[e2e] It's all my fault

Noel Chiappa jnc at mercury.lcs.mit.edu
Fri May 18 06:25:23 PDT 2007

    > From: Vadim Antonov <avg at kotovnik.com>

Again, apologies to all for the wandering nature...

    > natural monopoly (aka single provider) and monopoly are not the same.
    > .. The "natural monopoly" cannot exploit consumers by raising prices or
    > by reducing services using its "monopoly" position because doing so
    > will create opportunity for entrance by a smaller competitor.
    > ...
    > No matter how large a "naturaly monopolistic" company is, it is always
    > possible to borrow enough capital to create a comparably sized company.

I think you're incorrect here. First, I think of three categories of
monopoly, not two:

 - statutory monopoly, i.e. one instantiated by the government
 - 'ordinary' monopoly, i.e. one where one organization has taken over a
	market, and uses its economic power to maintain that monopoly
 - natural monopoly, i.e. one where it makes no economic sense to have
	competition (short of incompetence or malfeasance), e.g. a local
	household electricity distribution network

(Of course, one can further subdivide each of these into two subsets, ones
which are well-run and don't abuse their power to milk their customers, and
those which aren't, but that's an orthagonal axis.)

Second, abusive 'ordinary' monopolies aren't that easy to break, especially
if the market is large, and the monopolist has accumulated considerable
economic resources thereby. The monopolist's economic power is used to make
it impossible for a new competitor to get a foothold.

The usual tactic is to drop prices to below what it costs to provide the
goods/service, i.e. it's impossible for the competitor to make a profit. The
monopolist can usually run this way for a long time, e.g. years. (Heck, even
non-monopolist large companies, ones which are losing money through simple
incompetence, can last a long time: look at many airlines, and US car

Most financiers are not interested in getting into a situation where they
have to i) invest a really large amount of money, ii) wait years to get any
return at all (remember, prices <= cost, so no profits), and iii) probably
cannot get the same rate of return as they could if they deployed their
resources in some less-cuthroat part of the economy.

Another possible tactic, one specialized to communication networks, is to
refuse interconnection. The whole point of a communication network is to
communicate: if by signing up to provider B, which is much smaller than
provider A, you can only talk to provider B's clients, most people will sign
up with A. B soon withers away. (A similar effect is what eliminated all
competing protocols to TCP/IP.) This may lose provider A the money they could
charge B for interconnecting with A, but if their goal is to maintain the
monopoly, they will accept that loss.

For others, just study Microsoft's business tactics over the years...

    >> Furthermore, all recorded cases of natural monopoly have evidenced
    >> aggressive action; providers in natural monopoly situations crush
    >> competitors and resist changes to their market.

    > "Aggressive" is either a) violent or b) vigorous.
    > "B" means innovation, price cutting, and otherwise serving customers
    > better. This is _good_.

No, again, there's a third alternative you aren't listing: "take all possible
business actions it takes to drive the new competitor out of business", e.g.
deliberately losing money on sales.

Yes, if someone can gather the capital from people foolish enough to try and
create a competitor, as a result there may be a period, while the monopolist
is vanquishing its attacker, where i) products improve faster, and ii) prices
are lower. However, in the end the attacker will run out of resources, fold,
and then monopolist is back in business - and wil have deterred potential
competitors for a generation or more, who see what happened to this one.

On a more general note, through long experience the West has discovered some
of the pitfalls of capitalism - and they do exist - and created systems to
ameliorate them. Totally free markets turn into jungles, alas. (In fact, a
jungle is by definition the ultimate free market, in terms of competition.)

I can recommend a wonderful book, a colourful, fascinating and easy read (I
found it as hard to put down as a crime novel, no mean feat for a economics
history), which makes this point very clearly:

    John Steele Gordon, "The Scarlet Woman of Wall Street: Jay Gould, Jim
	Fisk, Cornelius Vanderbilt, the Erie Railway Wars and the Birth of
	Wall Street", Weidenfeld and Nicolson, New York, 1988

It describes the shenanigans in the US stock market in the 1860's and 1870's,
the events that led to the creation of initial regulatory bodies in those
markets (although period crashes since then, such as 1929, have shown how
those regulations need to be tweaked as weaknesses appear).

It also makes an interesting point: much of that regulation is
self-regulation, not government-imposed (although there has come to be more
of that recently). However, it is also clear that in some circumstances
individuals, even banded together, can't impose the necessary regulation, and
in those cases (and aggressive, abusive, monopolists are one) government
regulation may indeed be needed.


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