The Socialist Myth of Economic Monopoly Part 2

Concentration of Capital and Markets

“Market concentration” usually refers to the market share of the 4-5 biggest companies of a particular market. The question however is whether companies become larger in the Marxist sense i.e. that one capitalist eats the other and wealth is constantly concentrating in fewer and fewer hands, with the poor becoming poorer an the rich richer, or whether they became larger due to cost factors, in order for lower prices to be achieved thus making more and more products available for everybody, including the poor. Because it is not enough to say that there are fewer and bigger companies in a sector than they were some years ago, to prove that the Marxist analysis is correct. If socialists are right, the fewer and larger companies in a market must have caused the production of lower quality and more expensive goods. If on the other hand increasing concentration led to higher quality and lower prices for goods, the Marxist analysis must be wrong, and there must be other factors i.e. cost factors, that led to increasing concentration. So what do you think? What has happened to the quality and pricing of products since 1867 when Marx’s “Capital” was published? Do workers today have access to more and higher quality or less and lower quality products than they had almost two centuries ago?

Therefore if socialists want to prove that Marx was right about capitalism, they have to prove that increasing market concentration leads to products that are of lower quality and higher prices. Steven Lustgarten, in his article “Productivity and Prices: The Consequences of Industrial Concentration” showed that for the period 1947-1972, price increases were lower in industries with the highest increase in concentration, and in industries with the highest decrease in concentration, as compared to price increases in industries with relatively stable levels of concentration over time. He claims that changes in industry concentration were due to technological development which caused changes in the market structure and increased productivity, thus putting downward pressure on prices. While he claims that in industries that did not experience significant technological progress, concentration and prices tended to remain stable over time.

There is a lot of research on whether higher industry concentration leads to higher or lower prices. You should know that for every academic article that claims that higher market concentration leads to price increases, there is another paper showing the opposite. You just need to Google expressions like “benefits of industrial concentration, benefits of market concentration, cost reductions-industrial concentration, why market concentration is good, which is the optimal market structure, benefits of mergers and acquisitions, prices and industrial concentration, innovation and industrial concentration” and you will find plenty of evidence.

People also tend to forget that large corporations are the sums of a huge number of capitalists. Millions of small, medium and large capitalists hold the shares of large corporations. And this was actually the reason that the institution of the stock market was invented i.e. to make huge projects feasible. Assume that there are 1.000 businessmen producing a particular product. And they then form a new company in which they all hold shares. Is there an increase in concentration? Well there is but isn’t this a pool of resources in a common effort to exploit economies of scale? In reality of course, not all of the 1.000 businessmen will hold shares in the new company, but some will go bankrupt instead. But there is an inherent risk in the business world and bankruptcy is a possibility for both a small grocery shop and a large corporation.

I also want to give an example to show that market concentration is not necessarily something negative. Imagine an island where only cars and nothing else is produced. And there are let’s say 10 companies producing cars. After 10 years there are only 4 companies manufacturing cars but there is also a computer industry. Cars account for 40% of the island’s economy and computers for 60%. Has market concentration in the automobile industry increased? Well it did, but is this something negative? It is not because new companies appeared in other sectors. Isn’t that what we want? To produce what we already produced with less resources, in order to have resources for the production of new stuff?

Imagine 10 fishermen living in an island. In the beginning they are all fishing. Isn’t it a good thing if after some years, due to technology improvements, only 2 people are catching the same or even a larger amount of fish than before, and the other 8 people are producing something else? Doesn’t that make the island as a whole richer? If in 1950 there were 100 automobile industries employing 100.000 employees, and now there are only 40 companies employing only 50.000 employees, but at the same time these 50.000 employees are producing a larger quantity of higher quality automobiles than in 1950, it means that 50.000 people are freed from the automobile industry and can spent their time producing computers. That is what wealth creation is about.

