Module 5
Image Source: https://www.saic.edu/150/man-behind-monopoly-man.html
Monopolies are a concept that I remember learning about in the 3rd grade. It sounded scary and intimidating, and it is a concept that many people fall back on when discussing economics. It’s one of the only theories in economics and business that everyone knows, and freaks out about when it is mentioned. It is such a standard in business vocabulary, that I was surprised that Dr. Bylund showed that it was not as scary or shocking as we think it is.
Having a lasting monopoly allows entrepreneurs to get creative and find opportunities to create alternatives. There is nothing that can be so specific that it can’t be recreated in a different way. Having monopolies challenges entrepreneurs’ innovation techniques, but it is a challenge that is possible to overcome. Another important point from Bylund is that a monopoly cannot exploit customers. A product gets its value from what it can offer to the public, not the other way around. A monopoly cannot force consumers to purchase their products or services. They are not required to purchase a product that they do not want or cannot buy.
My Misconceptions about Monopolies
When I think about monopolies, I think about products at Walmart or companies like Amazon that everyone uses. I hadn’t considered companies that handle electricity, or other utilities as monopolies. These companies have such deep roots and it would cost too much money and effort for an entrepreneur to recreate the whole system. Another form of monopoly I hadn’t thought about before was transportation networks, like roads and railways. There is no point in creating new systems of roads or railroads, so these are natural monopolies. I also typically think about monopolies as having excess power, not as companies that are just more convenient. Bylund mentions having one store in a rural town, which also counts as a monopoly. This isn’t something I had considered much before, but it is the definition of what a monopoly is.
Competitive Markets
Bylund mostly retorts the idea of monopoly power, which applies to the foundational principle of competitive markets. The theory of monopolies is that companies can have total control over a product and potentially hike up the price as much as they want since they are the only producer. This actually is not true, because entrepreneurs can develop similar products or produce the same products at lower prices. *Monopolies do not excessively hinder competitive markets, because consumers always have a choice about whether or not they choose to purchase a good or service. *There are also laws and regulations about companies that purchase other companies, and deals can be canceled if it is determined that a company will have too much power in a market. A company can control a large percentage of a market, but it will not be allowed to control prices or run its competition out of the market.
Specialization, Division of Labor, and Free Exchange
If monopolies did have such a strong power that no other companies could enter the market, the division of labor would be uneven. Specialization allows different companies or groups to create different products and distribute labor so that one company or group is not producing everything. With the laws and regulations in place to prevent this, and the innovation of entrepreneurs, monopolistic powers using aggressive specialization are nearly impossible to come by. With so many entrepreneurs willing to find gaps in the market, the specialization of a market cannot be taken by force by a monopoly. Bylund’s points about monopolies also apply to the principles of free exchange. A consumer is able to buy a product or service only if they want to, and monopoly powers cannot force them. Free exchange allows both parties in an exchange to be better off. If a monopoly used power to drive up prices, consumers can choose to not purchase the product, or purchase an alternative. Monopolies have strong presences in the market, but they do not have the power to control the division of labor or free exchange.
Alignment of Incentives
Anti-trust laws are mentioned a few times in the lecture video. I know that these laws prevent large companies from controlling too much of the market, as I mentioned in my section about competitive markets. The principle of alignment of incentives shows that government policies should improve overall societal well-being. From what I’ve heard about these laws, they do improve societal and corporate well-being by banning companies from taking advantage of monopoly powers.* I think these laws are a good example of policies that protect consumers, but I’d like to hear these discussed in class to learn more about their advantages and disadvantages.*
Overall, monopolies aren’t as big and scary as I pictured them to be. There are monopolies, but they cannot exert too much power. If they do, there are laws and policies to protect consumers, and there are entrepreneurs who will make alternatives. Monopolies can continue to exist, but they do not have as much power to control markets and prices as I thought they did.