Coercive monopoly
Encyclopedia
In economics
and business ethics
, a coercive monopoly is a business concern that prohibits competitors from entering the field, with the natural result being that the firm is able to make pricing and production decisions independent of competitive forces. A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market
. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production. Also, according to economist Murray Rothbard
, "a coercive monopolist will tend to perform his service badly and inefficiently."
Advocates of free markets say that the only feasible way that a business could close entry to a field and therefore be able to raise prices free of competitive forces, i.e. be a coercive monopoly, is with the aid of government in restricting competition. It is argued that without government preventing competition, the firm must keep prices low because if they sustain unreasonably high prices, they will attract others to enter the field to compete. In other words, if the monopoly is not protected from competition by government intervention, it still faces potential competition, so that there is an incentive to keep prices low and a disincentive to price gouge (i.e., competitive pressures still exist in a non-coercive monopoly situation).
Exclusive control of Coca-Cola
would not be a coercive monopoly because consumers have a choice to drink another brand of soda, and the Coca-Cola company is subject to competitive forces. There is an upper limit to which the company can raise its prices before profits begin to erode because of the presence of viable substitute goods.
Contrastingly, for a non-coercive monopoly to be maintained, the monopolist must make pricing and production decisions knowing that if prices are too high or quality is too low competition may arise from another firm that can better serve the market. If it is successful, it is called an efficiency monopoly, because it has been able to keep production and supply costs lower than any other possible competitor so that it can charge a lower price than others and still be profitable. Since potential competitors are not able to be so efficient at producing, they are not able to charge a lower, or comparable, price and still be profitable. Hence, competing is possible but doing so is not profitable; whereas, for a coercive monopoly, competition is neither profitable nor possible.
Some recommend that government create coercive monopolies. For example, claims of natural monopoly
are often used as justification for government intervening to establish a statutory monopoly (government monopoly
or government-granted monopoly
) where competition is outlawed, under the claim that multiple firms providing a good or service entails more collective costs to an economy than that which would be the case if a single firm provided a good or service. This has often been done with electricity, water, telecommunications, and mail delivery. Some economists
believe that such coercive monopolies are beneficial because of greater economies of scale
and because they are more likely to act in the national interest
, while Judge Richard Posner
famously argued in Natural Monopoly and Its Regulation that the deadweight loss
es associated with regulating such monopolies were greater than any possible benefit.
which successfully engages in coercion
to the extent that it eliminates the possibility of competition, operates a coercive monopoly. A firm may use illegal or non-economic methods, such as extortion
, to achieve and retain a coercive monopoly position. A company which has become the sole supplier of a commodity through non-coercive means (such as by simply outcompeting all other firms), may theoretically then go on to become a coercive monopoly if it maintains its position by engaging in coercive "barriers to entry
." The most famous historical examples of this type of coercive monopoly began in 1920, when the Eighteenth Amendment to the United States Constitution
went into effect. This period, called Prohibition
, presented lucrative opportunities for organized crime
to take over the importation ("bootlegging
"), manufacture, and distribution of alcoholic beverages. Al Capone
, one of the most famous bootleggers of them all, built his criminal empire largely on profits from illegal alcohol, and effectively used coercion (including murder
) to impose barriers to entry to his competitors. However, it may be relevant to take into account the fact that government was intervening in the alcohol industry by making manufacture and sales illegal and arresting those in the business, thereby enabling unnaturally high profits, and was not providing the usual service of enforcing trade contracts; likewise, some corrupt public officials
derived rent-like profit from bribes that ensured that Capone would receive preferential treatment against potential competitors.
is claimed to have a coercive monopoly, and anti-trust action has been initiated to resolve the perceived problem. For example, in United States v. Microsoft
http://www.usdoj.gov/atr/cases/ms_index.htm The Plaintiff's Finding of Fact alleged that Microsoft "coerced" Apple Computer
to enter into contracts resulting in the prohibition of competition. Eric Raymond, an author and one of the founders of the Open Source Initiative
, says "The thing a lot of people somehow missed is that the courts affirmed the findings of fact – that Microsoft is indeed a coercive monopoly." Although the court ruled against the company, many continue to argue that Microsoft was not a coercive monopoly. Another disputed example, is the case of U.S. v. Aluminum Co. of America (Alcoa) in 1945. The court concluded that Alcoa "excluded competitors." The ruling is heavily criticized for punishing efficiency and is quoted below.
