[OPE-L] Monopoly. Friendly reply to Jerry & Michael

From: Alejandro Agafonow (alejandro_agafonow@YAHOO.ES)
Date: Wed May 09 2007 - 16:01:44 EDT

Dear Jerry and Michael:
Jerry on 05/06/2007: You seem to be assuming that technological breakthroughs have had their origin in initiatives undertaken by firms in private markets.  This is a classical vision of technological change which doesn't fit in very well with recent economic history […] While there was a partnership
between capital and the state in most of these cases, the *initiative* and the *funding*  came from the state.  Without legal provisos like cost-plus government contracts, firms would not have entered into that partnership.
Some kind partnerships between capital and State have the effect of “softening the budget constraint” of firms that in other way wouldn’t risk their assets due to the difficult forecasting of future price for that kind of goods. It is the case of military industry or, primarily in the past, locomotives. Even so Austrian would defend the market way of doing, but as exceptional exponents of a coherent mixed economy Market Socialists are willing to favour that kind of partnerships. Even we could conceive a partnership between a de-commodified sector (State) and a commodified one (public stockholder firm managed according to principal-agent relationship). Even more, in a “rawlsian original position” would be rational to choose that kind of partnership to reach technological stages in other way missed.
But other kind of partnerships are deceptive. I am thinking in NOKIA and the participation of Finland Government in backing its communication research industry. It is deceptive because today forecasting future prices for cell phones is possible and softening the budget constraint seems to be unnecessary, unless we were thinking in the benefits of having a strong multinational. Nevertheless, the Finland Government’s participation doesn’t obscure the fact that there is almost a world market for cell phones and whether the consumers wouldn’t choose NOKIA, the government joining wouldn’t make any difference.
Note that I am thinking in future prices forecasting not in the sense of Kantorovich but in the sense of Austrians. A situation where uncertainty is irreducible.
M. Perelman on 05/06/2007: Semi-monopolies, such as the old AT&T or IBM, had so much money that they could afford to do pure research, which would be profitable even if they would be able to appropriate only a small part of the benefits […] This experience suggests the benefits of state supported research rather than oligopolies.
The profitability Perelman refers to depends on two things: consumers’ freedom to choose and the existence of competition or at least the absence of non-market barriers for potential competitors. If these conditions are not fulfilled we are not talking properly of a marketable good and if perhaps marketable in the future. That’s why private firms avoid risking their capital unless they were sagacious enough to forecast the benefits. What we don’t know is the quantity of unsuccessful prototypes in capital and State partnerships.
Jerry on 05/06/2007: By not (generally) engaging in price competition, oligopolies can set prices higher than would have been the case in more classically competitive markets and thereby receive higher profit margins.  This ability to set prices is related to the success of the strategy of product differentiation […] Once brand loyalty is formed, oligopolies can charge a price which is a form of  *quasi-rent*
which consumers pay.
You seem to have a very plane conception of preferences. Maybe your wardrobe is composed of different coloureds shirts with different designs and maybe you are secretly a little happier when using a lively coloured t-shirt in a sunny Sunday instead of a grey one. If you don’t allow product differentiation surely your Socialist Citizens will be uniformed. Apparently it is a trivial matter but a developed economy has to be able to satisfy preferences as subtle as this one.
Some non-market Economists would agree with the former state and even though reject the quasi-rent phenomenon, supporting differentiation without monopoly. Nevertheless, natural monopoly without non-market barriers and rules guarantying an equitable access to distribution infrastructure in case of big sunk costs industries has an advantage lost by Planned Economies: upper average profits are a powerful magnet of competitors, even if it concerns only differentiation. This dynamical situation revels that natural monopolies or oligopolies are not an eternal condition but a cyclical one reached by success in consumers’ satisfaction. M. Perelman indirectly concedes this point when states: “For a short time you can have a competitive oligopoly -- Intel/AMD.  They are now shifting to a cuthroat price competition, but for a while, they were engaging in serious product competition.  This is always an unstable situation.”
Jerry on 05/06/2007: The doctrine of consumer sovereignty (and the marginal utility theory of consumer choice) is a reactionary  pro-business dogma and a counter-factual  myth.  That myth which claims that […]:
* consumer preferences are exogenous (they are supposed to simply drop from the sky, rather than be influenced by firms);
As I already stated concerning differentiation, this influence is good. Without it hypothetical Jerry’s t-shirt enjoinment would be frustrated. Of course, we better settle rules concerning fair advertisement.
* there is rational behavior by consumers;
* consumers have "perfect information" about the prices and qualities of   all commodities that they might purchase on the market;
It is not a requisite for real market neither Austrians & Market Socialists accounts. It is only needed by the counter-factual suppositions of “paretian optimality”.
*  there is no firm advertising (since under the assumption of perfect information, firm advertising is "wasteful" in that it provides consumers with information they already know);
Ruled out by the previous assumption.
*  markets are perfectly competitive.
If market were perfect competitive we would never support the cyclical relative monopoly phenomenon. Furthermore, our competition policy would be oriented to impede any kind of market concentration over the average, as actually does neo-classical Economists, for instance, Structure-Conduct-Performance trend in Industrial Economics.
Best regards,
Alejandro Agafonow

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