Monopolizing the Free Market

[Josh F]

I recently met a man who was a non-lethal weapons importer.  He was the largest importer in central America and he explained to me that he was the only person able to import pepper spray into a particular country.  He said he had signed exclusive deals with all the pepper spray distributors, telling them he would only buy their products if they refused to sell those products to other clients.

 

He created an effectual monopoly on pepper spray.

 

I have the potential to do the same thing, I am importing products into a new market which does not yet have these cheaper and better quality products.  In exchange for introducing the manufacturer to the market, it wouldn't be hard to secure a similar deal.

 

Is this ethical?  Is it good business practice?  Is it assholey?

To take the metaphor further, imagine if this guy cornered the pepper spray market by buying up all the retail operations.  Suddenly only retail options he owns would get access to the best and cheapest products, preventing other companies from competing. Is this a free market?

[Daniel Unplugged]

Is this ethical? Is it good business practice? Is it assholey?

Is it ethical? It is not unethical, unless the initiation of force is involved, such as if the government were to enforce your cartel by preventing competitors from entering the market. Good business practice? Perhaps. In the short term it may work well, but in the long term, in a free market, cartels are rarely sustainable. Competitors will find a way to sidestep you and your suppliers. New suppliers will appear out of thin air from all angles. You will be fighting a losing battle. Is it assholey? No. Distributors rights are commonplace. Treat your distributors well. If it is more profitable to do a deal with a competitor of yours, they will. If the market allows you to have a natural monopoly, then well done, and good for you. If you can hold onto it, then even better. It means you must be running your business really, really well.

[dsayers]

As with most things, there's a difference between a monopoly and a coercive monopoly.

 

I will say that even suggesting such an arrangement kind of admits that you don't think you could compete in a free market.

 

Anyways, it's an unenforceable arrangement. If people want pepper spray (PS) where the PS guy is selling, but don't want it so much that they'll pay the price he charges, there's a demand for cheaper PS. Another seller WILL step in and the distributor WILL sell to him if he can move more product faster. This is why freedom of association is powerful and necessary. I think people that make the arrangement you mention would be outcompeted and eventually outmoded. The practice itself I mean, not necessarily those who make use of it.

 

Side note: There's no such thing as a non-lethal anything, let alone weapon.

[Daniel Unplugged]

One more point. Take a look at how well Venezuela is controlling the market there, and they are a government, will all the coercive power attached. People are ingenious in their ways of circumventing rules and market controls. The invisible hand is incredibly powerful.

[Josh F]

As with most things, there's a difference between a monopoly and a coercive monopoly.

 

I will say that even suggesting such an arrangement kind of admits that you don't think you could compete in a free market.

 

Anyways, it's an unenforceable arrangement. If people want pepper spray (PS) where the PS guy is selling, but don't want it so much that they'll pay the price he charges, there's a demand for cheaper PS. Another seller WILL step in and the distributor WILL sell to him if he can move more product faster. This is why freedom of association is powerful and necessary. I think people that make the arrangement you mention would be outcompeted and eventually outmoded. The practice itself I mean, not necessarily those who make use of it.

 

Side note: There's no such thing as a non-lethal anything, let alone weapon.

Non-lethal weapons are a category of import products, and on a side now how much pepper spray would it take to kill someone? lol

 

The arrangement is only as enforceable as their contract, but without third parties, the buyer would simply cut that manufacturer out of the market.  The manufacturer stands to lose a lot of money if they don't maintain their relationship with the buyer.  Worse yet, with any significant market share he can out-compete anyone on prices, temporarily enough to squash their business.  This is still a common and profitable tactic, Walmart recently did it to Toys R Us, who secured the cheapest price on their Playstation 3s, and Walmart dropped their prices so low they were losing money on each sale just to eat up Toys R Us's market-share on Christmas. 

 

Is it ethical? It is not unethical, unless the initiation of force is involved, such as if the government were to enforce your cartel by preventing competitors from entering the market.Good business practice? Perhaps. In the short term it may work well, but in the long term, in a free market, cartels are rarely sustainable. Competitors will find a way to sidestep you and your suppliers. New suppliers will appear out of thin air from all angles. You will be fighting a losing battle.Is it assholey? No. Distributors rights are commonplace. Treat your distributors well. If it is more profitable to do a deal with a competitor of yours, they will. If the market allows you to have a natural monopoly, then well done, and good for you. If you can hold onto it, then even better. It means you must be running your business really, really well.

