Market Failure 3: Imperfect Competition (This game of Monopoly plays you!)


James K

James is a government policy analyst, and lives in Wellington, New Zealand. His interests including wargaming, computer gaming (especially RPGs and strategy games), Dungeons & Dragons and scepticism. No part of any of his posts or comments should be construed as the position of any part of the New Zealand government, or indeed any agency he may be associated with.

Related Post Roulette

46 Responses

  1. Avatar Oscar Gordon says:

    Any good examples of current Natural Monopolies? Utility companies, maybe?Report

    • Avatar James K says:


      natural monopolies tend to be things that involve networks. Electricity generation is not necessarily a natural monopoly, but electricity distribution most likely is. Similarly a competitive train transport industry is more likely than competitive train networks.

      I nee dot speak in tendencies here because market conditions can affect what is and isn’t a natural monopoly. A small country like New Zealand has more natural monopolies than the US would, especially the more densely-populated parts of the US.Report

      • Avatar Kolohe says:

        The US had competitive train networks in high density areas (and particularly, high cargo density areas – i.e. New York & Pennsylvania and their namesake railroads). They only failed when the demand for rail transport fell with the advent of cars and trucking. (and ironically, were kept separate for far too long because of anti-trust regulation, with an earlier combination possibly preventing the catastrophic business failure in the early 70s)Report

        • Avatar LeeEsq says:

          The big Japanese metropolitan areas like Tokyo, Osaka-Kobe-Kyoto, and Nagoya also have competitive train networks with different public and private train services offering similar if not exactly the same service.Report

        • Avatar Richard Hershberger says:

          Yes and no. If we are talking about transporting passengers and cargo between Philadelphia and New York City, sure. There was ample competition. But if we are talking about transporting coal (and incidentally other cargo as well as passengers) between the Pennsylvania coal country and anywhere else, then not so much. The small coal towns didn’t produce the volume to tempt competing railroads to come in. A lot of those coal mines were owned by small operations, and had little leverage with whatever railroad served them. The results were pretty much what you would expect: the railroads had them by the balls, and weren’t shy about squeezing. They controlled freight rates, or even whether there was any freight service, giving them the power to destroy. There were scandals where it came out that railroad managers, running up to very high levels within the corporations, were demanding kickbacks. The railroads objected to their employees freelancing, but they did the same thing on the corporate level. The eventual outcome was the creation of the Interstate Commerce Commission, which reined in the worst excesses.

          A modern comparison would be cable companies. In an area without cable people desperately want it, but once they have it they pretty much uniformly despise the cable company, and for excellent reason. Railroads, outside of the major hubs, were regarded similarly.Report

      • Avatar LeeEsq says:

        Anything that is infrastructure heavy like water supply or electricity distribution is going to tend towards natural monopoly with a few exceptions.Report

    • Avatar North says:

      Potentially Amazon in the future? Not yet of course but if they eventually corner the market the amount of cost necessary to create a comparable distribution network would be prohibitive.

      Cable providers I think are a more extant current example. Laying all that transmission wire is a significant barrier to entry.Report

      • Avatar Murali says:

        Their distribution itself relies on local sources. In the UK, I get amazon stuff by royal mail. And in Singapore, I would get it by singpost etc. You would have to get rid of dhl, fedex, the post office etc in order to rely on amazon’s own distribution network. But anyone can set up an online shop. And arguably if amazon gets uppity, you can always use ebay to hawk your stuff.Report

        • Avatar North says:

          Yes, agreed that it’s a reach. Amazon seems set to be a kind of “buy anything and have it delivered to you” behemoth but its competitors will likely be a host of “buy a number of specific things and have them shipped to you” companies rather than a second Amazon like behemoth.Report

          • Avatar ian351c says:

            When you wrote “Amazon” I immediately thought of Amazon Web Services, where there is indeed great potential for monopoly. The barriers to entry for starting a cloud service provider are quite high and the market is currently dominated by 2 (maybe 3) players: Amazon, Microsoft and (maybe) Google.Report

  2. Avatar Saul Degraw says:

    This is something I know a bit about because of experience in antitrust law and studying it in law school.

    There are a few things which are illegal per se in the United States antitrust law. The big two are Horizontal Price Fixing and Territorial Division. Horizontal Price Fixing is one of the few parts of Antitrust Law that the US Government will enforce with criminal penalties. Interestingly, horizontal price fixing seems firmly culturally rooted in Asia. A lot of Asian companies and executives get in trouble for Horizontal Price Fixing in the United States.

    A lot of states ban vertical price fixing but the Federal Government seems to think this is okay. This is called the Colgate Doctrine. A manufacturer has the right to set the terms of sale.

