A place where everyone can express his or her opinion freely
Friday, December 12, 2008
Free Market <=> Fair Market?
Join our discussion about the free market. Should government ever intervene into the market? What is a fair market? Click on comments to read or contribute.
Dima, how we suppose to use this site? Should I add comment evertime? Or can we create a forum rather than a blog? Blog looks like more personal (or one person has a complete power over the topics = nat fair!)
Alfonso, I support you completely. If Cagdas wants to have a unilateral power he should have thought about it earlier. Actually, I don't completely understand the idea of a fair market. Maybe Cagdas can share his thought?
Fair? competition, by definition should not be fair. In my words "All is fair in love, war and business!" as long as it is not fraud and it is voluntary, so be it. Predatory prices, OK, etc. Anything but coercion or goverment restrictions or intervention.
Competition has to be rough, it is competition not cooperation. Consumers benefit the more competition there is. Collusion is a tough one, however, if there are no government imposed barriers to entry, collusion will attract new firms, thus more competition until P=MC.
David, predatory pricing is not perfect competition, in particular when it can be subsidized from the profits a large corporation may get from a sector where they have a monopoly. In this case they would set P<MC since their economic profit function now includes the profits from both sectors, until they drive everybody out of the market, and can set barriers of entry so that they can exploit two sectors in monopoly at the end. How rough is rough? In that case, do you also agree that government should not intervene to regulate the market towards perfect competition. Let us not confuse perfect competition with the sense that competition has in other topics.
In the theory of industrial organization predatory pricing with a long purse may drive the competitors out of the market. But I don't think that the government should intervene to regulate the market in this case. Consumers benefit from lower prices at least in the short run. Increase in output in obvious. Higher prices might result in the long run but that is why we have potential entrants to keep the predator from exercising too much of market power which itself is a normal outcome of an ever-changing (not evenly-rotating) economy.
If companies perform predatory pricing is because their expected present value of the operation is positive, which means that the future prices will more than compensate the current loss. This means that although consumers benefit from lower prices in the short run, in the long run they more than pay for that benefit, which will imply a net cost to the consumer. This is because while they drive other companies out, they will start to place barriers of entry to ensure the market power, and they will make sure the barriers are set. Such barriers of entry can be of the type of vertical distribution agreements, for example, like Microsoft did with their operating system and PC manufacturers that drove OS-2 from IBM out of the market. There will be no potential entrants by that time, since they will have ensured that it is too expensive to enter, or that there is no market left for the entrant.
Now, are you going to say that the government should intervene when those barriers are in place to remove them? You can see how well all those litigations against Microsoft are going, it is a clear example of how difficult it is to remove the power once it has been established. Also, if government should not intervene when the company is performing predatory pricing, why should they intervene when it is ripping off the benefits? Why should consumers' benefit be more important than corporate profit? As you can see, it is not so clear that government should stay out of the markets at all, it has many implications. You can also see that a free market is not necessarily a fair market at all.
Alfonso, I never said that the government should intervene to remove the barriers or when companies are ripping off the benefits. Nor should it create any entrance barriers when the incumbents are trying to build ones. Yes, it is not that easy to analyze the effects of predatory pricing but look at Microsoft now. Yes, it has some market power but it is losing its positions to Apple precisely because whenever one stops competing even with potential entrants and the quality does not improve as it would otherwise he will be defeated some day. Truly free market does not tolerate any relaxing or shirking.
However, where once you had many competitors, you now have three (Microsoft, Apple and Unix) of which only two of them really get to the home user. This already means higher prices than under perfect competition. If Microsoft loses all its power to Apple, do you not think that Apple will increase the price of their computers, or their software? Sure they will... Otherwise... why fight for market power, if not to rip off future profits? So some benefits in the short run, will always mean higher costs in the long run. Remember, the company's objective is to maximize profit...
I wanted to leave a link to an article that shows a drive for total market control happening in Massachusetts. This case is more peculiar since they are doing it by already having higher rates than their competitors, and those higher rates are financing the expansion that is driving their competitors out. In this case there isn't any benefit for the consumers even in the short run.
Dima, how we suppose to use this site? Should I add comment evertime? Or can we create a forum rather than a blog? Blog looks like more personal (or one person has a complete power over the topics = nat fair!)
ReplyDeleteHahahahaahahah Cagdas... stop complaining!!! If you wanted to have control... you should have thought of it!!!
