Most people will readily
agree that monopolies are bad—unless you’re winning in a game of Monopoly. Consequently, it is also generally agreed
that the government must “do something” to counter abuse of power by
monopolists. It is, however, not generally recognized that often, monopoly
power in the market place is sanctioned—or even exercised—by governments.
In this post, I had intended to draw attention to some of these government-permitted
monopolies—e.g. milk marketing boards, taxis, labour unions, the Beer Store and
LCBO. I realized, however, that some
general discussion of the importance of completion is first in order. As I
started on that, I soon found that my post was too long. Consequently, in this
post, I will focus on the general and will get back to government permitted
monopolies, D.V., in a future post.
In the current post, I first
review competition from a Christian perspective. Then, I set out the advantages of competition
and the negative aspects of monopoly power. A proper perspective on competition
is essential to understanding the Conditional Preference for the Free Market
that I have been advocating in this blog. Insufficient competition in the market
is one of the reasons why our Preference
should be Conditional.
Competition and the Christian
Is competition--the underlying motivational
force of a free enterprise system--not something inherently immoral? Should
Christians not, instead, seek to reduce competition as much as possible? Ought
we, as Christians, perhaps reconsider the conventional economic wisdom that
competition in the marketplace should be encouraged? Some, for example, would
argue that:
Competition produces
aggression, rivalry, conflict, cheating and discrimination which are anathema
to the Christian conscience. For the Christian, the ideal is not competition
but cooperation, which by comparison produces mutual benefits, modesty and harmony.[1]
Competition is not
limited to the economy. It exists whenever the scarcity of something people
prize or value results in more people wanting it than can have it. Players in
games and contests compete--sometimes merely for the sake of winning, sometimes
also for the promised prizes. Students may compete for grades. Suitors compete
for the attention of loved ones. Christian politicians compete for the
opportunity to represent the citizens. Potential employees compete for
vacancies through job interviews.
Competition can be a
positive influence--motivating individuals to strive for higher levels of
excellence--but it can also "lead individuals and organizations to act in
ways that are dishonourable or dishonest." Nash argues, however, that
“these problems are simply another manifestation of original sin. They do not
demonstrate that there is anything wrong with competition itself.”[2]
Griffiths has rightly recognized that competition is not a Christian virtue to
which we should aspire as an end in itself. The frequently used biblical image
of the Church as one body, for example, contradicts that. On the other hand,
the Bible also uses the image of competition positively: e.g. "Run in such
a way to get the prize. Everyone who competes in the games goes into strict
training." [3]
In itself then, competition is not wrong; the question is how one
"competes".
There is merit,
therefore, in Tiemstra's characterization of competition as a "mixed
blessing":
Competition prods
people to do their best, but so does an attitude of conscientious service to
God and neighbour. Competition promotes instability, arouses jealousy, and can
provide incentives for immoral behaviour. People instinctively avoid
competition not just in an effort to increase their own economic and political
power, but also to promote stability and cooperation.[4]
Sadly, however, we
must recognize that we are concerned with a sinful world in which the majority
of people are not driven by an attitude of service to God and neighbour. Thus,
without competition, most people are likely to seek their own power rather than
to “promote stability and cooperation”.
In dealing with
competition in the marketplace, an understanding of how economists use the term
is critical. When economists expound the benefits of competition, they have in
mind the "perfectly competitive market" mentioned above in which very
similar products ("undifferentiated", "homogeneous") such
as wheat, coffee beans and copper are traded by many buyers and sellers so that
no individual buyer or seller can in any way affect the market price. Moreover,
there are no barriers to entry—new buyers and sellers can easily enter the
market. In such a market, individuals
can only accept the market price and decide whether they wish to buy or sell at
that price. The market price depends on the overall demand and supply for the
product as derived from the many buyers and sellers.