Advocates of a laissez-faire
economic policy are quick to assert (barring private criminal conduct) that a coercive monopoly can only come about through government intervention, and defend these situations as non-coercive monopolies in which government should not intervene. They argue that competition with these monopolies is open to any firm that can offer lower prices or better products —that competition is not excluded. They claim that these monopolies keep their prices low precisely because they are not exempt from competitive forces. In other words, the possibility of competition arising indeed affects their pricing and production decisions. A coercive monopoly would be able to price-gouge consumers secure with the knowledge that no competition will develop. Some see the fact that prices are low as lending evidence to the assertion that a monopoly is a non-coercive monopoly.
, an agency under the direct authority of the government itself holds the monopoly, and the coercive monopoly status is sustained by the enforcement of laws or regulations that ban competition, or reserve exclusive control over factors of production
for the government. The state-owned petroleum
companies that are common in oil-rich developing countries (such as Aramco in Saudi Arabia
or PDVSA in Venezuela
) are examples of government monopolies created through nationalization
of resources and existing firms; the United States Postal Service
is an example of a coercive monopoly created through laws that ban potential competitors such as UPS
or FedEx
from offering competing services (in this case, first-class and standard (formerly called "third-class") mail delivery).1
Government-granted monopolies
often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In government monopoly, the holder of the monopoly is formally the government itself and the group of people who make business decisions is an agency under the government's direct authority. In government-granted monopoly, on the other hand, the coercive monopoly is enforced through law, but the holder of the monopoly is formally a private firm
, or a subsidiary division of a private firm, which makes its own business decisions. Examples of government-granted monopolies include cable television
and water
providers in many municipalities in the United States
, exclusive petroleum exploration grants to companies such as Standard Oil
in many countries, and historically, lucrative colonial "joint stock" companies such as the Dutch East India Company
, which were granted exclusive trading privileges with colonial possessions under mercantilist economic policy. Intellectual property
such as copyrights and patents are government-granted monopolies. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton
in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional. 2
Economist Lawrence W. Reed
says that a government can cause a coercive monopoly without explicitly banning competition but by "simply [bestowing] privileges, immunities, or subsidies on one firm while imposing costly requirements on all others." For example, Alan Greenspan
, in his essay Antitrust argues that land subsidies to railroad companies in the western portion of the U.S. in 19th century created a coercive monopoly position. He says that "with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East." In addition, some claim that regulations can be established that place burdens on smaller firms that attempt to compete with an industry leader.
, noted for his espousal of anarcho-capitalism
, argues that the state itself is a coercive monopoly as it uses "violence" to establish "a compulsory monopoly over police and military services, the provision of law, judicial decision-making, the mint and the power to create money, unused land ('the public domain'), streets and highways, rivers and coastal waters, and the means of delivering mail." He says that "a coercive monopolist tends to perform his service badly and inefficiently". In addition to moral arguments over the use of force, free market anarchists often argue that if these services were open to competition that the market could supply them at a lower price and higher quality.
. (Heery, Edmund; Noon, Mike (2002). A Dictionary of Human Resources Management. Oxford University Press. p. 225)
started the commercially successful American Letter Mail Company
in order to compete with the United States Post Office by providing lower rates. He was successfully challenged by the U.S. government and exhausted his resources trying to defend what he believed to be his right to compete.
2. For about six months, Thomas Gibbons and Cornelius Vanderbilt
operated a steamboat with lower fares in defiance of the law. Gibbons successfully took his case to the United States Supreme Court. The Court ruled in Gibbons v. Ogden
that the state-government-granted monopoly was an unconstitutional violation of interstate commerce. Fares immediately dropped from $7 to $3.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and business ethics
Business ethics
Business ethics is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.Business...
, a coercive monopoly is a business concern that prohibits competitors from entering the field, with the natural result being that the firm is able to make pricing and production decisions independent of competitive forces. A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market
Contestable market
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there exist markets served by a small number of firms, which are nevertheless characterized by competitive equilibria because of the existence of potential short-term...
. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production. Also, according to economist Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
, "a coercive monopolist will tend to perform his service badly and inefficiently."