The price mechanism

Non economists have a tendency to confuse the workings of the price mechanism with monopoly. And before explaining what I mean, I want to say a few words about the price mechanism. One of the strongest arguments against the Marxist model is that it does not allow the price mechanism i.e. the law of demand and supply, to allocate scarce economic resources. Without the price mechanism, the state has to decide how resources must be allocated. For instance the bureaucrats will decide that 100 oranges and 100 lemons will be produced without considering consumer preferences. Therefore if consumers prefer 150 oranges and 50 lemons they will not be able to manifest their preferences through the price mechanism.

In a capitalist economy on the other hand, excess demand for oranges and excess supply of lemons, would push orange and lemon prices upwards and downwards respectively, increasing and squeezing at the same time profitability for oranges and lemons. This would create new jobs in the orange market and a loss of jobs in the lemon market. The result would be a transfer of labour and capital from the lemon to the orange market. This process would stop when the market would reach a production level which would be in accordance with consumer preferences i.e. 150 oranges and 50 lemons. It is therefore this mechanism that signals that a transfer of resources must take place.

If Nokia manufactures a very good smart phone that we all want to buy, she will indeed be able for a while to charge high prices, since consumers will not consider smart phones sold by other companies as close substitutes, and they will have a strong preference towards the Nokia smart phone. Some companies might even go bankrupt, but you cannot blame Nokia for coming up with a better product. It is the price mechanism that will drive these companies out of business. The price mechanism will signal that the market needs more Nokia style smart phones, and it will manifest that through increased profits for Nokia and reduced profits for her competitors. Because that is what the price mechanism does. It shows through profit fluctuation where and how scarce economic resources should be allocated. And what is the price mechanism or the law of demand and supply? It is the needs of consumers on one side (demand), and the ability of the economy to satisfy these needs on the other side (supply). There is therefore nothing wrong with increasing profits in some sectors and decreasing profits in some others. That is of course if the market is left to operate freely. If on the other hand the government intervenes excessively, increasing and decreasing profits might also show the relative power of interest groups that put pressure on government in order to gain privileges.

Moreover the libertarian competition model is based on what is called “innovation and imitation”. Companies struggle for a market share, and some of them manage to introduce new products and make large profits. The other companies will try to imitate the innovative companies, until they manage themselves to come up with something new. How easy it is for other companies to imitate depends on how sophisticated the product is. If for instance a company made large profits because it understood consumers’ need for more tomatoes, very quickly the other companies will increase production of tomatoes. If profits are due to a highly sophisticated and technologically advanced product, it will take some time for other companies to imitate or come up with something better. It might also be possible that the new product is protected by a patent and therefore the other companies have to wait some time before they are allowed to produce the product themselves. Patents should not be confused with government intervention. Patents must be protected in the same way that our home is protected otherwise businesses will not have a motive to invest on research and development of new products.

There is also the issue of “excess profits”. What do we mean by “excess profits”? There is no such thing as “excess profits”. By penalizing profits we also penalize the price mechanism which is the foundation of capitalism. And we should not confuse the cost of entering into a market with the profit opportunities that the market offers. If indeed a market offers profit opportunities new companies will enter. For instance if Samsung needs 1 billion euros to enter the automobile industry, she can find the capital to do so. Capital is not the issue for Samsung. The issue is whether the automobile industry has enough profits for one more player, or whether Samsung can come up with something better or cheaper than the products already produced in this market.

The free market anti-monopoly self defense

There are many mechanisms that protect the free market from monopoly policies. These mechanisms ensure that there will be a continuous improvement in quality and a continuous reduction in costs and prices.

a) Substitutes For almost all products there are substitutes i.e. motorbikes, bicycles, public transportation are all substitutes for cars.

b) Potential Competition Even if there is only one company in a market, there is always the chance that new competition will appear. This company has a motive to continually improve its products and prices to discourage potential competitors. Microsoft’s windows and Google’s android is a good example. Only by government regulations can a company become immune to competition.

c) Demand Elasticity Demand for goods is never perfectly inelastic. For instance a dramatic increase in the price of cigarettes might lead consumers to quit smoking (actually taxes account for most part of the price of cigarettes). Or consumers can reduce the quantity they purchase or stop buying the new products of the company. For instance if Microsoft charges very high prices, consumers might decide to stay with Windows XP and not buy Windows 7.