On the other hand,
when non-economists think of competition, they usually think of such things as
"cut-throat competition" where an individual company can, for
example, offer a product at a lower price than its competitors and, by doing
so, take a significant increased portion of the market--unless their
competitors immediately follow suit. The economist, however, refers to this
situation as one of "imperfect" or lack of competition–a
situation of market failure. There are only a few buyers and/or sellers; in the
extreme, you have a monopoly--only one seller (or buyer). Griffin has usefully
characterized this situation as rivalry.[5]
The negative aspects
that Christians abhor about "competition" in the marketplace are, in
reality, the effect of rivalry or the lack of a perfectly competitive
market. The exploitation of workers and small
businesses that is ascribed to “cut-throat” competition is, in fact, the result
of monopolistic situations. Before discussing these negative aspects, I will
first reiterate the importance of "good" competition.
Importance of Competition[6]
In a perfectly
competitive market (with many buyers and sellers, freedom of entry and low
entry costs), competition is a driving force for good. Goods are produced, and
consumers can buy them, at the lowest
possible price because of competition. Competition among producers for
scarce resources ensures that these go to the most efficient firms. Competition among buyers will ensure that the
goods most in demand are produced.
Competition motivates firms to innovate with new products. Competition
motivates businesses to continually look for better and cheaper ways to make
these goods. In short, competition is the essential element that causes the
market to provide the benefits that it does. In a perfectly competitive market
with undifferentiated products, severe, "cutthroat" competition cannot
occur. Sellers who reduce their price temporarily in order to try to put others
out of business, will only ensure that they themselves will undergo that fate.
Unfortunately, in
reality, there are very few perfectly competitive markets. Rather, various
degrees of imperfection occur. Products tend to be somewhat different--or
appear to be different--which leads to competition on the basis of things other
than price--e.g. quality, service, advertising. The number of buyers or sellers
may be less than "many"--a few large companies or even only one, i.e.
a monopoly. Various "barriers to entry" make certain industries less
competitive than others. That the investment required, for example, to start an
automobile or steel maker is significantly more than for a restaurant, no doubt,
explains the relative abundance of the latter.
As Tiemstra notes, "many capitalist
economies suffer from excessive concentration of wealth and the existence of
excessively large, bureaucratized private businesses." [7] Or as Vickers has written, “the invisible
hand of...classical economics has been replaced by the very visible hand of
concentrated economic power” ...in industrial complexes, in collectivized
suppliers of labour and the concentrated power of governments and their market
interventions[8].
Negative aspects of monopoly power
Certainly, there are
likely to be significant costs attached to a lack of competition; monopolies
that are not subject to the pressures of competitive markets fall prey to some
of the same incentives to bad stewardship entailed in government operations[9].
Although the extent of the costs depend on the specific situation and are
subject to dispute even among economists, insufficient competition may entail
the following problems:
Higher Prices, Lower
Wages, Lower Quality- If there is insufficient competition in a market, it will generally be
possible for a company to obtain higher prices and/or provide lower quality or
less service than in a competitive situation.
In a monopoly, the producer gains higher profits; the consumer loses. In
an extreme situation, for necessary goods, that can well be viewed as
extortion. Historically, such situations have occurred, for instance, when poor
employees were required to purchase all their basic needs at high prices in
company stores. In any monopolistic situation, it is possible for the strong
to unjustly take advantage of the weak. The higher prices, particularly when
they involve necessities, may cause significant injury to the poorest in
society. Stapleford, for instance, notes that
Throughout the world,
especially the Third World, concentration of wealth often leads to exploitation
by powerful people. Under such disparities in power, generally consumers pay
higher than efficient prices, have access to fewer goods and services, and have
less access to productive resources such as land. Suppliers of abundant
resources, such as labor usually receive compensation below what would prevail
in competitive markets. Rather than being independent agents who enter
transactions voluntarily, suppliers of resources (especially labor) are trapped
in conditions of desperate servitude by the dominant parties. This injustice is
unacceptable to God and to his people. [10]
Monopoly price
impacts are, however, not limited to Third World countries. For example, as I”ll get back to in future, “supply
management”, the monopolistic quota system in place in Canada for milk
significantly raises the consumer price of a basic necessity. Those with lower
income, no doubt, are hurt proportionately more by this over-pricing—as was
recently illustrated by the outrageous increase in the price of certain drugs.
