With each passing antitrust case, the monopolization of power from the public sector over the management of business matters is growing stronger. The way in which companies compete, scale in size and scope, manage operations, and market their services and product offerings, is now largely dependent on the good graces of government agencies. If a business is too big, too profitable, too entrenched — basically, too ambitious or autonomous — then it is likely to face the scorn of the Federal Trade Commission and the Department of Justice. And given the popularity of some of America’s largest firms, media coverage and political posturing for egging on antitrust cases has become a common occurrence.
The supposed monopoly status of successful businesses in the private sector, however, distracts from the dangers of a growing bureaucratic state. In truth, fears over marketplace dominance should pale in comparison to concerns over political interference. So, with this in mind, let’s first start with why monopolies should be viewed as a non-issue in market-based societies, elucidate the matter with an example, and then shift gears as to why government meddling in business affairs is the real problem at hand.
Monopolies Serve Markets and Grow Economies
A monopoly occurs when there is a single seller or when a firm has a dominant stance in the marketplace devoid of competition. Such an occurrence should not automatically be assumed as negative, especially when it is derived from consumer preference. For instance, there may be times when demand for a certain product or service is being sufficiently met and, as such, one provider is all that is necessary. There may also be times when it is inefficient or wasteful to have more than one seller. It could even be the case that consumers have little interest in trying the products or services of a competing brand if needs and wants are being fully met. A single firm may simply be the best at what it does and, therefore, that firm reigns supreme (think LEGO, Crayola, and dare I say Google search).
Accordingly, any effort towards generating competition for the above situations would be a poor allocation of resources. A smart business move, however, would be to invest in adjacent or complimentary products for the market that the monopoly is successfully serving.
Let’s illustrate this point.
It would not make sense for a small town to have multiple yoga studios taking up store space on every block. And, if consumers were happy with their existing yoga instructor and are satisfied with the studio hours being offered, it is unlikely that any would opt to try an alternate studio if one were to open — especially if there is no additional value being offered for making the switch.
Patrons of the existing yoga studio, however, would likely have an interest in purchasing new yoga apparel and accessories, as well as shopping at a local health store in town. And this is an important point — consumers like to have a diversity of options, not necessarily more of the same. Consumers also tend to be attracted to local trends and so as interest in yoga grows, so too does patronage not only for the studio but for affiliated stores.
Over time, the growing yoga studio proves to be of benefit to the town in that those who provide maintenance and plumbing or electrical services have been called upon when needed. Job opportunities have expanded as the studio is now in need of bookkeeping support, front desk personnel, cleaning services, etc. The studio also pays taxes and takes part in helping to sponsor and support community events from time to time.
As the popularity of the yoga studio takes off, the owner explores options for expansion to better meet demand needs and so more of the above spillover effects can occur. Turns out, big benefits can be derived from big business. Larger firms can employ more people who can consume more goods and services from other businesses. Larger firms also require more resources and strong supply chain networks and, as such, will be more likely to invest in resource development and infrastructure. Similarly, larger firms have the capacity to dedicate efforts toward research and development, which can lead to new innovations that can then be leveraged by other businesses and individuals.
You get the idea.
Market Dominance Doesn’t Negate Consumer Choice or Business Interests
Now, let’s say demand for the yoga studio skyrocketed but the owner didn’t have a desire to expand the studio size or sessions offered. The owner could curb demand by limiting access to pre-existing members or by raising prices to be in line with demand levels (much like Taylor Swift tickets). If to start raising prices, patrons could either opt to pay the higher price or opt out altogether. Consumers always have a choice even when there is just one seller since consumers can always opt out when price hikes occur. But let’s imagine that enough patrons were upset about the new studio prices and too many opted out — the studio would then be forced to readjust to a more affordable rate. Or, alternatively, if the studio kept prices high and demand were to remain high, an entrepreneur eager to seize the opportunity could open up a studio of their own.
Price hikes can be disconcerting for consumers in the interim, but pricing overall is not a major problem when monopoly power is concerned. Entry barriers, however, are.
When entry barriers are low and demand is high, incentives are strong for entrepreneurs to take a shot at unseating incumbent firms — and this has occurred time and time again. And, fortunately for yoga instructors, there is no certification required for opening up a studio for business within the United States. For other sectors, though, the entry barriers can be steep either due to startup costs or pre-established standards. Oddly enough, you are required to have a cosmetology license if you want to open a hair care studio. Guess yoga is a safer bet.
Alright, back to our fictitious scenario.
Let’s say the yoga studio owner does decide to expand due to high demand. The owner grows the size of the studio as well as product offerings and there is now a section near the front of the building that features yoga apparel, health supplements, along with a smoothie station. Some in town may feel that this is unfortunate for the small shops on their street, while others view it to be a growing competitive environment. Those who prefer the town’s health store will continue to patronize it, as long as it continues to be of value to them, and those who buy their supplements from the studio will appreciate the convenience.
