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Archive for April 6th, 2011

Could Friedman win at Monopoly?

Yes, everyone has already talked about this, but could Friedman with his vast knowledge about economics actually win at the  ubiquitous loved/hated board game?

Too begin, the board game is really very far from what is actually happening in a monopoly. Beside the idea that owning all the properties of one color (area, industry, etc) makes your prices higher, in real life no one is forced to buy from you. Predatory pricing does not happen and no choice of your buyer is allowed in the game.

I was, however, very interested in what at first seemed like a change of stance by Friedman. Unlike his usual free-market-will-fix-everything self, he at first opposed one type. On page 246 he writes about how a natural monopoly railroad would be built inefficiently early because of the high competition. He says, “Perfect discriminatory pricing is not the best solution to the problem of monopoly, but the worst…all of the gains from the firm’s production is transferred to the firm as monopoly profit–and all of the monopoly profit is burned up in the cost of acquiring the monopoly.”

This “inefficient rent-seeking” as later termed, is the the free market that he usually advocates. I wonder if efficiency trumps even the lassiez-faire for Friedman.

On the subject of Monopolies I am compelled to say that by far the worst one I have ever encountered in the Aramark Corporations concession license for Lake Powell. During my multiple trips each year I wonder why the government purposefully gives one company the power to charge 8 dollars for bag of ice and 6 bucks for a gallon of gas (figures are estimates, but it is very bad). I leave chapter 16 thinking wondering how “they” reconcile anti-trust laws and not enforcing price fixing agreements while letting Lake Powell, Liquor Sales in Utah (as one person nobly pointed out), and perhaps even professional associations (medical, state bars, etc, just to mix things up a bit) control everything within their sphere.

Regardless of Frie

I hated monopolies when I played Monopoly…

Stearns and Zwicki explain that because a congressman is in a particular subcommittee in legislation, the congressman will then use the power that he has in his committee to pass legislation that will help the constituents that have elected him into office. Makes sense from  a political stand-point. They have are then able to monopolize their power in that office to make get the votes they need to get into office. Thats the jist of it, I’m pretty sure.

So, my post is about solutions to that. Why do we need to solve this? Do we need to solve this?

The real question is, are congressmen supposed to have the interests of their area that they have voted into office or are they supposed to look after the well being of the nation? From an economic standpoint, we can look at it in net gains, rather than individual gains. If a business from somewhere in district that benefits from another company from another area being fragmented from an anti-trust law, should I use my power in office get those gains for my constituents. As Friedman explains the market will take care of any monopolies. There really isn’t any net loss if the monopoly is going to go under anyway. But, Friedman also explains that monopolies can be inefficient. If this is the case than society as a whole benefits from my use of power to exercise the enforcement of anti-trust laws, and I can help my constituency at the same time.

With this in mind the real inefficiency comes from disbanding businesses that aren’t necessarily monopolies as Stearns and Zwicki explain is what the FDC did, or not disbanding real monopolies when they occur because they are terribly inefficient. The congressmen, in my opinion, should have the good of the nation to be their first priority, and then the good of the district. That seems to be the theme of this class, is to look for net gains over individual gains.

Government Monopolies

April 6

Friedman really opened my eyes as to some of the inefficiencies and misperceptions of monopolistic behavior.  The thing that really caught my attention was when he discredited predatory pricing.  It probably sounds bad, but when I first learned about Rockefeller and Standard oil I couldn’t help but admire the genius and directed ambition of this man.  When I heard that he would start his board meetings with a “Let us PREY” comment my interest in him grew.  However, after I began to formally study economics I realized a lot of flaws with his tactics.

I am surprised at how much I was willing to believe without really thinking out the implications.  In my mind I believed that price cutting was an efficient way of monopolizing profits but after reading the simple logic of Friedman I realize the impact of the inefficiency.  Friedman really has a talent of taking everyday occurrences and evaluating them in economic terms.

However, this wasn’t the main focus of my planned post.  The thing that I was really thinking about was how governments really hold the biggest monopoly in the world.  I was thinking about things as little as the cost of renewing a driver’s license and the price of a traffic ticket.  We discussed earlier that there must exist an efficient punishment to deter risky behavior.  However, even if the government understood the optimal cost they still wouldn’t enforce it.  They can bring the same amount of revenue by reducing the quantity of service produced (example: number of police officials) and increasing the cost (price of a speeding ticket).  The result is that the consumers (us) receive a smaller portion of consumer surplus and the producers by restricting quantity receive extra-ordinary profits.

