Monopolies and Anti-Competitive Markets: Crash Course Economics #25

CrashCourse

26 Feb 201610:16

EducationalLearning

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TLDRThe video explores monopolies, which occur when a market is dominated by one seller that controls pricing and restricts competition. Economists often discourage monopolies as they exploit consumers, though in patents and natural monopoly utilities, they have purpose. Anti-trust laws promote fair competition, despite monopolies having some economic rationales like patents protecting R&D costs and public utilities benefitting from economies of scale. Overall, monopolies are complex - they can restrict supply and price gouge consumers, while also incentivizing innovation or cost reduction, illustrating that competition is generally good, except when it isn’t.

Takeaways

😀 Monopolies have market power and can dominate industries by keeping out competitors
😕 Monopolies can raise prices and restrict output without worrying about competition
🤔 Natural monopolies like utilities may be more efficient with one provider due to economies of scale
😠 Robber barons of the 19th century were cutthroat monopolists who crushed competitors
😡 Antitrust laws aim to promote competition and restrict monopolistic behavior
🧐 Oligopolies, where a few firms control an industry, can also wield monopoly-like power
😯 Patents grant temporary monopolies to incentivize innovation, allowing inventors to profit from their work
😮 Some price discrimination by monopolies allows charging different consumers different prices
🤨 Deregulation has opened up previously monopolized industries like telecom and airlines
😃 Ultimately, the impact of monopolies is complicated - competition is generally good but not always

Q & A

What are some examples of historical monopolists?
-Some examples given are Andrew Carnegie in steel, J.P. Morgan in banking, and John D. Rockefeller in oil.
What is crony capitalism?
-Crony capitalism is when a company influences government regulations in a way that limits competition, such as convincing a city government to ban competing food vendors to secure a monopoly.
What percentage of market share does a company need to wield monopoly power?
-A company does not need 100% market share to wield monopoly power. Even a large majority share like what Google has in internet search gives it some monopoly-like power.
What are some barriers to entry that allow monopolies?
-Barriers such as control of resources (like diamond mines), high start-up costs (like building a power plant), and government regulation can make it harder for competitors to enter a market.
What are antitrust laws?
-Antitrust laws promote competition and make anticompetitive business tactics illegal. The Sherman Antitrust Act of 1890 specifically outlawed monopolization and monopolistic behavior.
What is horizontal vs. vertical integration?
-Horizontal integration is buying companies that produce similar products (like Coca-Cola buying Pepsi). Vertical integration is buying companies up and down the supply chain (like Ford owning iron mines, steel plants, etc.)
How can patents lead to monopolies?
-Patents give inventors exclusive rights to profit from an invention for a limited time, allowing them to hold a legal monopoly until the patent expires.
What is a natural monopoly?
-A natural monopoly occurs when it is most efficient to have a single large producer rather than multiple smaller firms, such as with public utilities.
What is price discrimination?
-Price discrimination is the practice of charging different consumer groups different prices for the exact same product based on their willingness/ability to pay.
Why can monopolies damage markets?
-Monopolies can charge higher prices than competitive firms, discriminate prices unfairly, and erect barriers to prevent competition from entering the market.

Outlines

00:00

📺 Intro to Monopolies

Jacob and Adriene introduce the concept of monopolies. They discuss how monopolies can be terrible and exploit consumers, but also deliver essential services that competitive markets fail to provide. They set up the question of whether monopolies are good or bad.

05:05

😡 The Dark History of Monopolies

Jacob talks about the robber barons of the 19th century - Carnegie, Morgan, Rockefeller - who dominated industries like oil, railroads, banking, and steel. He explains how they would crush competitors and resist regulation. Adriene gives an example of a monopoly on food trucks secured through government connections.

🤝 Understanding Monopolies and Oligopolies

Jacob clarifies that a company doesn't need 100% market share to wield monopoly power. An oligopoly, where a few firms control a majority of market share, can also restrict competition. Barriers to entry like resource control and high startup costs also help monopolies maintain power.