At the end of the day, both the yoga studio owner and the small street shops are dependent on the interests and transactions of the town’s people, and both must adjust their offerings accordingly. As Thomas Sowell rightly points out:
What is called “capitalism” might more accurately be called consumerism. It is the consumers who call the tune, and the capitalists who want to remain capitalists have to learn to dance to it.
Now, let’s add a twist to this story and say that someone decides to bring the yoga studio’s expansion to the town council for review.
External Dictates Distort Market Mechanisms
Concerns about the studio’s growth and market power are raised during a town hall session and political officials decide to intervene. Rather than letting price signals, consumer interests, and business owners determine what will be offered in the marketplace, the fate of existing and future businesses will now be determined by an elected few who may or may not even engage with the products or services in question.
Time, effort, campaigns, and meetings occur for dealing with the yoga studio debacle; and some in the community could care less while others are consumed by it. The yoga studio owner begins to feel shunned by the town that made the business a success and the small store owners start embracing their new role as victims of big business. Eventually the studio owner concedes and reverts to only offering yoga sessions and shuts down its in-house product offerings. Patronage, however, doesn’t seem to improve for the local health store. As it turns out, the yoga studio and health store owners were so concerned with council disputes that they didn’t notice a change occurring in consumer interests, nor did they concern themselves with maintaining a competitive edge in a changing environment. As fate would have it, a new sports center featuring rock walls and strength training sessions opened on the outskirts of town and patrons now frequent a Whole Foods market that is not far off from the new facility.
Nevertheless, those sitting on the town council, unaware of their actual impact, feel empowered having passed a new rule that limits business expansion within the municipality and have dedicated tax dollars towards promotions that celebrate small businesses. In the short term, public officials have proved themselves as champions for the people, having stood up against big business taking over their town.
In the long term, the town’s dynamism as well as the dollars spent in the local community dwindles as small businesses continue to seek out support from the council and shirk from any growth prospects for fear of being reprimanded. Moreover, investment properties within the town lose their appeal due to the new restrictions and a shrinking consumer base. Those who previously provided services for or were employed by the yoga studio now travel outside of town for work and tend to also do their shopping along their new commuter route.
The yoga studio owner feels jaded and no longer partakes in or contributes to community events, and the health store owner feels shame more than vindication as other small stores clamor for favors and support from the municipality. By blocking business growth, council members actually entrenched and entrapped small shops. As for the customers who were previously happy with the yoga studio and health store, they now find both to be somewhat tainted and their discomfort causes them to look elsewhere.
The Moral of the Story and the Beauty of the Market Process
Had the focus stayed on consumer preferences, not council member positions, the health store would have likely diversified its offerings and the studio would have reallocated its resources in accordance with rising competitive pressures from the installation of the new sports complex outside of town.
Just as Blockbuster’s monopolistic status was taken down by tech innovation, so too is the potential for any big business to lose its market dominance over time. And, while Blockbuster’s nemesis, Netflix was bashed for its monopolistic status about a decade ago, we now see it has quite a cadre of competitors.
Carl Menger explains the market process and monopoly status best in Principles of Economics:
Every artisan who establishes himself in a locality in which there is no other person of his particular occupation, and every merchant, physician, or attorney, who settles in a locality where no one previously exercised his trade or calling, is a monopolist in a certain sense, since the goods he offers to society in trade can, at least in numerous instances, be had only from him.
Menger goes on to assert that as a market increases and demand rises, competition will naturally emerge if entrepreneurs are left unencumbered.
The monopolist cannot always comply with the growing requirements of society for his commodities (or labor services) . . . the need for competition itself calls forth competition, provided there are no social and other barriers in the way.
Thus, the monopoly status of a firm is not a problem if consumers are happy and entrepreneurs aren’t hampered. Moreover, competition is of no use if greater value can’t be attained or cost savings can’t be accrued. And when interests and situations change, so too will be what is demanded by the market regardless of which firm has market dominance. Throughout 2020, I was so thankful for Cosmic Kids Yoga on YouTube which kept my kids entertained and exercising during lockdowns — and enticed me to join in despite my disinterest in doing yoga. Another fitness trend that boomed over the past few years is Pickleball. No one could have guessed that a game invented in 1965 would now be one of the top health-oriented hobbies of Americans.
Clearly, what people buy or partake in today will vary from tomorrow and so it would be best for paternalistic agencies to let consumers determine who dominates the market in accordance to the products and services demanded. Empowering and informing consumers along with enabling and incentivizing entrepreneurs bodes for a better economy as compared to having nanny state officials bully supposedly big bad businesses.