Monopolies and profit
Posted by aogTuesday, 01 July 2003 at 09:26 TrackBack Ping URL
There are frequent complaints about monopolies and how they "extort" money from consumers. This is a misuse of that word, however. Absent government coercion to purchase the product (ala the BBC and the television tax) it is simply not possible for a monopoly to be a bad deal for consumers. If it were, then people wouldn't buy. Monopolies always have the competitor of "nothing", so unless one assumes that people are fundamentally stupid or incapable of understanding what a product is worth, then at worst a monopoly is a neutral value. But in general even a monopoly must provide some value to its customers.

The problem of monopoly then it not one is bad in an absolute sense (because everyone is better off for the existence of it), but that monopolies are generally sub-optimal, i.e. the total utility could be higher. This means that it's quite possible for government intervention against monopolies may well make everyone worse off and destroy what value the monopoly was delivering.

The point is that it is far from a tautology that breaking a monopoly is a good idea, as is often presumed in discussions on this topic. The freer the market the less likely that government intervention will yield a net improvement. We'd all be better off if the government concentrated on removing monopolies created by the government and not market forces. Like, for instance, primary education.