Advocates of free markets say that the only feasible way that a business could close entry to a field and therefore be able to raise prices free of competitive forces, i.e. be a coercive monopoly, is with the aid of government in restricting competition. It is argued that without government preventing competition, the firm must keep prices low because if they sustain unreasonably high prices, they will attract others to enter the field to compete. In other words, if the monopoly is not protected from competition by government intervention, it still faces potential competition, so that there is an incentive to keep prices low and a disincentive to price gouge (i.e., competitive pressures still exist in a non-coercive monopoly situation).
Contrasted with other monopolies
Exclusive control of electricity supply due to government imposed "utility" status is a coercive monopoly, because users have no choice but to pay the price that the monopolist demands. Consumers would not have an alternative to purchase electricity from a cheaper competitor, because the wires running into their homes belong to the monopolist.Exclusive control of Coca-Cola
Coca-Cola
Coca-Cola is a carbonated soft drink sold in stores, restaurants, and vending machines in more than 200 countries. It is produced by The Coca-Cola Company of Atlanta, Georgia, and is often referred to simply as Coke...
would not be a coercive monopoly because consumers have a choice to drink another brand of soda, and the Coca-Cola company is subject to competitive forces. There is an upper limit to which the company can raise its prices before profits begin to erode because of the presence of viable substitute goods.
Contrastingly, for a non-coercive monopoly to be maintained, the monopolist must make pricing and production decisions knowing that if prices are too high or quality is too low competition may arise from another firm that can better serve the market. If it is successful, it is called an efficiency monopoly, because it has been able to keep production and supply costs lower than any other possible competitor so that it can charge a lower price than others and still be profitable. Since potential competitors are not able to be so efficient at producing, they are not able to charge a lower, or comparable, price and still be profitable. Hence, competing is possible but doing so is not profitable; whereas, for a coercive monopoly, competition is neither profitable nor possible.
Establishing a coercive monopoly
According to business ethicist, John Hasnas, "most [contemporary business ethicists] take for granted that a free market produces coercive monopolies." However, some people, including Alan Greenspan and Nathaniel Branden, argue that such independence from competitive forces "can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises." Some point out that a monopolist themselves may "employ violence" to create or maintain a coercive monopoly.Some recommend that government create coercive monopolies. For example, claims of natural monopoly
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
are often used as justification for government intervening to establish a statutory monopoly (government monopoly
Government monopoly
In economics, a government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law...
or government-granted monopoly
Government-granted monopoly
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of...
) where competition is outlawed, under the claim that multiple firms providing a good or service entails more collective costs to an economy than that which would be the case if a single firm provided a good or service. This has often been done with electricity, water, telecommunications, and mail delivery. Some economists
Socialist economics
Socialist economics are the economic theories and practices of hypothetical and existing socialist economic systems.A socialist economy is based on public ownership or independent cooperative ownership of the means of production, wherein production is carried out to directly produce use-value,...
believe that such coercive monopolies are beneficial because of greater economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
and because they are more likely to act in the national interest
National interest
The national interest, often referred to by the French expression raison d'État , is a country's goals and ambitions whether economic, military, or cultural. The concept is an important one in international relations where pursuit of the national interest is the foundation of the realist...
, while Judge Richard Posner
Richard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...
famously argued in Natural Monopoly and Its Regulation that the deadweight loss
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
es associated with regulating such monopolies were greater than any possible benefit.
Private coercion
A corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
which successfully engages in coercion
Coercion
Coercion is the practice of forcing another party to behave in an involuntary manner by use of threats or intimidation or some other form of pressure or force. In law, coercion is codified as the duress crime. Such actions are used as leverage, to force the victim to act in the desired way...
to the extent that it eliminates the possibility of competition, operates a coercive monopoly. A firm may use illegal or non-economic methods, such as extortion
Extortion
Extortion is a criminal offence which occurs when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercion. Refraining from doing harm is sometimes euphemistically called protection. Extortion is commonly practiced by organized crime...
, to achieve and retain a coercive monopoly position. A company which has become the sole supplier of a commodity through non-coercive means (such as by simply outcompeting all other firms), may theoretically then go on to become a coercive monopoly if it maintains its position by engaging in coercive "barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...