d) Competition from all goods in the market People tend to think that a product only competes with similar products, which is not true. For instance a Fujitsu laptop does not only compete with an HP laptop. In reality all products compete with all products, because consumers’ income is limited and given. Therefore Fujitsu has to persuade a consumer to buy a new Fujitsu laptop and not a new bicycle or a new DVD player or take a short holiday instead. All companies compete with all companies in a free market.

e) Free International Trade As Milton Friedman said, the best defense against monopoly practices is to open the country to international competition. That is guaranteed to bring the lowest possible prices for consumers.

f) Division of labor and specialization. One of the main reasons capitalism managed to create this tremendous wealth in only 3 centuries, is the division of labor and specialization. Before capitalism that is before the market economy, every small society was organized as a self sufficient economic unit. Even families were organized as small self sufficient economic units. Each family would produce almost everything it needed. The market economy introduced the division of labor and specialization. Great businessmen became great because they had a specific talent. Bill Gates managed to create Microsoft, but that does not mean that he could be a successful businessman in the automobile industry, or that he could have made Microsoft what it is, without the help of millions of others i.e. employees, shareholders, scientists etc. I mean that Bill Gates is nothing on his own. He was clever in something, he had luck, but he is too insignificant on his own to control the world as Marx predicted, even with the help of some other mean capitalist friends.

The neoclassical theory of monopolistic competition

The Marxist theory of monopoly has long been discredited and it is rarely mentioned in academia. It is mainly used as a means of propaganda, as a means of convincing people that they need more government. In academia the neoclassical theory of monopolistic competition is taught, and even though it is a wrong theory, it is much more serious than its Marxist counterpart. Even though it is not probably correct to say that one wrong theory is more serious than another wrong theory, but anyway. The neoclassical theory of monopolistic competition can be found in most microeconomic textbooks if not all, and is taught in the best universities of the western world.

This theory is very strongly related to the supposedly superiority of equality over freedom. In the same way that we are taught that all people must be equal, we are taught that all companies must be equal. People that have studied economics will recognize egalitarianism as the basis of the neoclassical theory of perfect competition and monopolistic competition. Contrary to the Marxist approach this theory is in favor of a market economy but it recognizes as the PERFECT (and therefore ideal) form of competition, an economic environment where: a) There is a very large number of small firms b) The products produced are almost identical c) All consumers and producers have complete knowledge of the market d) There are no barriers to enter and exit the market e) Companies cannot affect prices i.e. they are price takers.

It is clear from the above that the philosophical base of perfect competition is equality (egalitarianism). In the same way that all people must be equal, all companies must be equal. After all, companies are simply an extension of people. Therefore to accept the above form of competition as perfect, is to indirectly also accept that the opposite i.e. a market with a few large companies that sell differenciated products, which have some control over their prices, and which have established some forms of barriers of entry i.e. successful brand names, is an inferior and problematic form of competition.

But they forget something very important. From all 5 characteristics of perfect competition, the element of competition is absent. The large number of small companies ignores the struggle of companies to grow larger in order to exploit economies of scale and become more efficient than their competitors. The assumption of identical products forgets that companies have to differentiate their products in order to make them more attractive to consumers, than their competitors’ products. The absence of barriers of entry means that companies should not establish successful brand names, or obtain high capitalization to exploit economies of scale. The assumption of perfect information forgets that one factor that separates successful from unsuccessful businessmen is the ability to communicate with customers. Finally to consider companies as price takers, is to ignore that companies must always struggle to find more cost efficient ways of production to obtain an advantage over their competitors.

Therefore the whole idea of perfect competition is totally incompatible with the notion of competition and perfectly compatible with egalitarianism. The economic environment it refers to is a business environment of zero competition and of equal business opportunities. It is clearly a socialist idea. And it is the idea of perfect competition that leads to the arbitrary assumption that a market with few large companies is not competitive. But this is not true. Large companies are the result of severe competition and of consumers’ pressure for better products and prices and not the result of monopolistic or oligopolistic competition.

