Coercive monopoly

In economics and business ethics, a coercive monopoly is a firm that is able to raise prices, and make production decisions, without the risk that competition would arise to draw away their customers.[1] A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete with it through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from the possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production.[2] Also, according to economist Murray Rothbard, "a coercive monopolist will tend to perform his service badly and inefficiently."[3]

Competition law
Basic concepts
Anti-competitive practices
Enforcement authorities and organizations

Whether coercive monopolies can arise in free market, or whether they require government intervention to institute them is a point of some disagreement. Advocates of free markets argue that the only feasible way that a business could close entry to a field and therefore be able to raise prices free of competitive forces, i.e. be a coercive monopoly, is with the aid of government in restricting competition. It is argued that without government preventing competition, the firm must keep prices low because if they sustain unreasonably high prices, they will attract others to enter the field to compete. In other words, if the monopoly is not protected from competition by government intervention, it still faces potential competition, so that there is an incentive to keep prices low and a disincentive to price gouge (i.e., competitive pressures still exist in a non-coercive monopoly situation). Others, such as some business ethicists, believe that a free market can produce coercive monopolies.[4]

Contrasted with other monopolies

Exclusive control of electricity supply due to government imposed "utility" status is a coercive monopoly, because users have no choice but to pay the price that the monopolist demands. Consumers do not have an alternative to purchase electricity from a cheaper competitor, because the wires running into their homes belong to the monopolist. Exclusive control of Coca-Cola is not a coercive monopoly because consumers have a choice to drink another cola brand and the Coca-Cola company is subject to competitive forces. Consequently, there is an upper limit to which the company can raise its prices before profits begin to erode because of the presence of viable substitute goods.

By contrast, to maintain a non-coercive monopoly, a monopolist must make pricing and production decisions knowing that if prices are too high or quality is too low competition may arise from another firm that can better serve the market. If it is successful, it is called an efficiency monopoly, because it has been able to keep production and supply costs lower than any other possible competitor so that it can charge a lower price than others and still be profitable. Since potential competitors are not able to be so efficient, they are not able to charge a lower, or comparable, price and still be profitable. Hence, competing in a non-coercive monopoly is possible but would not be profitable, whereas for a coercive monopoly competition would be profitable but is not possible.

Establishing a coercive monopoly

According to business ethicist, John Hasnas, "most [contemporary business ethicists] take for granted that a free market produces coercive monopolies."[4] However, some people, including Alan Greenspan and Nathaniel Branden, argue that such independence from competitive forces "can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises."[5][6] Some point out that a monopolist themselves may "employ violence" to create or maintain a coercive monopoly.[3]

Some recommend that government create coercive monopolies. For example, claims of natural monopoly are often used as justification for government intervening to establish a statutory monopoly (government monopoly or government-granted monopoly) where competition is outlawed, under the claim that multiple firms providing a good or service entails more collective costs to an economy than that which would be the case if a single firm provided a good or service. This has often been done with electricity, water, telecommunications, and mail delivery. Some economists believe that such coercive monopolies are beneficial because of greater economies of scale and because they are more likely to act in the national interest, while Judge Richard Posner famously argued in Natural Monopoly and Its Regulation that the deadweight losses associated with regulating such monopolies were greater than any possible benefit.[7]

Private coercion

A corporation which successfully engages in coercion to the extent that it eliminates the possibility of competition, operates a coercive monopoly. A firm may use illegal or non-economic methods, such as extortion, to achieve and retain a coercive monopoly position. A company which has become the sole supplier of a commodity through non-coercive means (such as by simply outcompeting all other firms), may theoretically then go on to become a coercive monopoly if it maintains its position by engaging in coercive "barriers to entry." The most famous historical examples of this type of coercive monopoly began in 1920, when the Eighteenth Amendment to the United States Constitution went into effect. This period, called Prohibition, presented lucrative opportunities for organized crime to take over the importation ("bootlegging"), manufacture, and distribution of alcoholic beverages. Al Capone, one of the most famous bootleggers of them all, built his criminal empire largely on profits from illegal alcohol, and effectively used coercion (including murder) to impose barriers to entry to his competitors. However, it may be relevant to take into account the fact that government was intervening in the alcohol industry by making manufacture and sales illegal and arresting those in the business, thereby enabling unnaturally high profits, and was not providing the usual service of enforcing trade contracts; likewise, some corrupt public officials derived rent-like profit from bribes that ensured that Capone would receive preferential treatment against potential competitors.

Antitrust

There are examples in history where a firm that is not a government-granted monopoly is claimed to have a coercive monopoly, and antitrust action has been initiated to resolve the perceived problem. For example, in United States v. Microsoft The Plaintiff's Finding of Fact alleged that Microsoft "coerced" Apple Computer to enter into contracts resulting in the prohibition of competition. Eric Raymond, an author and one of the founders of the Open Source Initiative, says "The thing a lot of people somehow missed is that the courts affirmed the findings of fact – that Microsoft is indeed a coercive monopoly."[8] Another disputed example, is the case of U.S. v. Aluminum Co. of America (Alcoa) in 1945. The court concluded that Alcoa "excluded competitors."[5] The ruling is heavily criticized for punishing efficiency and is quoted below.

It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.