." The most famous historical examples of this type of coercive monopoly began in 1920, when the Eighteenth Amendment to the United States Constitution
Eighteenth Amendment to the United States Constitution
The Eighteenth Amendment of the United States Constitution established Prohibition in the United States. The separate Volstead Act set down methods of enforcing the Eighteenth Amendment, and defined which "intoxicating liquors" were prohibited, and which were excluded from prohibition...
went into effect. This period, called Prohibition
Prohibition
Prohibition of alcohol, often referred to simply as prohibition, is the practice of prohibiting the manufacture, transportation, import, export, sale, and consumption of alcohol and alcoholic beverages. The term can also apply to the periods in the histories of the countries during which the...
, presented lucrative opportunities for organized crime
Organized crime
Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
to take over the importation ("bootlegging
Rum-running
Rum-running, also known as bootlegging, is the illegal business of transporting alcoholic beverages where such transportation is forbidden by law...
"), manufacture, and distribution of alcoholic beverages. Al Capone
Al Capone
Alphonse Gabriel "Al" Capone was an American gangster who led a Prohibition-era crime syndicate. The Chicago Outfit, which subsequently became known as the "Capones", was dedicated to smuggling and bootlegging liquor, and other illegal activities such as prostitution, in Chicago from the early...
, one of the most famous bootleggers of them all, built his criminal empire largely on profits from illegal alcohol, and effectively used coercion (including murder
Murder
Murder is the unlawful killing, with malice aforethought, of another human being, and generally this state of mind distinguishes murder from other forms of unlawful homicide...
) to impose barriers to entry to his competitors. However, it may be relevant to take into account the fact that government was intervening in the alcohol industry by making manufacture and sales illegal and arresting those in the business, thereby enabling unnaturally high profits, and was not providing the usual service of enforcing trade contracts; likewise, some corrupt public officials
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
derived rent-like profit from bribes that ensured that Capone would receive preferential treatment against potential competitors.
Anti-trust
There are examples in history where a firm that is not a government-granted monopolyGovernment-granted monopoly
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of...
is claimed to have a coercive monopoly, and anti-trust action has been initiated to resolve the perceived problem. For example, in United States v. Microsoft
United States v. Microsoft
United States v. Microsoft was a set of civil actions filed against Microsoft Corporation pursuant to the Sherman Antitrust Act of 1890 Section 1 and 2 on May 8, 1998 by the United States Department of Justice and 20 U.S. states. Joel I. Klein was the lead prosecutor...
http://www.usdoj.gov/atr/cases/ms_index.htm The Plaintiff's Finding of Fact alleged that Microsoft "coerced" Apple Computer
Apple Computer
Apple Inc. is an American multinational corporation that designs and markets consumer electronics, computer software, and personal computers. The company's best-known hardware products include the Macintosh line of computers, the iPod, the iPhone and the iPad...
to enter into contracts resulting in the prohibition of competition. Eric Raymond, an author and one of the founders of the Open Source Initiative
Open Source Initiative
The Open Source Initiative is an organization dedicated to promoting open source software.The organization was founded in February 1998, by Bruce Perens and Eric S. Raymond, prompted by Netscape Communications Corporation publishing the source code for its flagship Netscape Communicator product...
, says "The thing a lot of people somehow missed is that the courts affirmed the findings of fact – that Microsoft is indeed a coercive monopoly." Although the court ruled against the company, many continue to argue that Microsoft was not a coercive monopoly. Another disputed example, is the case of U.S. v. Aluminum Co. of America (Alcoa) in 1945. The court concluded that Alcoa "excluded competitors." The ruling is heavily criticized for punishing efficiency and is quoted below.
It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.
Advocates of a laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
economic policy are quick to assert (barring private criminal conduct) that a coercive monopoly can only come about through government intervention, and defend these situations as non-coercive monopolies in which government should not intervene. They argue that competition with these monopolies is open to any firm that can offer lower prices or better products —that competition is not excluded. They claim that these monopolies keep their prices low precisely because they are not exempt from competitive forces. In other words, the possibility of competition arising indeed affects their pricing and production decisions. A coercive monopoly would be able to price-gouge consumers secure with the knowledge that no competition will develop. Some see the fact that prices are low as lending evidence to the assertion that a monopoly is a non-coercive monopoly.