The basic argument of monopolistic competition

I will now present the basic argument of monopolistic competition by giving an example. It might look silly to someone that never took a microeconomic course, and yet it is on this silly idea that monopolistic theory is based. And the idea that the government should intervene to protect consumers from monopolies, is based on the theory of monopolistic competition, and therefore this silly idea that I will present have very important repercussions. It is actually a silly which is taught at all western universities.

Assume that there is a manufacturer of tables. He buys wood and produces tables. The more tables that he produces the lower their selling price will be. The latter follows from the law of demand and supply which says that a higher supply leads to lower prices (ceteris paribus). This is a theoretical model and therefore prices are supposed to be know for different level of production i.e. the producer knows what the price of a table will be if he produces 100, 1.000 or 100.000 tables. He knows prices before even producing a single table. This is not realistic but this is only a theoretical model and not real life.

Let’s assume that he can sell each table for 10 euros if he produces 1.000 tables and 9.95 euros if he produces 1.001 tables. We see that the increase in quantity supplied generates a small fall in price from 10 to 9.95 euros or 0.05 cents. The thing is that the price fall does not only involve the last piece but all production i.e. each one of the 1.001 tables will be now sold for 9.95 and not 10 euros. And this is what makes the difference. Assume that marginal cost i.e. the cost of producing one more table, from 1.000 to 1.001, is 4 euros (fixed costs do not change with production). What would the producer do? Well by producing the 1.001th unit, he would incur a variable cost of 4 euros, would receive and additional 9.95 euros, and lose 0.05 for all the previous 1.000 units i.e. 1.000 times 0.05 =50 euros. Therefore the effect on his profits from the production of the 1.001th unit would be -50-4+9.95= -55.55 euros, and therefore he would not produce the 1.001th unit.

If on the other hand the company was operating in an environment such as the one described by perfect competition, the producer would be a price taker, and therefore he would go ahead with the production of the 1.001th unit. Because he would be a price taker, and therefore his production would not affect costs or selling prices. Therefore the situation would be the following. He would pay an additional cost of 4 euros, he would receive 10 euros for the 1.001th unit, since his increased production would not affect prices, and he would therefore increase his profits by 10-4=6 euros. He will then continue to produce until his marginal cost equals price i.e. MC=P. For those that have taken a course in microeconomics, what I am saying is that a monopoly produces until marginal cost equals marginal revenue i.e. MC=MR, while a perfectly competitive company produces until marginal cost equals price i.e. MC=P.

Therefore the dominant model of the neoclassical competition theory claims that the government should intervene to prevent companies obtaining significant market power, because significant market power will lead to higher prices and lower number of units produced, and therefore lower employment. Therefore the basic argument of monopolistic competition, and therefore of government intervention is that the “non-perfectly” competitive producer will take into account the effect that his production will have on the prices of his product, while the “perfectly” competitive producer will not take this into account.

And it is this model that determines government policies and not the Marxist nonsense. The Marxist monopoly nonsense is simply used to develop a corporate phobia to the public. Because it is much easier to say to the public that the poor are getting poorer and the rich are getting richer and that capital is increasingly concentrated in a few hands and bla bla bla, and that capitalism leads to monopoly, than explaining the neoclassical theory of competition. The Marxist approach is much more convenient for propaganda purposes. But policy makers in the Western world do not consider the Marxist nonsense at all. Policies are rather based on the neoclassical theory of competition.

Criticism to the model of monopolistic competition

My criticism to the Marxist view of monopoly applies to the model of monopolistic competition too, and therefore I will not repeat it here. I will simply add a few things. As I already said, the key argument of the monopolistic theory is that big companies have some control over their prices, while small companies are price takers. But this is not a realistic assumption, since in reality all companies have some control over their prices, even the small ones. Moreover to penalize increased market concentration, is to give wrong incentives. Imagine a market with 4 big companies, where one of them has come up with a more efficient way of production. And the company wants to pass the reduction in cost to prices i.e. sell at lower prices. But if the company does so, it might increase its market share and drive some companies out of the market, thus making the state’s competition commission to take action against it. And therefore the company might decide to keep prices at the current level.