    As to natural monopolies, I believe in price regulation, utilities commissions, and control boards. There are some things like Internet which are treated as natural monopolies in the U.S. but should not be.

    Antitrust/Competition Law seems to be another big divide among liberals and libertarians with Libertarians insisting (and often firmly) that antitrust is unnecessary and hinders competition. Libertarians seem doubtful of the idea of a monopoly and believe that antitrust law has a firm and necessary part of law and enforcing competition. Fair competition laws have existed in one form or another for hundreds of years.

    The big battles in economics seem to be between engineers and ecologists. I lean more towards engineering.Report

    • Avatar Oscar Gordon says:

      Re: Libertarians & Antitrust – it isn’t that antitrust is not needed, it’s that absent government meddling in markets (specifically in raising barriers to entry), it would not be needed.

      In short, monopolies form because governments make it hard for competition to emerge.

      I don’t hew to that precisely, but it has a point in that not all of the monopolies the government has had to deal with have been natural monopolies. Many of them are the result of regulatory barriers to entry (note I am not judging the validity of the regulations in question, only stating that their existence had a hand in the formation of a monopoly).Report

      • Avatar LeeEsq says:

        How does this explain the ur-monopoly Standard Oil and other 19th century trusts though? There wasn’t much in the way of federal or state regulation that would naturally lead to monopolies during the 19th century. Businessmen still found to their advantages to form monopolies and did so.Report

        • Avatar Oscar Gordon says:

          Don’t know, I’m not well versed on the period with regard to the regulatory framework. It could be that in that case, it was less barriers & more cronyism. Or perhaps there were barriers that I’m not aware of.

          I’m just clarifying the libertarian position.Report

        • Avatar Jaybird says:

          If you will, look at the (imperfect) example of cigarettes vs. vaping.

          There are a handful of problems with vaping. Health issues are a concern somewhat compared to not vaping, there are appearance issues insofar as we don’t like thinking about how we’re constantly walking through clouds of each others’ exhaust, that sort of thing.

          But smoking has been “grandfathered in”. There are hurdles that vaping has to jump over that smoking never had to.Report

        • Avatar Lyle says:

          What happened here was Standard Oil was able to buy its competitors out first in Cleveland, and then elsewhere (Rockefeller was not greedy and was willing to pay a fair price). Standard Oil may have bought properties out and not disclosed it for a while as well. But they went city by city and bought up the refiners in each city (Standard Oil was downstream only at this time). Standard was big enough to offer the railroads a large enough business that they were willing to pay rebates on the shipments (even for competitors shipments). Standard played the Pennyslvania RR off against the NYC and the Erie Since all 3 served Clevland and the oil country in NW pa.Report

          • Avatar Richard Hershberger says:

            Standard Oil was, so far as I can tell, operating in a very free market, at least so far as the government was concerned, either with regard to regulation and cronyism. Railroads nearly always involved some sort of government involvement, if only for eminent domain to obtain rights of way (or outright land grants, for roads through virgin territory). Standard Oil wasn’t like this. I don’t doubt that Rockefeller bought political favor as needed, but who didn’t? It was (and is) part of the cost of doing business, and Rockefeller didn’t start with any particular advantage. The upshot is that Standard Oil is, even apart from being the ur-monopoly, a good counter-example to the claim that monopolies don’t occur without government assistance.Report

            • Avatar Brandon Berg says:

              Standard Oil wasn’t a monopoly. Its market share peaked around 90%, and had declined to around 60% by the time the breakup happened. It’s not clear that breakup solved any real problem.

              The claim isn’t that companies don’t ever acquire very high market share in the absence of government-imposed barriers to entry*. It’s that the threat of competition makes it difficult for firms to exploit monopoly pricing power to a significant degree while maintaining that market share.

              The rationale for antitrust law is that, having acquired a high market share, a company can exploit that position to charge monopoly prices without losing market share. It’s the latter part that’s questionable.Report

              • Avatar Yhwh says:

                Standard Oil had all the qualities of a monopoly and functioned as one for most regional markets. They were ruled a monopoly in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911). I don’t see how claiming they weren’t a monopoly is in any way justifiable or defensible logically.Report

    • Avatar James K says:


      I do think libertarians don’t take market failure seriously enough in general, though it is certainly the case that government action, even antitrust law itself, can impede competition.

      I also think there is something to the “engineers vs. ecologists” paradigm, I’ve heard it used by people who self-identify as ecologists. I lean more that way myself, but as this series indicates I’m not averse to a little engineering so long as you really know what you’re doing.Report

      • Avatar Oscar Gordon says:

        Isn’t that the rub? We need engineers, but what we have are teenage mechanics.Report

        • Avatar Kim says:

          Getting more game designers to write laws would be a good idea.
          I’m not happy with regulations that reward killing old people — particularly when asshole corporations are actually dumb enough to start writing their internal regulations to actually kill people.Report

          • Avatar Richard Hershberger says:

            Getting more game designers to write laws would be a good idea.

