Free Market vs Socialism

[Adron]

Startup cost does not really change the fact that there cannot be monoply. I never said there cannot be monopolisitic competition, or oligopoly. The only things that are really not going to exist are pure competition and a pure monopoly. If there is only one company making a good and it is expencive and no one else can get in, chances are the consumer will not have any consumer surplus and will just not buy it so even the 'monopoly' will not have price setting control, which is one of the characteristics of a monopoly. I think this will be an elastic good, otherwise there would probably be other companies going after it. So therefore the consumer is not going to pay for it when he has no surplus.

A pure monopoly? Of course, if it by definition cannot exist, it cannot exist. It's very likely that a situation bearing every similarity to a monopoly will occur naturally given no regulations of the market.

[Arta]

I'm not going to read all 5 pages of this thread, so soryy if this has been asked before.

What happens if only one company is good at something, and thus eventually, by the forces of competition, puts everyone else out of business? Or, to extend the situation: what happens if one company is particularly cut-throat and has enough money to force everyone else out of the market? Wouldn't that give rise to a monopoly too?

[dxoigmn]

I think the demonstrable existence of monopolies, or near-monopolies, weakens your agument somewhat.

That and the fact that he is arguing theory, while most everyone is giving real world examples.  Theory is great, but not if the real world says otherwise.

[MyndFyre]

I'm not going to read all 5 pages of this thread, so soryy if this has been asked before.

What happens if only one company is good at something, and thus eventually, by the forces of competition, puts everyone else out of business? Or, to extend the situation: what happens if one company is particularly cut-throat and has enough money to force everyone else out of the market? Wouldn't that give rise to a monopoly too?

Yes it would.  However, antitrust laws are designed not to prevent this from occurring the way that you explain (in the former situation) here, but rather as you describe (in the latter situation).  If a company produces such a kick-ass product at such a kick-ass price that everyone buys from them and stops buying from the competitors, free-market has a few opportunities:
1.) The competitors must adapt and produce a better product, or else they will go out of business; or:
2.) The competitors must diversify and enter a different specialization, or else they will go out of business.
Now, if one company just has a lot of money and decides to start buying out competitors a la Microsoft, antitrust laws begin to intervene and say "Hey!  Your business practices are threatening the freedom of the free market!"

Antitrust laws are designed to let the market do its thing as I described -- which prevents people and companies with abundant resources from damaging the market.

[Banana fanna fo fanna]

Theory is great, but not if the real world says otherwise.

JUST LIKE COMMUNISM.

[quasi-modo]

I think the demonstrable existence of monopolies, or near-monopolies, weakens your agument somewhat.

That and the fact that he is arguing theory, while most everyone is giving real world examples.  Theory is great, but not if the real world says otherwise.

Except the real world does not say otherwsie. This is how the economy wants to work, it is governments and other regulationg bodys that corrupt this.

Startup cost does not really change the fact that there cannot be monoply. I never said there cannot be monopolisitic competition, or oligopoly. The only things that are really not going to exist are pure competition and a pure monopoly. If there is only one company making a good and it is expencive and no one else can get in, chances are the consumer will not have any consumer surplus and will just not buy it so even the 'monopoly' will not have price setting control, which is one of the characteristics of a monopoly. I think this will be an elastic good, otherwise there would probably be other companies going after it. So therefore the consumer is not going to pay for it when he has no surplus.

A pure monopoly? Of course, if it by definition cannot exist, it cannot exist. It's very likely that a situation bearing every similarity to a monopoly will occur naturally given no regulations of the market.

No, there will always be competition. If there is no competition the industry will not exist.

What happens if only one company is good at something, and thus eventually, by the forces of competition, puts everyone else out of business? Or, to extend the situation: what happens if one company is particularly cut-throat and has enough money to force everyone else out of the market? Wouldn't that give rise to a monopoly too?

The thing is it cant. I went over this earilier, even with a differentiated produc people are going to go where they have the greatest surplus. That might mean they will chase after an inferior good, but they are going to go where they have the most 'utils'.

I'm not going to read all 5 pages of this thread, so soryy if this has been asked before.

