John Larsen wrote:dblagent007 wrote:John, why would competition lead to efficiencies in the company itself but not the market? Isn't the company trying to compete in the market and that is why it is trying to be more efficient?
Because companies must necessarily duplicate services and structures that already exist in other companies. This is why whenever there is a merger or acquisition it is inevitably followed by a downsizing. Think about it this way, what if there were two companies bringing electricity to your house. There would be twice as many wires, transformers, power stations, etc.
Companies try to sell a merger to their shareholders by saying that the combined company will be more efficient because of "synergies" and because certain redundancies will be eliminated. The truth is that this is very often not the case. If both companies are operating efficiently, then there is very little benefit in combining them. They may experience some small economies of scale from the combination, but not much. On the other hand, if one of them was very inefficient, then the efficient company may acquire or merge with them and make them efficient. Then they are getting something valuable in return.
As for the electricity example, you are citing a natural monopoly where it is widely recognized that it would be wasteful to duplicate the electrical lines, etc. Now, are the electrical companies efficient? Not by a long shot. They are only as efficient as the state regulators force them to be. Incidentally, this is one example where there is a natural monopoly that should be regulated. We just have to take the risk that the government will do it effectively (a very big risk indeed!).
dblagent007 wrote:Your redundancy argument makes it sound like we would all be better off if everything was a monopoly - there is clearly no redundancy in those situations. However, in a monopoly, the company has little incentive to be more efficient, improve, and meet consumer demand.
Monopolies are the most efficient markets by far, however, the cost savings from single sourcing all goes to to the monopoly not to the consumer. So in a monopoly situation the companies make a much higher margin. The monopoly has no interest in passing savings on to consumers.
One of the strengths of competition is it prevents companies from making huge margins of profit, however it does so at the costs resulting from more than one provider in the marketplace.
The monopoly does have an incentive to be more efficient, improve and meet consumer demand if it means greater profit for the share holders.
You may be right if there was ever a monopolist that for some reason acted like it was in a competitive market and was continually looking for ways to drive down prices, increase services, develop new products. However, no such monopolist has ever existed. Monopolists tend to ignore the needs of consumers. It will only be as efficient and effective as it has to be to maintain its monopoly, which isn't very efficient or effective, especially if the market has an inelastic demand curve.
John, I don't know if you own a business or not, but most businesses have to be forced by competition to improve. You would think that monopolies would try to become more efficient to increase consumption of the product, increase profit to shareholders, etc. However, it has never worked that way. Monopolists tend to make fat profits that keep shareholders happy so that there is no real incentive to take painful steps to make the profit even greater. For example, if I was a monopolist like the phone companies used to be (think AT&T in the 70s), why would I spend tremendous amounts of money on new capital improvements when people have to buy my product anyway? The answer is that they won't - unless competition forces them to.
The bottom line here is that monopolies = BAD
dblagent007 wrote:If you don't believe me, think of the cable company of old (now they are slightly more responsive due to competition from satellite TV). Are we worse off because FedEx and UPS each have a fleet of trucks, planes, distribution centers, etc. from which to ship goods?
The cable company example is a special case, since the cable companies received federal aid to build and maintain the infrastructure. It might be that cable would have never been economical without federal aid. They had no motive to improve because of this federal aid structure.
John, if the cable company cannot be profitable without federal aid, then why on earth should it even exist? Is there some right for a company to exist even though consumers view its products as not being worth the cost it takes to produce? No. If they can't hack it, they need to get out.
Incidentally, I think you are very wrong about whether cable companies are economical or not.
We are not necessarily worse off, but it costs more than it would otherwise. There is a lot of unnecessary redundancy that is costly. When you read about the problem of "over capacity" in the airlines, this is exactly what they are talking about. There are economies of scale that can be achieved by larger and larger companies as opposed to many small companies.
Overcapacity in the airlines is due to drop in demand, not competition induced redundancy. Even if we had a single monopolistic airline, overcapacity would still exist when demand drops.
Look, I'm not saying that there are not benefits to free market competition, I am just saying it is not the low cost model. Monopolies have served us very well in some cases because competition makes no sense. For example, the electric company.
Right. There are some situations where there is a natural monopoly. However, the monopoly is something we have to endure since it results in increased costs to consumers. These have to be regulated to do the best we can to make sure they aren't abusing their market power. In general, though, I would much rather purchase from a competitve market than a monopolized market (why? because in a competitive market I get to choose, something I don't get in a monopolistic market).
dblagent007 wrote:Should all parcel carriers be combined so that we can eliminate the redundancy? No. Why? Because in this market, and most others, there is no redundancy. FedEx has a share of the market that they service with the trucks, planes, etc. that they own. UPS has a share of the market that they service with its trucks, planes, etc. There is no redundancy. The redundancies where goods and equipment sit idle, which would lessen the overall welfare of society, do not exist because no one in their right mind would create them (government is the exception).
If this were true, no companies would ever go out of business, but that is not the case.
Now hold on. As I said above, a drop in demand will create overcapacity in a competitive market as well as a monopolistic market. I thought your point was that a competitive market producing just the right amount of goods to meet the demand will have redundancies that a monopolistic market that is also producing just the right amount of goods to meet the demand (actually demand is dampened somewhat in a monopolistic market) won't have. If that is what you are saying then I disagree. The competitive market will be divided up amongst the different competitors. Each will have the equipment to serve the needs of the market. There are no real redundancies in most of these situations.
dblagent007 wrote:As for the profit motive, you are exactly correct that private companies will have no motivation to do things unprofitable. In most markets that is good because it eliminates waste. However, with regard to space exploration, the environment, etc., there is a role for government. The problem is that even in these areas the government gets hijacked by the special interests to the point that the clean air act is more of weapon to punish "bad" companies than it is a weapon to clean up the air (I should tell you sometime about my travails of trying to get my truck converted to run on much cleaner natural gas only to be denied by the EPA in reliance on the clean air act; bureaucracy run amok, I tell you!!).
I agree with you in general but I don't know what you mean by "special interests".
By special interests, in the contex of the clean air act, I would list the Sierra Club, Wilderness Society, Utilities, etc. Unfortunately, the government gets into bed with some of these groups and it makes absolutely stupid decisions.