Well if I go to the government and bribe the right people to make a law for me, there is no force involved in getting the law made, just in enforcing it later.  Similarly it is not the initiation of force that gets me those deals with the manufacturer's, but the result is that I made myself more competitive by limiting my competitor's market access.  There is no law stopping him from importing a product, but agreements between me and these manufacturers prevent him from doing so nonetheless. 

 

Standard Oil was famous for one strategy using pipelines, prior to which oil was being moved around by Trains. Their control of the pipelines made gas cheaper for the consumer, but gave them a strong competitive edge over the other companies.  Most people who found oil had to eventually pay to link up with his pipelines. 

 

I do tend to agree with a lot of your points though, especially thinking that in order to gain that monopoly first you have to significantly increase the quality of the market, by introducing new manufacturers and variations on the product.  Like without this pepper spray guy, there was hardly pepper spray to be found at all, and now there are several companies and a larger market. So a monopoly in the free market, in any large industry at least, is just the best man standing?  I can see that

[dsayers]

how much pepper spray would it take to kill someone? lol

 

Somebody with a healthy respiratory system or somebody whose body already smothers them? Somebody with healthy eyes or somebody who is allergic?

 

I should've been forthcoming with my bias. I have a real problem with paramilitary police abusing the hell out of tazers out of a misguided belief that being LESS lethal means it's like candy.

[Daniel Unplugged]

Every product that has ever been invented/sold on a market began as a monopoly. I can think of none who have managed to keep it.

[Josh F]

Somebody with a healthy respiratory system or somebody whose body already smothers them? Somebody with healthy eyes or somebody who is allergic?

 

I should've been forthcoming with my bias. I have a real problem with paramilitary police abusing the hell out of tazers out of a misguided belief that being LESS lethal means it's like candy.

I agree and I told the guy the same thing, he didn't care.

Every products that has ever been invented/sold on a market began as a monopoly. I can think of none who have managed to keep it.

Good point

[Ancient Mariner]

I recently met a man who was a non-lethal weapons importer.  He was the largest importer in central America and he explained to me that he was the only person able to import pepper spray into a particular country.  He said he had signed exclusive deals with all the pepper spray distributors, telling them he would only buy their products if they refused to sell those products to other clients.

 

He created an effectual monopoly on pepper spray.

 

Are there any alternatives to pepper spray for personal safety? Even if he is able to gain a monopoly on pepper spray, it would only be as effective as the price of its alternatives. Are guns illegal in the country where he has the pepper spray monopoly?

 

I understand guns are lethal (as opposed to pepper spray) but it is still an alternative for personal safety and it might be even more effective for security purposes in some central american cities. 

[cynicist]

To take the metaphor further, imagine if this guy cornered the pepper spray market by buying up all the retail operations.  Suddenly only retail options he owns would get access to the best and cheapest products, preventing other companies from competing. Is this a free market?

 

Seems like a clever business practice to me. Remember that in this hypothetical scenario that buying up all the retail operations is taking a huge gamble, because if a new competitor finds a way to break into the market then you are now at a huge disadvantage due to the expenses you've incurred in securing the monopoly.

 

I mean it's not even being a dick since that's a huge risk. Being a dick is when you are Microsoft and you use your leverage on manufacturers to implement a proprietary standard that screws over anyone who wants to use a computer without Windows on it.

 

The only ethical concern I see here is possibly who he is supplying that pepper spray to....

[GRosado]

As with most things, there's a difference between a monopoly and a coercive monopoly.I will say that even suggesting such an arrangement kind of admits that you don't think you could compete in a free market.Anyways, it's an unenforceable arrangement. If people want pepper spray (PS) where the PS guy is selling, but don't want it so much that they'll pay the price he charges, there's a demand for cheaper PS. Another seller WILL step in and the distributor WILL sell to him if he can move more product faster. This is why freedom of association is powerful and necessary. I think people that make the arrangement you mention would be outcompeted and eventually outmoded. The practice itself I mean, not necessarily those who make use of it.Side note: There's no such thing as a non-lethal anything, let alone weapon.

What is the difference between a coercive monopoly & monopoly?

[Daniel Unplugged]

What is the difference between a coercive monopoly & monopoly?

The coercion of course. Take government police services for example. If a company sets up a police force to complete with the government, they will be subject to all kinds of violence and coercion from the state. The state has a coercive monopoly on violence. Also, look at the socialized medical services in Canada. If anybody attempts to provide those services, they are subjected to the violence of the state.You can also consider any service that requires licensing by the state to be a coercive monopoly/oligopoly, since any who attempt to compete, without a license, will be subject to violence.

