Coercive monopoly

In economics and business ethics, a coercive monopoly is a form of monopoly where a firm is able to make pricing and production decisions independent of competitive forces because all potential competition is effectively barred from entering the market. [1] [2] Almost all those who employ the term to label such a state of affairs maintain that it can only be achieved by government intervention. A coercive monopoly is distinguished from a non-coercive monopoly, which enjoys no such safety from potential competitive forces.

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 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 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 would has very few incentives to improve its products or services and is prone to engage in monopolistic pricing, also known as price gouging [3]. Contrastingly, an non-coercive monopoly has no assurance of a competition-free future. As a consequence, to maintain its monopoly position it must make pricing and production decisions knowing that if prices are too high or quality is too low that competition may arise from another firm that can better serve the market (also called an efficiency monopoly).

Economist Alan Greenspan, asserts 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" [4]. Those who argue that a coercive monopoly cannot exist without government intervention causing it are typically laissez-faire advocates that oppose anti-trust laws. Others hold that a firm can indeed establish a coercive monopoly without government intervention. Business ethicist, John Hasnas, says that "most [contemporary business ethicists] take for granted that a free market produces coercive monopolies" [5] Some recommend that government create coercive monopolies. For example, claims of natural monopoly are often used as justification for government intervening to establish government monopolies or government-granted monopolies, where competition is outlawed and prices are regulated, out of fear that the alleged natural monopoly will price-gouge consumers. This has often been done with electricity, water, and telecommunications. Some economists believe that such coercive monoplies 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 (ISBN 1-882577-81-7).

Establishing a coercive monopoly

A corporation which successfully engages in coercion to the extent that it eliminates the possibility of competition, it 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 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.

There are many examples of situations in history where the allegation that a unregulated private firm is immune from competition is arguable, as there is no use of actual violence. For example, in United States v. Microsoft [6]the Plaintiff's Finding of Fact alleged that Microsoft "coerced" Apple Corporation to enter into contracts resulting in the prohibition of competition. [7] The court affirmed the finding of fact and concluded that Microsoft Corporation's actions indeed created a situation were competition was excluded. or example, in 1999. Microsoft Corporation use of exclusive contracts was alleged to have created a situation were competition was excluded, in the highly contested court case, US v. Microsoft. Although the court ruled against the company, many continue to argue that Microsoft was not a coercive monopoly [8] [9].

Another example, is the case of U.S. v. Aluminum Co. of America (Alcoa) in 1945. The court concluded that Alcoa "excluded competitors." Advocates of a laissez-faire economic policy are quick to assert that a coercive monopoly can only come about through goverment 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. [10] A coercive monopoly would be able to price-gouge consumers secure with the knowledge that no competition will develop. Some see the fact that prices are low as lending evidence to the assertion that a monopoly is a non-coercive monopoly.

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 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. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional. 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." [11] 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.

Political Debates

In ordinary language, to call something "coercive" usually implies a condemnation of it. But it should be remembered that "coercive monopoly" is a term that admits of a technical economic definition, and describes a particular form of monopoly without necessarily making any claims about whether such a monopoly should or should not exist. Thus, there are at least two distinct questions involved in political debates over what are claimed to be coercive monopolies:

1. Whether the methods through which a particular monopoly is established and maintained are coercive (i.e., in fact prohibitive of competition)
2. Whether establishing and maintaining a monopoly through coercive mehtods is justified

Debates on the first question are usually tied to debates over the nature of barriers to entry. What some regard as a barrier to entry, others may not.

Debates on the second question typically often focus on whether coercive monopolies created or maintained by government intervention, such as through subsidies, state monopoly, or government-granted monopoly are morally or legally justifiable. (There are relatively few explicit defenders of private rackets.) Advocates of laissez-faire economic policy usually oppose all government-enforced monopolies on principle, as restraints on the free market (which they condemn either as a violation of natural rights, or as inefficient on utilitarian grounds, or both). Defenders of economic intervention often claim that without government intervention, big business is able to dominate economic activity to the detriment of workers and consumers--possibly by forming private cartels or monopolies--and that state monopolies or government-granted monopolies are one tool — along with others, such as anti-trust legislation — by which a democratically accountable government might be able to exert popular control over big business and promote the people's legitimate interests.

Some free market advocates argue that these fears are misguided, in part, because the only coercive monopolies that can remain economically stable in the long run are maintained by government intervention: they point out that many of the usual claimed examples of coercive monopoly --such as Standard Oil --were not monopolies at all, much less coercive monopolies. For example, Standard Oil had 64% of the oil refining market in competition with over 100 competitors at the time of trial which ordered the breakup of the trust. And, in the case of AT%T, it is claimed that they gained much of their profits and their dominant market position from government granting them monopoly status. They argue that under free market competition, any firm that tries to exercise monopoly power will thereby create economic incentives for competitors, and thus undermine its own monopoly status. Advocates of this line often reject the concept of a natural monopoly as a myth used to justify what they regard as irrational intervention into the free market.

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 took his case to the U.S. Supreme Court. His case was successful. The Court ruled that the government-granted monopoly was an unconstitutional violation of interstate commerce. Fares immediately dropped from 7 to 3 dollars.

See also

Non-contestable market, Free market, Government-granted monopoly, Government monopoly, Natural monopoly

External links

• The Question of Monopolies Nathaniel Branden defines and discusses coercive monopoly
• Antitrust Policy As Corporate Welfare by Clyde Wayne Crews Jr "Coercive monopoly power does not emerge from the transitory outcomes of the voluntary exchanges that comprise the marketplace. It is hoped that policymakers will come to recognize that government cannot protect the public from monopoly power, because it is the source of such power."
• Antitrust Laws Harm Consumers and Stifle Competition by Edward W. Younkins "a coercive monopoly is closed entry that can only be achieved by an act of government intervention in the form of special regulations, subsidies, or franchises"
• Antitrust by Alan Greenspan examines "whether active competition does inevitably lead to the establishment of coercive monopolies"
• The judicial hacker by Lawrence Kudlow "Microsoft fails to meet the traditional standards of a coercive monopoly"
• Regulation and monopoly by Lawrence Reed - contrasts coercive and efficiency monopoly
• Witch-hunting for Robber Barons: The Standard Oil Story says that government causes coercive monopoly by granting privileges to firms