The other problem is that the government has to decide which price is low, reasonable or high. But how can a government decide that? If one invents a new vehicle that can fly and can substitute cars, how much should he charge for it? What should determine its price until competition comes up with something similar or even better? Should the price be determined by its cost, by the inventor’s intelligence, by its utility to consumers, a combination of these factors or something else? Why not let consumers decide what they are willing to pay for it? Is there really a better way to determine the right price? For an excellent criticism to the theory of monopolistic competition see chapter 2 of Dominick Armentano “Antitrust and Monopoly: Anatomy of a policy failure”, Brian Simpson “Markets don’t fail.

The rhetoric of economic monopoly

Politicians very often attack large corporations and multinationals because there is a huge dispersion of ownership and nobody pays much attention. People that hold significant numbers of shares are very few and they represent a very small number of votes. And politicians care about votes. Only with large number of votes they can remain in their office. And voters do not perceive attacking multinationals as an attack on their own interests, even when they hold some shares. But they should care because these companies are very important to them. And they are important not because they might hold a few shares, but because of the great products that these companies manufacture. But there is so much propaganda about big companies that people tend to be very suspicious towards them.

The truth is that the rhetoric of monopoly is always put forward by small less competitive units, in order to protect themselves from competition from larger and much more efficient producers. Small production units i.e. farmers, always represent more votes than big companies, and they therefore can exert much more political pressure. But people tend to think the opposite. That is they believe that the 50-100 largest companies of the country, actually run the country. But this is very wrong. Sure the political system can have and almost always have linkages to these companies, and might receive financial support or even bribes in corrupted countries, but it is always the large number of voters that keep politicians in place. And politicians care much more about gaining the support of strong guilds than the support of multinationals. Multinationals cannot keep politicians in office, but strong guilds and syndicates can. It is always and everywhere true, that the rhetoric of monopoly is in reality used to protect less efficient production units from competition and leads to higher and not to lower prices for consumers as politicians claim all the time.

I mean that the rhetoric of monopolies is used to cause corporate phobia to the public, and thus justify the introduction of regulations which are supposed to protect consumers from higher prices, but which are in reality meant to protect small inefficient producers that represent significant voting power i.e. farmers, or to protect large domestic producers from more efficient foreign competitors. In either case the result is higher prices for consumers.


If after reading this document one agrees that large companies and high market concentration is not necessarily something negative, one has to also realize that it is not possible to have very large numbers of very big corporations. Germany cannot have hundreds of automobile companies, because such economic sizes require huge amounts of capital to operate. And the economy does not only need automobiles, but it also needs medicines, food, houses, computers etc, and therefore there must be some champions in all economic sectors. The more the German economy grows the more automobile companies she can have, if that is what German people want.

What I mean is that there are few large corporations in the automobile industries because large economic size is required to produce better and cheaper cars, and there are not hundreds of such companies because an economy cannot afford to have many such companies, and not because capitalism leads to monopoly. An economy can only afford to have a few giants producing something. Some countries cannot afford to have any such companies actually. Therefore if we want highly sophisticated products at good prices, we have to see large companies as something positive, and at the same time we should not expect to see hundreds of them. The question then is what do socialists want? Do they want many small automobile, computer, airplanes companies to be happy and stop saying that capitalism leads to monopoly? Do they want each city to produce its own cars and airplanes in the same way it produces its own bread?

The wise thing to do before calling a market monopolistic is to observe whether there is pressure on the company or companies in this market to improve quality and prices. In my opinion the problem with these big companies is that they are under so much pressure to satisfy their clients and generate profits that they might sometimes do things they should not do. But I do not worry at all that they take consumers as granted and charge unreasonable prices.

Leave a Reply

Your email address will not be published. Required fields are marked *