One might argue that these funds are used to help the consumers, but before we take this approach we must remember the screwed up incentives of politicians.  The revenue that they bring in isn’t necessarily used in our benefit (unless we are the highest paid rent-seekers).

I believe that we can look at most government agencies and recognize the effects of monopolistic behavior.

Liquor Store

It seems that in Utah the government feels the need to have its hands in everything.  The government has announce several closing of state liquor stores.  One might as why the state is involved in the business of liquor sales in the first place, it must be money related.  The funny thing about these stores that are being closed is that they still were making a lot of money for the state, over a million a year.  This kind of thought process that state and local governments use isn’t always in the best interest of the business at had.  I think they want to be in control, they could easily let Liquor store be owned and ran by private individuals but they would be losing control.  This need is very inefficient and causes a loss for the public as well as the government.

I’m going to have to agree with Ian blog on this chapter, it was hard to follow Friedman.  I also agree that all air lines companies will become one massive company, and that tax payers will spend lots of unnecessary money to keep it alive.  It seems like most of the things the government takes over are dying companies.  For example the post office,  the looses tons of money but the government keeps investing into it.  Friedman also talks about the antitrust law or otherwise known as the competition law that regulates anti-competitive conduct.  Now this is good I like this law, it keeps company from coming into little towns and selling a product for super cheap to where it is a loss to the company until it runs all of their competitors out of business, and then raise the price.  Well what about territory or how many certain business that sell the same product can be in a town.  For example why do we have two Wal-Mart in Logan or a home depot right next to a Lowes and it is like that in every town.  We have two Burger Kings, why is this allowed?  The biggest one is the Wal-Mart, I don’t think it is necessary or right to have to Wal-Mart.  I mean that kills Smiths and Family value.  I mean isn’t that going against the anti- competitive conduct.  People say that Wal-Mart is good for communities, I disagree and refuse to shop there.     

Southwest Airlines is NASA’s Major Competitor

When dealing with monopolies I have always been a little back and forth, and it seems like Friedman is too (or maybe that is just the way I always view Friedman.) On the one hand I believe that a market should be free and people should be able to do and get as much business as they can. But on the other hand I do believe that open competition and a fair playing field are necessary to create the best possible products for the best prices. But all of this hoop-law about people thinking a monopolized market is a bad thing is ridiculous. I still feel that the invisible hand of societies markets would be the driver of prices in a monopolized market. Just because only one entity is offering a specific good or service and the playing field is not fair doesn’t mean that, that company can start building crap products or raise their prices and the public will still buy them. People would still weigh their benefit of owning a product versus the cost, and if the cost surpassed the benefit, people would pass. And can I also say that I really don’t mind the idea of a monopolized air traffic system, maybe then we won’t have holes blowing open in airplanes (of course that comment is just for humor.) Surely monopolies of certain things aren’t a bad idea, what about the gas company or sewage? Even the idea of allowing these to be a free market system is absurd. If you think about it there are various things in today’s life that are monopolized that aren’t necessarily a bad thing. Most of us have grown up in Utah and have had the city take care of our trash, but back east it is mostly done by privatized companies. So on any given day you could have two or three trash trucks come down your road. What about NASA? Think if that went into a widespread privatized system just like airlines. Could you imagine blowing a hole in one of those on re-entry? Of course the humor of certain ideas is funny to think about and a monopoly may not hurt an economy but I don’t feel that it is the fair way to go when dealing with free markets. Sure there are those things that just work better when allowed to be a monopoly, but we also have a little thing called the Constitution that allows us to have a chance to succeed. If monopolies were never regulated you would see companies that have been around forever, who are bigger and more profitable that wouldn’t allow anybody else to get a start; and me not ever having a chance to own my own company is not an idea that I am willing to except.

I know this may seem weird, but I just recently put two and two together about the game Monopoly. I can’t remember the last time I played Monopoly. I do remember that it always took soooo long. I guess I can now conclude that the reason why I never realized why the game is called what it is, is because I have never played the game out to a winner. It has always ended because we got bored or someone was sick and tired of paying up – the rents were skyrocketing and the same person owned all the properties! Anyways, I thought this was just stupid. The “aha” moment I thought was funny.