[GRosado]

The coercion of course. Take government police services for example. If a company sets up a police force to complete with the government, they will be subject to all kinds of violence and coercion from the state. The state has a coercive monopoly on violence. Also, look at the socialized medical services in Canada. If anybody attempts to provide those services, they are subjected to the violence of the state.You can also consider any service that requires licensing by the state to be a coercive monopoly/oligopoly, since any who attempt to compete, without a license, will be subject to violence.A non-coercive monopoly doesn't threaten its competitors, or it's would be competitors with violence.

I get what your saying but wouldn't a regular monopoly have coercive elements to it? Coercion is the practice of forcing another party to act in an involuntary manner by use of intimidation or threats or some other form of pressure or force, and describes a set of various different similar types of forceful actions that violate the free will of an individual to induce a desired response, usually having a strict choice or option against a person in such a way a victim can't escape.I just see a monopoly on a good with inelastic demand as coercive to the buyers but I could be wrong.

[Daniel Unplugged]

I just see a monopoly on a good with inelastic demand as coercive to the buyers but I could be wrong.

Sure, in a monopolistic situation, a consumer may need to pay a monopoly premium on the good, but that is not coercion. It is a voluntary interaction, that benefits both parties. Of course, if a monopoly is charging a premium on their products, they are practically begging for new competitors to enter the market. All free market monopolies throughout history seem to follow the same life cycle. They obtain a monopoly, start to raise prices, make some good profits, encourage competitors to enter the market, and then they lose their monopoly and prices return to normal. The market has no mercy for monopolies.

I get what your saying but wouldn't a regular monopoly have coercive elements to it?

What are you referring to? Can you give examples?

[GRosado]

Sure, in a monopolistic situation, a consumer may need to pay a monopoly premium on the good, but that is not coercion. It is a voluntary interaction, that benefits both parties. Of course, if a monopoly is charging a premium on their products, they are practically begging for new competitors to enter the market. All free market monopolies throughout history seem to follow the same life cycle. They obtain a monopoly, start to raise prices, make some good profits, encourage competitors to enter the market, and then they lose their monopoly and prices return to normal. The market has no mercy for monopolies. What are you referring to? Can you give examples?

I'm assuming you know about the concept of Price Elasticity of Demand. If not just tell me & I will explain it or you can find the definition online.The coercive elements would be like I described before.If there is a good with inelastic demand the monopoly can engage in profiteering & the consumer only has one choice which is to buy it or not. If the good is lets say Gas then people are gonna need it & any change in price will increase or decrease the quantity demanded by very little. Of course there are alternatives such as biking but that is inefficient & highly improbable that people who commute far too work will be willing to take such an alternative.So if I use the definition from my previous post I can construct it out as coercion.One Party(Gas Company) uses some form of pressure(Horizontal integration) on another party(Gas Consumer) to induce a desired response(consume about same quantity of gas while paying a higher price) usually having a strict choice in such a way victim can't escape(consumer needs gas to travel to workplace & other areas such as grocery stores, so going without purchasing gas is harmful to the consumer livelihood).

[Daniel Unplugged]

I'm assuming you know about the concept of Price Elasticity of Demand. If not just tell me & I will explain it or you can find the definition online.The coercive elements would be like I described before.If there is a good with inelastic demand the monopoly can engage in profiteering & the consumer only has one choice which is to buy it or not. If the good is lets say Gas then people are gonna need it & any change in price will increase or decrease the quantity demanded by very little. Of course there are alternatives such as biking but that is inefficient & highly improbable that people who commute far too work will be willing to take such an alternative.So if I use the definition from my previous post I can construct it out as coercion.One Party(Gas Company) uses some form of pressure(Horizontal integration) on another party(Gas Consumer) to induce a desired response(consume about same quantity of gas while paying a higher price) usually having a strict choice in such a way victim can't escape(consumer needs gas to travel to workplace & other areas such as grocery stores, so going without purchasing gas is harmful to the consumer livelihood).

