus reducing its share of the market, any attempt to drive prices very far above their natural market level must lead to the monopoly's own destruction.
- "The Machinery of Freedom" pg 22 (I would recommend the chapters on monopoly in their entirety for an enjoyable empirical analysis)