An interesting
historical example of monopoly pricing is that of Robert Fulford, the inventor
of the steamboat, who was given a monopoly on all steamboat traffic in New York
for 30 years. After this monopoly was
struck down in court in 1824, a competing group involving Cornelius Vanderbilt
(of “Robber Baron” fame), forced the price of a trip from New York City to
Albany from seven down to three dollars! [11]
Less Output- The most profitable
level of production for a monopolist is likely to be less than it would have
been in a perfectly competitive market. That is, it pays a monopolist to
restrict production and get a higher price for that output. That obviously
means fewer jobs. From a purely economic perspective, monopolists cause
misallocation of resources. Moreover, as Stapleford notes above, consumers
have access to fewer goods and services. In Biblical times, the monopolist was
able “hoard grain” in time of scarcity and earned the curses of the people.[12]
Undesirable
Combination of Outputs-Monopolists can force their customers to buy goods in combinations that
they really do not want. For example, at the moment, in Canada, monopoly cable
television operators require users to subscribe to “packages” of channels. For
an initial price, you get a basic package with a minimum number of channels of
which you might be interested in only a few. To get a certain specific
additional channel, not included in base package, you have to subscribe to
another package at increased cost and more unwanted channels. With modern
technology it is possible to subscribe only to the specific channels that you
want–as is done in France. In Canada,
however, the monopolist cable companies have, up to now, made us pay for the
channels that we do not want in order to get those we do want[13].
Inefficiencies- With less
competition, there is less incentive for a company to produce efficiently and
to search for better production techniques. Lack of sufficient competition thus
leads to wasteful, unstewardly, production. In the final analysis, a pure
monopolist that is permitted to pass on its costs to the consumer has no
incentive to improve its operations. Without the pressure of existing or
potential competition, companies may also be less quick to spend money on
research and adapt to new technology.
Inefficiencies due to
lack of competition are especially likely to prevail in markets that are not open
to international trade. When foreign competitors are allowed in, significant
restructuring may be required. Nevertheless, the beneficial impact of the more
competitive situation outweighs the short-term costs; it is, in fact, one of
the major driving forces behind the recent impetus to freer trade.
Anti-Competitive
Action- Given the benefits to be attained by individual companies from less
competition, companies frequently strive to get rid of competitors. In an
oligopolistic market (few sellers), rivals may be eliminated and the entry of
new competitors blocked by aggressive, cutthroat tactics. Possibilities include
simple product disparagement, predatory pricing (cutting prices below cost
temporarily in order to force out smaller competitors), pressure on suppliers
to prevent rivals from obtaining necessary raw materials, pressure on banks to
withhold necessary financing and pressure on retailers to refuse to stock the
rival's product. In addition, if there are only a few competitors, they may “collude"
by agreeing on high prices and dividing the market between themselves--to the
detriment of the consumer and potential competitors. Finally, competition can
be reduced by merging with or taking over a competitor.
After ridding
themselves of some rivals, the remaining companies are left free to operate
wastefully and to exploit the consumers. Even worse, many of the actions above would,
in themselves, be unethical--evidencing the very opposite of Christian
neighbour love. However, given the
sinfulness of mankind such striving is likely to occur frequently when there
are a limited number of sellers. Even Adam Smith already commented that “People
of the same trade seldom meet together, even for merriment or diversion, but
the conversation ends in a conspiracy against the public or in some contrivance
to raise prices”.[14]
Concentration of Power/Corruption
A lack of competition,
with a few large companies, yields a concentration of power in the hands of a
wealthy few. The companies or individuals in charge will not only be able to
exercise the negative monopoly powers described above, they may also be able to
influence governments to do their bidding. With the threat of job and tax
losses, few politicians will be able to oppose them. In addition to normal
lobbying, they will be in the position to bribe both politicians and relevant
bureaucrats.