What happens if only one company is good at something, and thus eventually, by the forces of competition, puts everyone else out of business? Or, to extend the situation: what happens if one company is particularly cut-throat and has enough money to force everyone else out of the market? Wouldn't that give rise to a monopoly too?

Yes it would.  However, antitrust laws are designed not to prevent this from occurring the way that you explain (in the former situation) here, but rather as you describe (in the latter situation).  If a company produces such a kick-ass product at such a kick-ass price that everyone buys from them and stops buying from the competitors, free-market has a few opportunities:
1.) The competitors must adapt and produce a better product, or else they will go out of business; or:
2.) The competitors must diversify and enter a different specialization, or else they will go out of business.
Now, if one company just has a lot of money and decides to start buying out competitors a la Microsoft, antitrust laws begin to intervene and say "Hey!  Your business practices are threatening the freedom of the free market!"

Antitrust laws are designed to let the market do its thing as I described -- which prevents people and companies with abundant resources from damaging the market.

nononono! When in a state of unregulated competition anti trust laws are not even neccessary. That is the whole situation I am trying to talk about. In a pure unregulated market there can be no collusion, not monoplies, only competition.

(MyndFyre edit: merged four posts into one.  Quasi, please do not double-post.)

[MyndFyre]

nononono! When in a state of unregulated competition anti trust laws are not even neccessary. That is the whole situation I am trying to talk about. In a pure unregulated market there can be no collusion, not monoplies, only competition.

In a purely unregulated market, do you honestly think that there would be no collusion?

You're gas-station owner A.  Gas-station owner B and C both compete with you for the same street corner.  Fortunately you're all doing fairly well because you're right off of the freeway.

Let me give you two scenarios in which antitrust laws help to preserve competition:

1.) Owner C lowers his price to or below cost.  You (A) and B now have a choice: you both can follow suit (and lose money) or you can stay where you are and lose business.  In an unregulated market, A and B can talk to each other and work to both lower their prices close to (but not necessarily the same) price as A without losing money, which would force C to either raise his price (his tactic isn't working as well as he'd planned) or to go out of business (not taking enough of A's and B's business away, and so he's losing too much money in the long haul).  In a market where A and B cannot contrive, they both are forced to lower their prices to be equally competitive to C.

In the unregulated market, any team (but in this case, A and B) can collude and control the market.  In a regulated market, any of them (but in this case, C) can control the market.

2.) Let's say your gas stations are at a truck stop and there isn't another stop for 40 or 50 miles.  Cost of gas per gallon (including tax) is $0.65 for all three of you.  Cost to maintain the station, equipment, and employees brings your gas price to $1.45 before making a profit, so you all charge roughly $1.75 per gallon.  (By the way, I'm just making up numbers here; I really have no idea what costs and prices are for gas stations).  This is slightly higher than city stations anyway, but not outside the general fair-market range.

In an unregulated market, all three stations can collude and charge, say, $2.00 per gallon, well above the fair-market price.  All three will be making significantly more money (in profit) per customer, and since there is a corner on the market (the only gas stations within the next 50 miles), what is anyone going to do about it?
If someone tries to get into the market, in the unregulate market, to generate competition to lower prices, the three original owners can shoot their prices down drastically to drive out or keep out anyone who wants to infringe.  It is not in the interest of someone to come into a colluded market, but it is certainly in the interest of the members of the market to collude.

An unregulated, free-market economy will always end in monopolies or oligopolies, and that isn't our desired goal.

[quasi-modo]

nononono! When in a state of unregulated competition anti trust laws are not even neccessary. That is the whole situation I am trying to talk about. In a pure unregulated market there can be no collusion, not monoplies, only competition.

In a purely unregulated market, do you honestly think that there would be no collusion?

You're gas-station owner A.  Gas-station owner B and C both compete with you for the same street corner.  Fortunately you're all doing fairly well because you're right off of the freeway.

Let me give you two scenarios in which antitrust laws help to preserve competition:

1.) Owner C lowers his price to or below cost.  You (A) and B now have a choice: you both can follow suit (and lose money) or you can stay where you are and lose business.  In an unregulated market, A and B can talk to each other and work to both lower their prices close to (but not necessarily the same) price as A without losing money, which would force C to either raise his price (his tactic isn't working as well as he'd planned) or to go out of business (not taking enough of A's and B's business away, and so he's losing too much money in the long haul).  In a market where A and B cannot contrive, they both are forced to lower their prices to be equally competitive to C.