Advocates of a laissez-faire economic policy are quick to assert (barring private criminal conduct) that a coercive monopoly can only come about through government intervention, and defend these situations as non-coercive monopolies in which government should not intervene. They argue that competition with these monopolies is open to any firm that can offer lower prices or better products —that competition is not excluded. They claim that these monopolies keep their prices low precisely because they are not exempt from competitive forces. In other words, the possibility of competition arising indeed affects their pricing and production decisions.[5] A coercive monopoly would be able to price-gouge consumers secure in the knowledge that no competition could develop. Some see low prices as evidence for a non-coercive monopoly.

Government monopolies

Undisputed examples of coercive monopolies are those that are enforced by law. In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the coercive monopoly status is sustained by the enforcement of laws or regulations that ban competition, or reserve exclusive control over factors of production for the government. The state-owned petroleum companies that are common in oil-rich developing countries (such as Aramco in Saudi Arabia or PDVSA in Venezuela) are examples of government monopolies created through nationalization of resources and existing firms; the United States Postal Service is an example of a coercive monopoly created through laws that ban potential competitors such as UPS or FedEx from offering competing services (in this case, first-class and standard (formerly called "third-class") mail delivery).1

Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In government monopoly, the holder of the monopoly is formally the government itself and the group of people who make business decisions is an agency under the government's direct authority. In government-granted monopoly, on the other hand, the coercive monopoly is enforced through law, but the holder of the monopoly is formally a private firm, or a subsidiary division of a private firm, which makes its own business decisions. Examples of government-granted monopolies include cable television and water providers in many municipalities in the United States, exclusive petroleum exploration grants to companies such as Standard Oil in many countries, and historically, lucrative colonial "joint stock" companies such as the Dutch East India Company, which were granted exclusive trading privileges with colonial possessions under mercantilist economic policy. Intellectual property such as copyrights and patents are government-granted monopolies. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton by the State of New York in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional because of a conflicting inter-state grant to Thomas Gibbons by the federal Congress. 2

Economist Lawrence W. Reed says that a government can cause a coercive monopoly without explicitly banning competition but by "simply [bestowing] privileges, immunities, or subsidies on one firm while imposing costly requirements on all others."[9] For example, Alan Greenspan, in his essay Antitrust argues that land subsidies to railroad companies in the western portion of the U.S. in 19th century created a coercive monopoly position. He says that "with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East." In addition, some claim that regulations can be established that place burdens on smaller firms that attempt to compete with an industry leader.

The state as coercive monopoly

Economist Murray Rothbard, noted for his espousal of anarcho-capitalism, argues that the state itself is a coercive monopoly as it uses force to establish "a compulsory monopoly over police and military services, the provision of law, judicial decision-making, the mint and the power to create money, unused land ('the public domain'), streets and highways, rivers and coastal waters, and the means of delivering mail." He says that "a coercive monopolist tends to perform his service badly and inefficiently". In addition to moral arguments over the use of force, free market anarchists often argue that if these services were open to competition that the market could supply them at a lower price and higher quality.

Unions

Labor unions have been called coercive monopolies which keep wages rates higher than they would otherwise be if individuals competed with each other for wages. Economists who believe this to be the case refer to this as a monopoly wage. (Heery, Edmund; Noon, Mike (2002). A Dictionary of Human Resources Management. Oxford University Press. p. 225)

Footnotes

1. Lysander Spooner started the commercially successful American Letter Mail Company in order to compete with the United States Post Office by providing lower rates. He was successfully challenged by the U.S. government and exhausted his resources trying to defend what he believed to be his right to compete.

2. For about six months, Thomas Gibbons and Cornelius Vanderbilt operated a steamboat with lower fares in defiance of the law. Gibbons successfully took his case to the United States Supreme Court. The Court ruled in Gibbons v. Ogden that the state-government-granted monopoly, which conducted some service between New York and New Jersey, was an unconstitutional violation of interstate commerce. Fares immediately dropped from $7 to $3.[10]

See also

Notes and references
  1. Greenspan, Alan, Antitrust Archived 2005-12-17 at the Wayback Machine, in Capitalism:The Unknown Ideal by Ayn Rand. Also The Question of Monopolies Archived 2005-10-24 at the Wayback Machine by Nathaniel Branden defines and discusses coercive monopoly.
  2. Kudlow, Lawrence, The Judicial Hacker, in Jewish World Review (June 14, 2000)
  3. Rothbard, Murray, The State Versus Liberty in The Ethics of Liberty by Rothbard (1982)
  4. Hasnas, John. The normative theories of business ethics: a guide for the perplexed Archived 2005-10-27 at the Wayback Machine. in Business Ethics Quarterly v. 8 (Jan. 1998) p. 19-42 ISSN 1052-150X Number: BSSI98006753
  5. Antitrust, by Alan Greenspan Archived 2005-12-17 at the Wayback Machine
  6. Branden, Nathaniel, ''The Question of Monopolies Archived 2005-10-24 at the Wayback Machine, from The Objectivist Newsletter (June 1962)
  7. Posner, Richard A. Natural Monopoly and Its Regulation (ISBN 1-882577-81-7).
  8. Silicon Valley, AOL TW React With Caution Archived 2007-05-14 at the Wayback Machine in The Industry Standard, (June 28, 2001)
  9. Reed, Lawrence. Witch-Hunting for Robber Barons: The Standard Oil Story Archived 2005-10-29 at the Wayback Machine The Freeman, a publication of The Foundation for Economic Education, Inc., March 1980, Vol. 30, No. 3.
  10. Folsom, Burton W. The Myth of the Robber Barons. Young America, 2003.
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