What I found interesting from last class was how monopolies affect people. I always assume that what is common sense to me is common sense to others. Then again, now thinking about it, that sounds really stupid because everyone has their own standard based on what they know or have experienced. For example, I know nothing about guns, and in Utah it seems like almost everyone could tell the different kinds and how they worked, at least to an extent. I grew up not even allowed to buy a water gun or Nerf gun. Never really saw a reason to own a gun, nor do I see any use of it for me.

So, I guess my thoughts were just wandering all over the place because everything I have written really has nothing to do with the concept of monopolies. Anyway, I found it interesting that in Russia it is still at the economic status that the U.S. was at the time of the Revolutionary War, with notes getting passed between people like they were worth nothing. In the end, someone realized that they would be worth something after a time. The story one of the visiting Russians told us, about a man with a tank of vodka that went to a factory, was incredible. He sold the alcohol for the note that was worth a fair amount. In one day, the man was able to buy the factory with the notes he now had from selling the alcohol. That would be a crazy appreciation of the notes he held or a criminal case of fraud (if it were in this country).

Grocery Store Monopolies

After I read the chapter about monopolies I have been thinking about them all week. Now I can see monopolies everywhere throughout my life. There was one idea that I kept coming back to. Friedman talks about a natural monopoly. I could not help but to wonder why there weren’t natural monopolies all over the place which led me to contemplate this lovely little valley. Cache Valley is a relatively small area and yet there are 2 Lee’s, 2 Wal Mart’s, 1 Macey’s, 1 Smith’s, 1 Smith’s Marketplace, 1 Fresh Market, 1 Walgreen’s and many other small markets. How can there be so many places that sell the exact same thing in one small valley? It doesn’t make sense. And then I realized that preference plays a huge role in business/monopolies. Personally I like to do my grocery shopping at Wal Mart. I do understand that perhaps they do carry the best produce but you just can’t beat those prices. My mother is a die-hard Macey’s fan. She is willing to pay more money for food because she enjoys the atmosphere of Macey’s more than that of Wal-Mart. That could be one factor in why there aren’t a million natural monopolies around us, simply because people value different things at different prices. Some, like my mother are willing to pay more for the exact same product because, “Macey’s is just classy”, while others, like myself, would rather go where the products are the least expensive.

Shoot. What is a monopoly again?

There seems to be a general belief that consumers are the victims of the system. Perhaps this is untrue. I think that we as consumers actually have a lot more control over the way things are than we realize. Consumers, through their choices, determine what gets produced. I think that the only real way in which a company can be profitable is by catering to its customers. So consumers have a lot of power. As I suggested in my earlier post this week, maybe monopolies aren’t as powerful as we think they are. Monopolies exist if their good or service is the best one out there. However, maybe I fundamentally don’t understand monopolies. (Actually, change that “maybe” to “I know I don’t understand monopolies”) I believe in competition, and monopolies supposedly eliminate competition. Competition is supposed to create better products, more innovation, etc. But unless a monopoly is somehow being supported through a government (reminded here of protectionism), I think there still exists opportunity for competition. If someone comes up with a better product or way of doing something, the monopoly can be challenged. Status quo bias is powerful, but so is innovation. And consumers are the most powerful of all.

Self Regulating Market

In all of Friedmans explanations about solutions to monopolies, a common theory emerged, Self Regulation. The idea that players within a certain market will regulate one another and thus prevent a monopoly was in almost every single example that Friedman used. Now this may be the Libertarian in me, but if so many economist can see this, and so many examples have proven that markets wil regulate themselves, the question persists, why do regulatory committees exist? While thinking about all the money and time and effort wasted in regulatory committees that have proven to do little, I reflected back on what our russian friends said about safety and security. During the time of the Soviet Union, they mentioned that they felt more a sense of safety and security, particularly in business. I propose that this is the real reason that these regulations exist, not for the regulation, but for the sense of safety it provides people. Economic uncertainty is one of the most frightening feelings. By allowing the government to “provide” that security, most of us are really sacrificing our liberty. And when things go bad, we can blame the government all we want, but it will still not fix the problem at hand. Has our economy improved at all after the market crash of 2008? Has government done anything to fix it? Yet, we continue to rely on them for regulatory safety in nearly all economic aspects. I am reminded of a quote by the wise Benjamin Franklin “Those who would give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” The words ring truer for me today more than ever. @_@