In the unregulated market, any team (but in this case, A and B) can collude and control the market.  In a regulated market, any of them (but in this case, C) can control the market.

2.) Let's say your gas stations are at a truck stop and there isn't another stop for 40 or 50 miles.  Cost of gas per gallon (including tax) is $0.65 for all three of you.  Cost to maintain the station, equipment, and employees brings your gas price to $1.45 before making a profit, so you all charge roughly $1.75 per gallon.  (By the way, I'm just making up numbers here; I really have no idea what costs and prices are for gas stations).  This is slightly higher than city stations anyway, but not outside the general fair-market range.

In an unregulated market, all three stations can collude and charge, say, $2.00 per gallon, well above the fair-market price.  All three will be making significantly more money (in profit) per customer, and since there is a corner on the market (the only gas stations within the next 50 miles), what is anyone going to do about it?
If someone tries to get into the market, in the unregulate market, to generate competition to lower prices, the three original owners can shoot their prices down drastically to drive out or keep out anyone who wants to infringe.  It is not in the interest of someone to come into a colluded market, but it is certainly in the interest of the members of the market to collude.

An unregulated, free-market economy will always end in monopolies or oligopolies, and that isn't our desired goal.

I even posted a little picture explaining this. How game theory works. Even if a company sells at a loss, it cannot do that indefinatly and if they were in compettiion before that the other stations would be able to sell at that point for a period of time too. It would just be stupid and self destructive for company a to sell there to begin with but would not shake the competition or drive anyone out of business.

also, why were those posts merged? I was kinda hoping to keep them separate, keep my replys for separate posts apart... its organized.

ps: please refer to my diagram on game theory to why collusion cannot occur. The only reason we have had collusion today is because regulations by govts have allowed it to happen.

The market has always shown a tendancy to preserve competition, its regulation that corrupts that. The only thing the market cannot do on its own is prevent a negative externality.

[quasi-modo]

Guys, I guess one thing I am trying to get at is: Government regulation and interfearence is bad. Let the market handle its self. Any tax will create a dead weight loss. I could graph how the supply and demand curves move with a tax and plot the efficiency lost, but I really would not like to right now. You also have other bad things like price floors and price ceilings. The market will be most efficient when it is left to run it's self. I know the government needs income so some taxes are neccessary, and I know there needs to be a safeguard for negative externalities, such as pollution. Free Market (the freer the better) will be inherently more efficient then something like socialism where the government and the market tend to be intertwined almost.

[Adron]

Guys, I guess one thing I am trying to get at is: Government regulation and interfearence is bad. Let the market handle its self. Any tax will create a dead weight loss. I could graph how the supply and demand curves move with a tax and plot the efficiency lost, but I really would not like to right now. You also have other bad things like price floors and price ceilings. The market will be most efficient when it is left to run it's self. I know the government needs income so some taxes are neccessary, and I know there needs to be a safeguard for negative externalities, such as pollution. Free Market (the freer the better) will be inherently more efficient then something like socialism where the government and the market tend to be intertwined almost.

Well, we've heard you claim that unregulated markets will be good, and there is some magical diagram that proves it. However, points have been made in replies that you have failed to respond to. Look at MyndFyre's scenario again; what he was really saying was that the gas stations can collude and charge $2 for their gas, and they will all make more profit from that than they would if they charged $1.75.

[Arta]

I think you're making reference to the prisoner scenario here, but I don't think it applies. It specifically requires that the players don't know the choices of the other players. In an unregulated market, there is no disincentive for a company to suggest to another company that they collude. If they say no, then nothing's lost. If they say yes, they will be aware of eachother's choices, and game theory no longer applies.

Unless you're talking about some other part of game theory. Perhaps you could expand on that?

[MyndFyre]

I think you're making reference to the prisoner scenario here, but I don't think it applies. It specifically requires that the players don't know the choices of the other players. In an unregulated market, there is no disincentive for a company to suggest to another company that they collude. If they say no, then nothing's lost. If they say yes, they will be aware of eachother's choices, and game theory no longer applies.