Yes monopolies can, and usually do, engage in profiteering, but remember that that is a tried and tested method for increasing competition. I don't consider it immoral. Businesses, and people will always sell for the highest price they can get, and buy for the lowest price they can get. This mechanism is what ensures markets are efficient, it is entirely necessary. It is not immoral for people to act in their own best interest, so long as doing so does not harm others. Morally requiring people to do otherwise is just collectivism, which I reject as immoral. Don't forget to distinguish between short term, and long term elasticity in demand. In the long term, the high gas priced would induce the consumer to reduce their consumption. In the long term they may; buy a more fuel efficient car, find a car pool buddy, find a job closer to home etc. I do not accept that (overall, as opposed to individual) demand for gas is particularly inelastic in the short term. There are usually many alternatives that are available at a moments notice, if the high price requires it.I didn't look it up in a dictionary, but I consider that coercion requires a threat to do harm to the victim. If that threat does not exist, I will always reject that there is coercion. I consider it to be an intentional innacuracy, designed to misrepresent and exadurate. (Not having a go at you personally. This problem comes up often. I think that it is important that we try to be accurate in the words we use.)

[GRosado]

Yes monopolies can, and usually do, engage in profiteering, but remember that that is a tried and tested method for increasing competition. I don't consider it immoral. Businesses, and people will always sell for the highest price they can get, and buy for the lowest price they can get. This mechanism is what ensures markets are efficient, it is entirely necessary. It is not immoral for people to act in their own best interest, so long as doing so does not harm others. Morally requiring people to do otherwise is just collectivism, which I reject as immoral.

I never said it's immoral nor am I arguing that it's totally coercive, what I'm saying is that a monopoly has coercive elements to it. Nor am I saying it's immoral to act in an individualistic manner & I haven't even given any signals that read collectivism lol.Competition does not just spring & would be kept out for a very! very! long time due to the monopoly's power also known as 'high barriers to entry'.You say always but that's getting into epistemology & your basically substituting your own version of the Rational Actor model into that equation. You have no way of knowing that everyone's preferences are too buy low & sell high. Also the price mechanism isn't predicated on the model you have suggested.

Don't forget to distinguish between short term, and long term elasticity in demand. In the long term, the high gas priced would induce the consumer to reduce their consumption. In the long term they may; buy a more fuel efficient car, find a car pool buddy, find a job closer to home etc. I do not accept that (overall, as opposed to individual) demand for gas is particularly inelastic in the short term. There are usually many alternatives that are available at a moments notice, if the high price requires it.

In the short run certain goods have an almost totally inelastic demand & that's something that can't be denied. Your very correct in the long run demand will become more elastic but I'm saying that barriers to entry may prevent that for a large period of time.But hey like I said I might be wrong to think that a monopoly has coercive elements to it.

I didn't look it up in a dictionary, but I consider that coercion requires a threat to do harm to the victim. If that threat does not exist, I will always reject that there is coercion. I consider it to be an intentional innacuracy, designed to misrepresent and exadurate. (Not having a go at you personally. This problem comes up often. I think that it is important that we try to be accurate in the words we use.)

No I'm not twisting words & I put the definition in one of my previous posts, so I don't think you read it all the way through. The definition was taken from Wikipedia so it's not anything "intentionally" misconstrued. You know you took a personal shot at me & then said you didn't? That's being hypocritical is it not?

[Tyler Durden]

It's not unethical, it's not assholey, but it is a very bad business strategy.

 

It appears like you're restricting the actions of your supplier, but you're actually restricting your own actions. Let me illustrate this:

 

Let's say you buy 100 items a week from your supplier with the deal that as long as he's selling to you he can't sell to anyone else.

 

In the beginning this works fine, because it's a new market so nobody else wants to buy. But if you're successful at selling 100 items a week at some point somebody else will want to do the same thing. If there are multiple suppliers he can go to another supplier and you immediately lose your monopoly. In that case the deal you made was worthless to begin with, so let's assume that your supplier is the only one.

 

If he approaches your supplier and wants to start small with 10 items a week your supplier might say no because of the deal you have with him, in which case your monopoly is still in place, but it wouldn't have made a big difference if some other guy was selling 10 items while you were selling 100.

 

But your supplier might also think "ah well, it's only 10, no harm in that, and Thought Terrorist is never gonna notice anyway." Which is not a big deal if you don't notice, but if you do, you're faced with a big dilemma. Are you going to walk away from your supplier, the one and only supplier, over these 10 items, while you are selling 100, and lose everything, in order to keep your word that you wouldn't buy from him if he sold to anyone else?

 

In that scenario, keeping your word would mean you lose everything.

 

But maybe you know your supplier well, maybe he's a trustworthy guy who always keeps his word. In that case he will tell the other guy that he's not going to sell him 10 items because he has a deal with you. Then the other guy will ask him "okay, so Thought Terrorist is only buying if you don't sell to anyone else, how much is he buying?" And your supplier will answer "100." And the other guy will say "well okay, then I will buy 110." And your supplier will say "deal."