Webb, for example,
wrote that the “increasing concentration of power” allowed the “merger
movement” which led to the loss of jobs
in the early 1980s. This concern is “supported by the biblical account of the
Jubilee Year as well as passages from Isaiah and Micah where, ‘this principle
of avoiding the concentration of power is perhaps best expressed in a way
meaningful to us today’”[15].
Moreover, as Shleifer and Vishny argue, a government rife with corruption may
“maintain monopolies, to prevent entry, and to discourage innovation by
outsiders if expanding the ranks of the elite can expose existing corruption
practices”. Such corruption may be merely the result of government financing
activities; the approved way of getting funds for Tudor monarchs in the U.K.
was to sell monopoly rights! In any case, “economic and political competition
can reduce the level of corruption and its adverse consequences”.[16]
Some Caveats
It is only fair to
recognize that there are some situations where competition is not the most
stewardly alternative. In cases such as “natural monopolies”, e.g. an electric
utility, it is obviously wasteful, i.e. unstewardly, for various companies to
duplicate the necessary transmission lines. If only one company is authorized
to operate, however, it is (without regulation) free to set prices at whatever
level it chooses. Particularly, where such monopolies provide necessities, such
as electricity , the poor consumer is, likely, to be exploited. Since,
moreover, these utilities tend to use public resources (e.g. road allowance),
government retains significant responsibility for their actions.
Moreover, if there
are fewer companies competing in a market, it is easier for these companies to
attain "economies of scale." That is, as companies become larger,
their costs per item produced tends to go down. The larger companies are able
to use more specialized plants and equipment and allow their employees to
become more proficient in narrower tasks. In some industries, e.g. the
automobile industry, reasonably efficient production is possible only if there
are a small number of producers. If the lower costs obtained in this way
are actually passed on to the buyer, we all benefit.
Finally, it is likely that--at least in some industries--imperfectly competitive
markets are, in the long run, more innovative than a perfectly competitive one.
Firms must be relatively large to be able to undertake the necessary research
and have some prospect of being able to benefit from that research if it is
successful. In a perfectly competitive market where everyone could quickly
start production of the new products, there would be little incentive to
innovate. The drive to innovate is, however, the opportunity to make “monopoly”
profits which will reward the research effort. Patents on new inventions are
thus a necessary protection to ensure that companies are willing to undertake
expensive and time-consuming research e.g. in the pharmaceutical industry. The
flip side is, of course, that unless others can eventually come up with a
similar product without infringing the patent, the patent holder has a monopoly
with all the possible negative implications mentioned before . [17]
The Government's Task
Given the negative
effects of imperfect, rivalrous competition, it is obvious, that a government
which seeks to maintain justice and protect the weak has a task. The stewardly
use of God's creation implies that the government promote adequate competition
and regulate those monopolies and near monopolies that cannot be avoided
(natural monopolies or those that otherwise benefit society through economies
of scale). Most countries, in fact, already have legislation to this end--although
their adequacy and implementation processes remain a matter of debate. Such
legislation normally seeks to prevent the strong from driving out the weak by
making such things as "predatory pricing" illegal. It also attempts
to ensure that adequate competition exists so that monopolists cannot take
unfair advantage of their customers. Mergers and acquisitions are, therefore,
monitored (and forbidden if necessary) to prevent the merged firm from obtaining
too large a share of the market. Finally, it seeks to prevent collusion by
companies to artificially reduce competition and maintain high prices (and
inefficient operations).[18]
Seeking to increase
competition is, where possible, far preferred over regulation[19]. Almost invariably, a regulating agency permits
prices to increase to levels that permit companies to recoup their costs and
earn a “fair return” on their capital. Although that sounds fair, the problem
is that--with all costs eventually “passed through”-- there is no penalty for
inefficient operation and no incentive to resist exorbitant wage demands. Regulation
also blunts entrepre- neurial incentives to innovate and take risks. In
general, encouraging the entrance of competitors is, then, an attractive way to
reduce monopoly power wherever possible. Moreover, not all parts of a “natural
monopoly” need to be monopolies. Recent history has shown, for example, that electricity monopolies can be broken up
with the transmission of power remaining a regulated monopolist but the actual
power generation broken up into competitive elements with the transmitter being
able to purchase from multiple competitive generators.