Unless you're talking about some other part of game theory. Perhaps you could expand on that?

I agree.  The game theory scenario in which nobody can win is that situation in which everyone loses; it's called the Prisoner's Dilemma.

You and your partner in crime are both busted for a bank roberry.  Cop comes in and tells you (individually) that he has enough to put you both away for 5 years; but if you agree to trade in on your buddy, you'll only get one year (or none, even), but your buddy will get 10.  If you both trade in on each other, you'll both get 10.

In this case, Rational Choice Theory directs us to trade in on our buddy in hopes that he won't trade us in; however, in an overwhelming majority of trials, both partners turn each other in (the exception is with organized crime).

But Rational Choice Theory directs us to collude when everyone can gain together.

Your Game Theory diagram does not adequately respond to either scenario that I have illustrated.

Game Theory is based on RCT.  Tell me -- if you're part of a 3-gas station group that is charging $2.00 a gallon for no extra work, why would you lower your price?  Say you lowered your price per gallon to $1.90 -- the other two can lower their prices as well, and you'd all be at the same point as you were when you were at $2.00 per gallon, just making less money per customer.  That's irrational.

Guys, I guess one thing I am trying to get at is: Government regulation and interfearence is bad. Let the market handle its self. Any tax will create a dead weight loss. I could graph how the supply and demand curves move with a tax and plot the efficiency lost, but I really would not like to right now. You also have other bad things like price floors and price ceilings. The market will be most efficient when it is left to run it's self. I know the government needs income so some taxes are neccessary, and I know there needs to be a safeguard for negative externalities, such as pollution. Free Market (the freer the better) will be inherently more efficient then something like socialism where the government and the market tend to be intertwined almost.

I'm not suggesting we impose taxes or anything like that; however, enforce the freedom in the economy.  Corporations that can prevent competitors from entering a market or conducting business are not permitting a free market.  Hence they need to either be broken up or fined in some way as to destroy their monopoly.

[Arta]

Seems to me that an analagous suggestion would be to remove all law. By deregulating life, we make everyone more free. It would be great if we could do that; if everyone could be trusted enough, but unfortunately, some people aren't that mature, and neither are some companies.

[quasi-modo]

Guys, I guess one thing I am trying to get at is: Government regulation and interfearence is bad. Let the market handle its self. Any tax will create a dead weight loss. I could graph how the supply and demand curves move with a tax and plot the efficiency lost, but I really would not like to right now. You also have other bad things like price floors and price ceilings. The market will be most efficient when it is left to run it's self. I know the government needs income so some taxes are neccessary, and I know there needs to be a safeguard for negative externalities, such as pollution. Free Market (the freer the better) will be inherently more efficient then something like socialism where the government and the market tend to be intertwined almost.

Well, we've heard you claim that unregulated markets will be good, and there is some magical diagram that proves it. However, points have been made in replies that you have failed to respond to. Look at MyndFyre's scenario again; what he was really saying was that the gas stations can collude and charge $2 for their gas, and they will all make more profit from that than they would if they charged $1.75.

My diagram provides an answer for why that cannot happen. My diagram answers that perfectly infact.

I think you're making reference to the prisoner scenario here, but I don't think it applies. It specifically requires that the players don't know the choices of the other players. In an unregulated market, there is no disincentive for a company to suggest to another company that they collude. If they say no, then nothing's lost. If they say yes, they will be aware of eachother's choices, and game theory no longer applies.

Unless you're talking about some other part of game theory. Perhaps you could expand on that?

I am talking about all of game theory, I am not talking about any prisoner scenario. The companies can know eachothers choices or not, either way there will always be compettiion. I do not understand what is so hard to get. I think I need to reexplain myself one more time....

I think you're making reference to the prisoner scenario here, but I don't think it applies. It specifically requires that the players don't know the choices of the other players. In an unregulated market, there is no disincentive for a company to suggest to another company that they collude. If they say no, then nothing's lost. If they say yes, they will be aware of eachother's choices, and game theory no longer applies.

Unless you're talking about some other part of game theory. Perhaps you could expand on that?