ReplyDeleteWith respect to the free market <=> fair market question, I'll reply with two questions: what is a fair market? is a monopoly a fair market?
ReplyDeleteAlfonso, I support you completely. If Cagdas wants to have a unilateral power he should have thought about it earlier.
ReplyDeleteActually, I don't completely understand the idea of a fair market. Maybe Cagdas can share his thought?
By the way, I think a monopoly can be a part of a fair market.
ReplyDeleteI don't think fair market exist at all.
ReplyDeleteFair? competition, by definition should not be fair. In my words "All is fair in love, war and business!" as long as it is not fraud and it is voluntary, so be it. Predatory prices, OK, etc. Anything but coercion or goverment restrictions or intervention.
ReplyDeleteCompetition has to be rough, it is competition not cooperation. Consumers benefit the more competition there is. Collusion is a tough one, however, if there are no government imposed barriers to entry, collusion will attract new firms, thus more competition until P=MC.
This comment has been removed by the author.
ReplyDeleteDavid, predatory pricing is not perfect competition, in particular when it can be subsidized from the profits a large corporation may get from a sector where they have a monopoly. In this case they would set P<MC since their economic profit function now includes the profits from both sectors, until they drive everybody out of the market, and can set barriers of entry so that they can exploit two sectors in monopoly at the end. How rough is rough? In that case, do you also agree that government should not intervene to regulate the market towards perfect competition. Let us not confuse perfect competition with the sense that competition has in other topics.
ReplyDeleteIn the theory of industrial organization predatory pricing with a long purse may drive the competitors out of the market. But I don't think that the government should intervene to regulate the market in this case. Consumers benefit from lower prices at least in the short run. Increase in output in obvious. Higher prices might result in the long run but that is why we have potential entrants to keep the predator from exercising too much of market power which itself is a normal outcome of an ever-changing (not evenly-rotating) economy.
ReplyDeleteIf companies perform predatory pricing is because their expected present value of the operation is positive, which means that the future prices will more than compensate the current loss. This means that although consumers benefit from lower prices in the short run, in the long run they more than pay for that benefit, which will imply a net cost to the consumer. This is because while they drive other companies out, they will start to place barriers of entry to ensure the market power, and they will make sure the barriers are set. Such barriers of entry can be of the type of vertical distribution agreements, for example, like Microsoft did with their operating system and PC manufacturers that drove OS-2 from IBM out of the market. There will be no potential entrants by that time, since they will have ensured that it is too expensive to enter, or that there is no market left for the entrant.
ReplyDeleteNow, are you going to say that the government should intervene when those barriers are in place to remove them? You can see how well all those litigations against Microsoft are going, it is a clear example of how difficult it is to remove the power once it has been established. Also, if government should not intervene when the company is performing predatory pricing, why should they intervene when it is ripping off the benefits? Why should consumers' benefit be more important than corporate profit? As you can see, it is not so clear that government should stay out of the markets at all, it has many implications. You can also see that a free market is not necessarily a fair market at all.
Alfonso, I never said that the government should intervene to remove the barriers or when companies are ripping off the benefits. Nor should it create any entrance barriers when the incumbents are trying to build ones. Yes, it is not that easy to analyze the effects of predatory pricing but look at Microsoft now. Yes, it has some market power but it is losing its positions to Apple precisely because whenever one stops competing even with potential entrants and the quality does not improve as it would otherwise he will be defeated some day. Truly free market does not tolerate any relaxing or shirking.
ReplyDeleteHowever, where once you had many competitors, you now have three (Microsoft, Apple and Unix) of which only two of them really get to the home user. This already means higher prices than under perfect competition. If Microsoft loses all its power to Apple, do you not think that Apple will increase the price of their computers, or their software? Sure they will... Otherwise... why fight for market power, if not to rip off future profits? So some benefits in the short run, will always mean higher costs in the long run. Remember, the company's objective is to maximize profit...
ReplyDeleteI wanted to leave a link to an article that shows a drive for total market control happening in Massachusetts. This case is more peculiar since they are doing it by already having higher rates than their competitors, and those higher rates are financing the expansion that is driving their competitors out. In this case there isn't any benefit for the consumers even in the short run.
http://www.boston.com/news/local/massachusetts/articles/2008/12/21/fueled_by_profits_a_healthcare_giant_takes_aim_at_suburbs/