I note, however, that
the benefits of a free market do not require a perfectly competitive market.
Even imperfect competition with somewhat differentiated products and a
reasonable number of competitors should generate the benefits we have discussed.
There is, however, no consensus as to the extent of concentration that is too
much. Whether government intervention is
necessary to ensure competition will continue to be a matter of political
debate in specific circumstances.
Concusion
Overall, I conclude,
with Chewning, that “competition has an overall salutary effect on fostering
business conduct that provides the best economic outcomes for the most people
in a fallen world.”[20]
Consequently, we must be careful that, in considering solutions to the economic
ills of the day, we do not unnecessarily reduce competitive forces. In
addition, we should generally be supportive of government actions which seek to
maintain and increase competition. Moreover, as I hope to discuss in the future,
governments themselves must not establish or protect monopolistic industries.
[1].As summarized by Brian Griffiths, in, The Creation of Wealth,
Hodder & Stoughton, London, 1984, p.70.
[2]. Ronald Nash, Poverty and Wealth: The Christian Debate over Capitalism,
Crossway
Books, Westchester, 1986.pp.73ff.
[3]. 1 Cor 9:24-27. See also Heb 12:1; Ps 19:5. Haymond notes that the
“excellent wife” depicted in Proverbs 31, “will be a fierce competitor in all
her commercial activities”..”competing fiercely to serve others and benefit her
family and community”. Jeffrey E. Hammond, “The Proverbs 31 Women:
Entrepreneurial Epitome?”,Faith and Economics, Fall 2012, p.4.
[4]. In Institute for
Reformational Studies, Window on Business Ethics, Potchefstroom
University for Christian Higher Education, 1993, p. 145,
[5]. Op. cit., p.72.
[6] I stress that I am talking about
competition in the macro sense--is it good to have a competitive markets? For a
discussion as to how Christians in business should act in a market that is not “perfectly
competitive”, see Clive Beed, “Jesus and Competition”, Faith & Economics,
Spring 2005, pp.41-57.
[7]. Tiemstra, op.
cit., p.231.
[10]. John E. Stapleford,Bulls,
Bears & Golden Calves: Applying Chrisitan Ethics in Economics,
InterVarsity Press, Downers Grove, Illinois, 2002,p.64.
[11] Burton W. Folsom, Jr. The
Myth of the Robber Barons, Young American Foundation, Herdon, Virginia,
2003, pp.2,3
[13]. Some changes are being promised to take effect this year.
[14].As quoted in Stapleford, op. cit. p.33.
[15] Bruce G. Webb,(from Bruce
Wilkinson) “Is There Value-added in Christian Scholarship? The Case of
Unemployment” Faith & Economics, Spring/Fall 2006,p.48
[16]. Op. cit. p.108.
[17] See Folsom, op.cit. p.11 for an
example where an existing monopoly prevented the early American adoption of
iron ships.
[18] The recent global recession (2008) has brought forward another reason to avoid concentration of power. Banks and automobile companies were bailed out by government because they were “too big to fail”–the consequences of failure on employees, suppliers and those depending on them would have been too massive to contemplate. Possibly, we should draw a lesson for the future to also take this criterion into account before permitting mergers and, even, perhaps encouraging break-ups of existing large companies. See Small business, big business, subsidies and bailouts
[19] For example, it has been
suggested that in Canada where there are only two railroads—not
necessarily—geographically competitive in all areas, competition could be
encouraged, in areas where there is not truck or marine competition, by giving
alternate railroads “running rights” to compete on the monopolist’s tracks.
Francois Tougas, “Abolish the Canadian Rail monopoly”, National Post, June 24, 2008, FP15.
[20]. Chewning, Vol. 2,
p.167