I agree.  The game theory scenario in which nobody can win is that situation in which everyone loses; it's called the Prisoner's Dilemma.

You and your partner in crime are both busted for a bank roberry.  Cop comes in and tells you (individually) that he has enough to put you both away for 5 years; but if you agree to trade in on your buddy, you'll only get one year (or none, even), but your buddy will get 10.  If you both trade in on each other, you'll both get 10.

In this case, Rational Choice Theory directs us to trade in on our buddy in hopes that he won't trade us in; however, in an overwhelming majority of trials, both partners turn each other in (the exception is with organized crime).

But Rational Choice Theory directs us to collude when everyone can gain together.

Your Game Theory diagram does not adequately respond to either scenario that I have illustrated.

Game Theory is based on RCT.  Tell me -- if you're part of a 3-gas station group that is charging $2.00 a gallon for no extra work, why would you lower your price?  Say you lowered your price per gallon to $1.90 -- the other two can lower their prices as well, and you'd all be at the same point as you were when you were at $2.00 per gallon, just making less money per customer.  That's irrational.

No, because you would get more money in the end because more customers would come your way. Its less money per customer but it would work out to being more money in the long run then you would have had with the higher price. Even if you are selling blow the equilibrium it should still work out.

Not quite, see the key difference in gaim theory is in game theory you know the other's decision. But both companies are going to backsab eachother no matter what though.

Guys, I guess one thing I am trying to get at is: Government regulation and interfearence is bad. Let the market handle its self. Any tax will create a dead weight loss. I could graph how the supply and demand curves move with a tax and plot the efficiency lost, but I really would not like to right now. You also have other bad things like price floors and price ceilings. The market will be most efficient when it is left to run it's self. I know the government needs income so some taxes are neccessary, and I know there needs to be a safeguard for negative externalities, such as pollution. Free Market (the freer the better) will be inherently more efficient then something like socialism where the government and the market tend to be intertwined almost.

I'm not suggesting we impose taxes or anything like that; however, enforce the freedom in the economy.  Corporations that can prevent competitors from entering a market or conducting business are not permitting a free market.  Hence they need to either be broken up or fined in some way as to destroy their monopoly.

I do not think so, I mean not everything is for sale, like I think I have said. Also if this industry has a good that is not essential the supposed monopoly does not even have the monopolisitc power of price control.

Seems to me that an analagous suggestion would be to remove all law. By deregulating life, we make everyone more free. It would be great if we could do that; if everyone could be trusted enough, but unfortunately, some people aren't that mature, and neither are some companies.

I am not saying take away all law, not encouraging anarchy. I am just saying that even if the law were removed there would still be regulation. The market will naturally regulate it's self. Its regulation in the first place that corrupts it's ability to do so.

(MyndFyre edit: fixed the quote and merged two posts.  Please stop double-posting.)

[MyndFyre]

No, because you would get more money in the end because more customers would come your way. Its less money per customer but it would work out to being more money in the long run then you would have had with the higher price. Even if you are selling blow the equilibrium it should still work out.

Not quite, see the key difference in gaim theory is in game theory you know the other's decision. But both companies are going to backsab eachother no matter what though.

I don't get what's so hard to understand about what I'm saying here...

Game theory applies when there is a potential for loss.  However, when companies are colluding to overinflate their prices, every company wins.  It's not a zero-sum game.

You and your 2 competitors have been successfully running your businesses making $0.30 per gallon profit, charging $1.75 per gallon.  In a desire to make more money, the three of you agree to raise your prices collectively to $2.00 per gallon.

Now you, being an enterprising gas station owner, thinks that, if you lower your price, you will get more customers (correct), but the other two station owners will not lower their prices (incorrect).

Say you lower your price to $1.90 per gallon.  You might get more customers on the first day, but I guarantee you that by the next day, PARTICULARLY SINCE THE OTHER COMPANIES AREN'T LOSING ANYTHING but SOFT MONEY (money they don't have yet), they are going to lower their prices to $1.90 each, maybe even less.

It is irrational to backstab the other gas station owners, because all that happens is that you make less profit.  It's irrational.

Also, game theory doesn't apply here because the three of you aren't isolated; in game theory, decision-making by actors is done independently of each other.