 

Your supplier will sacrifice you as a customer because he can sell more by selling to someone else who doesn't even demand exclusivity, and with you out of the way the new guy can take your place. He can sell 100 of his items to the people that would otherwise have been your customers, and he can sell the other 10 to the people he had in mind when he approached your supplier.

 

By demanding exclusivity you're creating an all-or-nothing situation for yourself which will inevitably lead to nothing if you stick with it.

[Jagsfan82]

If there is a good with inelastic demand the monopoly can engage in profiteering & the consumer only has one choice which is to buy it or not. If the good is lets say Gas then people are gonna need it & any change in price will increase or decrease the quantity demanded by very little. Of course there are alternatives such as biking but that is inefficient & highly improbable that people who commute far too work will be willing to take such an alternative.

What good is there that really has an inelastic demand and also is subject to risk of monopoly?  Gas doesn't seem to make sense, especially as we are coming even closer to having legitimate substitutes.  Well, there already ARE legitimate substitutes. Certainly we don't have to worry about monopolies on the goods that matter.  Food, shelter, clothing, education, and health care all seem to be impossible to monopolize.  Long term elasticity, mostly due to the innovation of substitutes, protects the consumer from monopolies on other goods... that is... if we can even think of a good example.  Its really not good business strategy to drive up barriers to entry to protect a monopoly.  It might be profitable in the short run, but it just increases the amount of resources allocated to innovating a product that renders your monopoly obsolete, taking all the market share.   

 

Standard Oil was famous for one strategy using pipelines, prior to which oil was being moved around by Trains. Their control of the pipelines made gas cheaper for the consumer, but gave them a strong competitive edge over the other companies.  Most people who found oil had to eventually pay to link up with his pipelines. 

Standard OIl is a fine example of a good business strategy, but not a good example of a monopoly that took advantage of the consumer.  Its certainly not immoral or a real danger to the consumer to charge for pipeline usage. 

[GRosado]

What good is there that really has an inelastic demand and also is subject to risk of monopoly?  Gas doesn't seem to make sense, especially as we are coming even closer to having legitimate substitutes.  Well, there already ARE legitimate substitutes. Certainly we don't have to worry about monopolies on the goods that matter.  Food, shelter, clothing, education, and health care all seem to be impossible to monopolize.  Long term elasticity, mostly due to the innovation of substitutes, protects the consumer from monopolies on other goods... that is... if we can even think of a good example.  Its really not good business strategy to drive up barriers to entry to protect a monopoly.  It might be profitable in the short run, but it just increases the amount of resources allocated to innovating a product that renders your monopoly obsolete, taking all the market share.

Toilet Paper, utilities(water,electricity), Gas, maybe Telephones. Saying gas doesn't make sense doesn't make sense at all. costs for these alternatives are shocking to say the least, but that's why me & Daniel made the distinction between Short Run & Long Run Price Elasticity of Demand, so refer to previous posts on that. They may seem to be but you never know one day a company may find out how to, almost nothing is impossible. Definitely not mostly due to innovation in subsitutes... its the availability of substitute goods, the duration of price increases, Consumer necessity & the amount of disposable income the consumer has.

 

"Its really not good business strategy to drive up barriers to entry to protect a monopoly. It might be profitable in the short run, but it just increases the amount of resources allocated to innovating a product that renders your monopoly obsolete, taking all the market share. "

Not to be rude or insult you but I truly feel that you don't know what your talking about & let me speak as to why.

How is a monopoly keeping out competitors not good business strategy? That's like saying a boy trying to get the girl he likes by keeping other guys away from her is a bad way to get the girl he loves.

The monopoly is not trying to be more profitable when raising barriers to entry, its trying to keep competition out & if anything the monopoly will incur high costs that would reduce their profit margin which goes directly against what you said.

If resources cannot be allocated into the X industry due to the monopoly's high barriers to entry the resources will be allocated to other industries in the short run & possibly the long run, there isn't a one way channel that resources are allocated down as you stated in different terms. It would take the entrepreneur a huge amount of resources & time to break into the X industry so many will be discouraged from attempting to do so. Innovation on its own does not render a monopoly obsolete & to say such is to severely overstate the power of the innovation against the monopolies barriers & even if the innovation does allow the entrepreneur to break into the X industry the monopoly isn't just gonna vanish into thin air, its gonna fight till its dying breath & could possibly make a comeback.