Government monopolies
Undisputed examples of coercive monopolies are those that are enforced by law. In a government monopolyGovernment monopoly
In economics, a government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law...
, an agency under the direct authority of the government itself holds the monopoly, and the coercive monopoly status is sustained by the enforcement of laws or regulations that ban competition, or reserve exclusive control over factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
for the government. The state-owned petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
companies that are common in oil-rich developing countries (such as Aramco in Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
or PDVSA in Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
) are examples of government monopolies created through nationalization
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
of resources and existing firms; the United States Postal Service
United States Postal Service
The United States Postal Service is an independent agency of the United States government responsible for providing postal service in the United States...
is an example of a coercive monopoly created through laws that ban potential competitors such as UPS
United Parcel Service
United Parcel Service, Inc. , typically referred to by the acronym UPS, is a package delivery company. Headquartered in Sandy Springs, Georgia, United States, UPS delivers more than 15 million packages a day to 6.1 million customers in more than 220 countries and territories around the...
or FedEx
FedEx
FedEx Corporation , originally known as FDX Corporation, is a logistics services company, based in the United States with headquarters in Memphis, Tennessee...
from offering competing services (in this case, first-class and standard (formerly called "third-class") mail delivery).1
Government-granted monopolies
Government-granted monopoly
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of...
often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In government monopoly, the holder of the monopoly is formally the government itself and the group of people who make business decisions is an agency under the government's direct authority. In government-granted monopoly, on the other hand, the coercive monopoly is enforced through law, but the holder of the monopoly is formally a private firm
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, or a subsidiary division of a private firm, which makes its own business decisions. Examples of government-granted monopolies include cable television
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...
and water
Water
Water is a chemical substance with the chemical formula H2O. A water molecule contains one oxygen and two hydrogen atoms connected by covalent bonds. Water is a liquid at ambient conditions, but it often co-exists on Earth with its solid state, ice, and gaseous state . Water also exists in a...
providers in many municipalities in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, exclusive petroleum exploration grants to companies such as Standard Oil
Standard Oil
Standard Oil was a predominant American integrated oil producing, transporting, refining, and marketing company. Established in 1870 as a corporation in Ohio, it was the largest oil refiner in the world and operated as a major company trust and was one of the world's first and largest multinational...
in many countries, and historically, lucrative colonial "joint stock" companies such as the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
, which were granted exclusive trading privileges with colonial possessions under mercantilist economic policy. Intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
such as copyrights and patents are government-granted monopolies. Another example is the thirty-year government-granted monopoly that was granted to Robert Fulton
Robert Fulton
Robert Fulton was an American engineer and inventor who is widely credited with developing the first commercially successful steamboat...
in steamboat traffic, but was later ruled by the U.S. Supreme Court to be unconstitutional. 2
Economist Lawrence W. Reed
Lawrence Reed
Lawrence W. Reed is president of the Foundation for Economic Education , headquartered in Irvington-on-Hudson, New York, a position he has held since September 1, 2008. Before joining FEE, Reed served as president of the Mackinac Center for Public Policy, a Midland, Michigan based free-market...
says that a government can cause a coercive monopoly without explicitly banning competition but by "simply [bestowing] privileges, immunities, or subsidies on one firm while imposing costly requirements on all others." For example, Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
, in his essay Antitrust argues that land subsidies to railroad companies in the western portion of the U.S. in 19th century created a coercive monopoly position. He says that "with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East." In addition, some claim that regulations can be established that place burdens on smaller firms that attempt to compete with an industry leader.
The state as coercive monopoly
Economist Murray RothbardMurray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
, noted for his espousal of anarcho-capitalism
Anarcho-capitalism
Anarcho-capitalism is a libertarian and individualist anarchist political philosophy that advocates the elimination of the state in favour of individual sovereignty in a free market...
, argues that the state itself is a coercive monopoly as it uses "violence" to establish "a compulsory monopoly over police and military services, the provision of law, judicial decision-making, the mint and the power to create money, unused land ('the public domain'), streets and highways, rivers and coastal waters, and the means of delivering mail." He says that "a coercive monopolist tends to perform his service badly and inefficiently". In addition to moral arguments over the use of force, free market anarchists often argue that if these services were open to competition that the market could supply them at a lower price and higher quality.