            The problem is that play-testing is a bitch. It’s not that game designers are necessarily wonderful at anticipating undesirable consequences, as that they have the opportunity to see how the rules work in action before they go live with those rules.Report

            • Avatar Kim says:

              They’re better than the idiots we have in charge now (warning: I may be biased).

              And yes, we are playtesting with people’s fucking lives on the line.
              (And, thank god, the government does see something wrong with killing people to get more money, because the corporations DON’T. Regs will be changing, and soon).Report

            • Avatar Kim says:

              Playtesting is a hell of a lot easier when you crowdsource it online — and yes, you can totally do that for governmental laws. If it worked for Amazon Prime Pantry, it works for that too.
              Did you ever play the Star Wars pizza delivery game? (ahem. the game that was a pizza delivery game, until they redid it for Star Wars).Report

      • Avatar Saul Degraw says:

        My issue with ecology is that it is often used as an argument for doing nothing in the form of human suffering.

        People lose their jobs in recessions and depressions through no fault of their own. There might not be jobs for them to take up in those conditions. Yet there is a strong strain of arguing against the welfare state even knowing these facts.Report

    • Avatar Kazzy says:


      Can you explain the difference between horizontal and vertical price fixing?Report

      • Avatar Guy says:

        Consider the pencil market from @james-k ‘s first post. It has various stages in getting the raw materials from their starting points and states and turning them into a pencil in your hand (or classroom, as the case may be). Horizontal consolidation (and the horizontal price fixing that goes with it) is when a single firm controls all of a particular stage in that market. Maybe Bob’s Lumber Yard is the only outfit selling pencil-quality wood, and they’ve managed to prevent everyone else from doing so. They don’t have the entire pencil making process locked up, but they’ve got a huge part of it under their control.

        Vertical consolidation is when a firm controls the entirety of their supply chain – Charlie’s Pencils cuts its own trees, extracts its own rubber, and mines its own graphite and so on and so forth. It may have competitors at various stages of this process, but Charlie’s is able to avoid dealing with them and still make a profit. Effectively, all the manufacturers and distributors that make up the Charlie’s production chains refuse to deal with anyone who isn’t also a division of Charlie’s.Report

        • Avatar Yhwh says:

          Vertical consolidation lite is when a firm deliberately buys up all the available production time to prevent competing products from coming to market, forming a temporary monopoly because they have the monetary heft to pull it off. This happened a few years ago when Apple overbought production and then sat on a mass of un-used iPad screens to prevent Samsung and other competitors’ Android-based tablets from being available in time for the christmas shopping season.Report

      • Avatar Saul Degraw says:


        Horizontal Price Fixing means among competitors or people who should be competitors for market share. Say, Levi’s, 7 for All Mankind, Citizens of Humanity, etc. met and agreed that they would only sell jeans for 125 dollars or more. That’s price fixing.

        Vertical price fixing is trickier because it is often a manufacturer laying out terms and conditions for retailers such as “Retailers cannot sell my product for below X. Sales can only happen after X date.” Some of these are allowed and others are not. This is usually called the Colgate Doctrine.Report

        • Avatar Kazzy says:

          Thanks. Horizontal is what I tend to think of. Vertical seems okay provided all parties agree to the terms. A lot of that (I assume) is about brand control as much as anything. My understanding is that manufacturers aren’t really impacted by retail price since they make their money selling wholesale. But True Religion doesn’t want to be seem as cheap jeans.Report

  3. Avatar Joe Sal says:

    Again, excellent work James. About the only thing I would add would be some points on quality. I’m not sure if that is something economists bring into analysis or if it was just omitted for clarity.Report

    • Avatar James K says:

      Thanks @joe-sal quality is its own special thing, but competition economics isn’t one of my strengths, so I decided not to get into it.Report

    • Avatar Brandon Berg says:

      This is called monopolistic competition. It’s monopolistic, in the sense that each firm’s products are different, but still competition because they’re close substitutes.Report

  4. Avatar Kim says:

    The alcohol market in a lot of American states is a de-facto monopoly, with less variety of what’s being sold than actual state supported monopolies (as profit motive would suggest).

    There are known inefficiencies with state supported monopolies, but I think it’s generally a mistake to simply assume that “competition” will take over if we get rid of the state monopoly.Report

  5. Avatar DensityDuck says:

    You may be planning to discuss this, but the legality of vertical price fixing has been a question under US law for a long time. It was only relatively recently (2007) that the US Supreme Court declared that such fixing was not per se illegal (in an opinion that, to bring it back around, cited Coase’s writings on economics).Report