WorldSys: Austrian Home Study Course, Week 15

1 In mainstream theory, what is a “perfectly competitive” market?

A purely competitive market is one in which all the sellers of a good are so small that they individually cannot move prices, distribution, or any other feature of the market around. This becomes a perfectly competitive market when perfect information is introduced.

2 In mainstream theory, what is the definition of a monopoly?

An intolerable situation in which there is either one seller of a good or several sellers collude to act as a single agent. Such an entity, it is assumed, has quite a lot of power in the marketplace.

3 What is allocative inefficiency?

Allocative inefficiency is one consequence of allowing monopolies to exist: namely, that any firm in a monopoly position can boost profits by restricting supply. If you are a soap-manufacturing monopoly and people simply must get their soap from you you can maximize profits by producing just so much soap, which prevents the per-unit price from dropping.

4 What is technical inefficiency?

Technical inefficiency is the other dire consequence of allowing monopolies to exist: because the firm has no competition from direct sellers and is thus not incentivized to be as efficient as possible. Over time all sorts of suboptimal configurations creep into the production, distribution, and marketing processes because there is no reason to control costs.

5 Why does uncertainty upset the orthodox benchmark of competitive equilibrium?

Because none of the assumptions we make in attempting to understand competitive equilibrium hold at all. The competitive equilibrium model assumes homogeneous consumer preference and perfect information, when in real markets consumer tastes change moment-by-moment and no one has a crystal ball. It’s hard to see why a model with assumptions this fantastic should be taken seriously at all.

6 What is the Austrian approach to competition?

Austrianism makes no assumptions about perfect information or intransigent consumer tastes. It takes dynamism, change, and limited information as its starting points, and never runs into the absurdities of the textbook model of pure/perfect competition.

7 Name some problems with orthodox monopoly theory.

It draws dubious conclusions from specious comparisons to a model of competitive equilibrium that bears no relationship to the real world. Orthodox monopoly theory does little to justify anti-trust regulation because it gives us no reason to suspect that collusion among firms will be stable or that a single firm could capture monopoly profits by engaging in monopoly prices indefinitely.

8 Couldn’t a monopolist cut prices to discourage rival entrants into his industry?

Sure, but this practice would either be economically unsustainable or the result of a profound increase in productive efficiency. If it’s the former then eventually prices will rise and other firms will enter the market, if it’s the latter then the entire marketplace is getting a good deal and therefore should lighten up a little bit.

9 What is the relevance of economies of scale to mergers among firms?

Mergers needn’t signal anything nefarious, there are perfectly wholesome reasons for multiple firms wanting to integrate. One of these is ‘economies of scale’. An economy of scale is any situation in which a given process becomes easier as productive output increases. Beyond a certain point it might make economic sense to expand into a bigger factor, invest in better equipment, and acquire automation. All of this means savings can be passed on to consumers.

What might not be feasible for one firm might be feasible for three, if they merged.

10 What is the conventional account of the Standard Oil case?

That Standard ruthlessly expanded its business holdings with ethically dubious maneuvering before finally being smashed by the almighty hammer of the State at the height of its monopolistic tyranny.

11 What were the managerial innovations of Standard Oil?

Quoting from Dominick T. Armentano: “[The success of Standard] was the result of shrewd bargaining for crude oil, intelligent investments in research and development, rebates from railroads, strict financial accounting, vertical and horizontal integration to realize specific efficiencies, investments in tank cars and pipelines to more effectively control the transportation of crude oil and refined product…”

12 How did the price of kerosene move following Standard Oil’s rise to dominance?

The prices fell from 30 cents/gallon to a little under 6 cents/gallon over the course of three decades.

13 How many competitors did Standard Oil have in 1911?

At least 147.

14 Why do some empirical studies use profit as a measure of “monopoly power”?

Mainstream theory is that extremely high profits are evidence of restricted competition and monopoly practices.

15 What are some problems with these studies?

They conflate ‘accounting profit’ with ‘economic profit’ (I do not understand the distinction at present and it is not elaborated in the book), the presence oft tariffs, occupational licensing, and other barriers to entry might force a connection between legal and market monopolies that needn’t necessarily hold, and most of these studies are comparing existing profits against a ‘competitive equilibrium’ benchmark which, as we’ve seen, is problematic.

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