Unions
Labor unions have been called coercive monopolies which keep wages rates higher than they would otherwise be if individuals competed with each other for wages. Economists who believe this to be the case refer to this as a monopoly wageMonopoly wage
Monopoly wage is a term used by economists to refer to the higher wages earned by unionized workers compared to non-unionized workers. It entails the idea that unions act as coercive monopolies by raising wages other than what they would be if there was competition between individual...
. (Heery, Edmund; Noon, Mike (2002). A Dictionary of Human Resources Management. Oxford University Press. p. 225)
Footnotes
1. Lysander SpoonerLysander Spooner
Lysander Spooner was an American individualist anarchist, political philosopher, Deist, abolitionist, supporter of the labor movement, legal theorist, and entrepreneur of the nineteenth century. He is also known for competing with the U.S...
started the commercially successful American Letter Mail Company
American Letter Mail Company
The American Letter Mail Company was started by Lysander Spooner in 1844, competing with the legal monopoly of the United States Post Office in violation of the Private Express Statutes. It succeeded in delivering mail for lower prices, but the U.S...
in order to compete with the United States Post Office by providing lower rates. He was successfully challenged by the U.S. government and exhausted his resources trying to defend what he believed to be his right to compete.
2. For about six months, Thomas Gibbons and Cornelius Vanderbilt
Cornelius Vanderbilt
Cornelius Vanderbilt , also known by the sobriquet Commodore, was an American entrepreneur who built his wealth in shipping and railroads. He was also the patriarch of the Vanderbilt family and one of the richest Americans in history...
operated a steamboat with lower fares in defiance of the law. Gibbons successfully took his case to the United States Supreme Court. The Court ruled in Gibbons v. Ogden
Gibbons v. Ogden
Gibbons v. Ogden, 22 U.S. 1 , was a landmark decision in which the Supreme Court of the United States held that the power to regulate interstate commerce was granted to Congress by the Commerce Clause of the United States Constitution. The case was argued by some of America's most admired and...
that the state-government-granted monopoly was an unconstitutional violation of interstate commerce. Fares immediately dropped from $7 to $3.
See also
- Non-contestable market
- Free marketFree marketA free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
- Government-granted monopolyGovernment-granted monopolyIn economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of...
- Government monopolyGovernment monopolyIn economics, a government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law...
- Natural monopolyNatural monopolyA monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
- Regulatory captureRegulatory captureIn economics, regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as...
- Rent seekingRent seekingIn economics, rent-seeking is an attempt to derive economic rent by manipulating the social or political environment in which economic activities occur, rather than by adding value...
External links
- The Question of Monopolies Nathaniel BrandenNathaniel BrandenNathaniel Branden, né Nathan Blumenthal , is a psychotherapist and writer best known today for his work in the psychology of self-esteem from a humanistic perspective...
defines and discusses coercive monopoly - Antitrust Policy As Corporate Welfare by Clyde Wayne Crews Jr "Coercive monopoly power does not emerge from the transitory outcomes of the voluntary exchanges that comprise the marketplace. It is hoped that policymakers will come to recognize that government cannot protect the public from monopoly power, because it is the source of such power."
- Antitrust Laws Harm Consumers and Stifle Competition by Edward W. Younkins "a coercive monopoly is closed entry that can only be achieved by an act of government intervention in the form of special regulations, subsidies, or franchises"
- Antitrust by Alan Greenspan examines "whether active competition does inevitably lead to the establishment of coercive monopolies"
- The judicial hacker by Lawrence KudlowLawrence KudlowLawrence "Larry" Kudlow is an American economist, television personality, and newspaper columnist. He is the host of CNBC's The Kudlow Report. As a syndicated columnist, his articles appear in numerous U.S. newspapers and web sites, including his own blog, Kudlow's Money Politic$.-Early...
"Microsoft fails to meet the traditional standards of a coercive monopoly" - Regulation and monopoly by Lawrence ReedLawrence ReedLawrence W. Reed is president of the Foundation for Economic Education , headquartered in Irvington-on-Hudson, New York, a position he has held since September 1, 2008. Before joining FEE, Reed served as president of the Mackinac Center for Public Policy, a Midland, Michigan based free-market...
- contrasts coercive and efficiency monopoly - Witch-hunting for Robber Barons: The Standard Oil Story says that government causes coercive monopoly by granting privileges to firms