⚖️ Antitrust Laws and Regulation

Adriene explains how monopolies can restrict output and raise prices, which is why antitrust laws promote competition. She talks about the history of US antitrust legislation, like the Sherman Act outlawing monopolization. Regulators review mergers and acquisitions and have busted anticompetitive behavior.

🤔 The Complex Role of Monopolies

Jacob notes that sometimes monopolies are useful, like patents granting exclusive production rights to spur innovation. Natural monopolies in utilities also avoid duplicate infrastructure costs. Deregulation has dissolved monopolies in industries like telecom and airlines. The video ends affirming that monopolies and pricing have pros and cons.

Mindmap

Keywords

💡monopoly

A monopoly refers to a market controlled by one seller, with a good or service that has no close substitutes. They are able to set higher prices and restrict output without worrying about competitors. Examples from the script include 'pure monopolies', local governments creating anti-competitive regulations, and intellectual property rights like patents.

💡barriers to entry

Barriers to entry prevent competition in a market. The video mentions government regulations, control of resources, and high startup costs as barriers. They help existing firms maintain large market shares.

💡antitrust laws

Antitrust laws promote competition by making anticompetitive business tactics illegal. The Sherman Antitrust Act of 1890 outlawed monopolization and monopolistic behavior. It gave government agencies power to block anti-competitive mergers and acquisitions.

💡competition

Competition between many producers is beneficial for consumers through lower prices, higher quality, and innovation. It's a key part of capitalism. Monopolies are seen as harmful because they restrict competition.

💡price discrimination

Price discrimination is charging different customers different prices for the same product. Businesses use it to increase profits. Monopolies can easily price discriminate since consumers can't switch to competitors.

💡economies of scale

Economies of scale means lower average costs per unit as production increases. This gives natural monopolies an advantage - having one firm avoids duplicate infrastructure costs.

💡deregulation

Deregulation is the removal of regulations, so as to allow more market competition. The video mentions this happening in industries like airlines and mail delivery since the 1970s.

💡public utilities

Public utilities like electricity and water have high infrastructure costs, making them natural monopolies. Prices and quality may still be regulated even though competition is limited.

💡horizontal integration

Horizontal integration refers to companies merging with or acquiring competitors ie. in the same industry. Regulations often block this to prevent too much market control.

💡vertical integration

Vertical integration is when a company owns or controls other entities across its supply chain. Only some types like coercive deals face antitrust action.

Highlights

Monopolies are able to erect barriers that economists call barriers to entry.

Incentives and competition made society better off.

I’ve influenced government regulations in such a way that anyone who’s hungry, but doesn’t want to enter a building, has to buy food from me.

When a single company has a huge market share in its industry, like Google does in search, they wield a lot of the same power that a pure monopoly would.

Another barrier is high start up costs. You may want to build a nuclear power plant to compete with your power company but you need a whole lot of money to get in the game.

A patent essentially guarantees their right to be a monopoly, but not forever.

Natural monopolies are special situations where it is more cost effective to have one, large producer rather than several smaller competing firms.

I mean, if there were three competing electric power companies in one city, that would mean, building three different power plants, and running three sets of power lines through the streets.

Nike has about 90% market share in basketball shoes, but it’s not a natural monopoly.

In 1974 an antitrust lawsuit was filed by the Department of Justice, and the end result, was the largest corporate breakup in American history. AT&T dissolved in seven regional, telephone companies, and other companies like Sprint and MCI quickly jumped into the market.

This process called deregulation, and it’s happened in many markets from delivering mail to airlines.

They charged different rates to haul freight. This gave an advantage to, companies that shipped more freight and helped to force smaller producers out of business,, creating even more monopoly power in the economy.

The airline industry does this using time: charging those that book early less than those that book late.

Price discrimination works best when firms have a large share of market power.

If there were hundreds of airlines it is unlikely that any one of them could price discriminate without losing customers.

Transcripts

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