The Fear of Monopoly - Part Two

0:00THE FEAR OF MONOPOLY PART II Considering the area of monopoly and competition, the question before us relates to whether or not a free market tends to create competitive factors or whether it will inevitably drift toward the rigidity found in a monopoly. It will be my contention that, given a free market, the various factors that will appear will automatically tend to encourage competition, and that if we have a free market, in fact, that is, there is no government intervention for any purpose, either to impede or to assist, that the tendency will be to eliminate monopoly, or at least harmful monopoly, and will constantly In addition to price and quality, which are two very basic items in competition, assuming a free market, there are four other areas that are competitive that I want to examine each in turn. These are direct competition, parallel competition, dollar competition and market competition. What we call direct competition is an area of competition which in point of fact even the government recognizes as existing. That is, it exists from time to time. Wherever

1:32we have two or more entrepreneurs, businessmen, industrialists engaged in providing what is is essentially the same good or service we have an instance of direct competition. That is, if we have two or more steel companies manufacturing steel, two or more airlines serving the same cities, two or more drugstores covering virtually the same retail territory, two or For example, if you have, let us say, two textile mills, owned by two are two different firms. They will vary their weaves. They will vary their patterns. They will do whatever they can to introduce variations that will make what they are doing better than what their competitor is doing.

2:49But nonetheless, we call it direct. Even though it isn't precisely direct, it is direct enough so that we call it direct. Another example would be, say, two motion picture exhibition houses, two moving picture theaters. Theaters. Obviously they will be showing different films. It would be absolute direct competition if two moving picture theaters, side by side, both opened up to show exactly the same picture. Well then you would have really direct competition. But I don't recall ever having seen that. Everybody varies it as much as they can. Just as two television stations, although we say They are in direct competition. They certainly will have different programming, and two newspapers will do what they can to vary the content and the presentation that they make. Nonetheless, we call these instances of direct competition, and the argument is that if you do not have a direct competitor, then there is a monopoly there.

3:52Now, this is the only place where I am going to make a concession. Assuming a free market, is possible for there to be, under certain conditions, the absence of a direct competitor. That is absolutely a possibility in a free market. For example, in fact, there are two ways that such a monopoly could occur given a free market. When a new product is developed and introduced for the first time, obviously there is no direct competitor because it is a brand new idea. How can there be a competitor to my widget when I am the fellow that invented the widget? Clearly there isn't one. So obviously, when a new product is introduced, there is no direct competitor. Also, a direct competitor might be eliminated under the following condition.

4:45Let us suppose that we have an entrepreneur who is so efficient, so good, so much better that he is able to underprice his competition. Ultimately, he puts them out of business because he is so much better than they are. In fact, he continues to operate this way. He is so good and he keeps his quality so high that no one can touch him, and he keeps his price so low that no one can get in there. He could get into a position of operating without a Direct Competitor. That's true. So if that has been your fear that a free market could introduce a case where there is no direct competitor, your fear is justified. That can happen in a free market. But now I'm going to tell you it doesn't make any difference if it does or not, because the direct area of competition is the least important. Now that may come as a shock, but actually it is. It's very insignificant. Assuming you Assuming you have a free market, whether or not you have a direct competitor at a given

5:55moment is actually inconsequential. Let me go on to try to establish that as I make a few more points first. Let me take parallel competition next. Parallel competition is that type of competition that is a competition between firms or industries that are in essence doing the same thing. Now we have product competition. We have competition, for example, between airlines and bus lines. Now, that's not the same. You have different bus lines competing directly. You have different airlines competing directly. But there is also competition between airlines and bus lines, and they're doing quite a different thing. And yet, the end result is an ultimate product that is similar in each case. I could leave from this city and go to another city either by Bus or by Plane. If I go by bus, I have the choice of two or three bus lines. If I go by plane, I have the choice of several airlines. But whether I go by plane or bus is a decision that throws me into one area or another, and that is called parallel competition.

7:23In this particular case, let me show you the ramifications of it. For instance, it would be clear that if you have a newspaper and the newspaper is competing with another newspaper, You have newspaper competition, but have you ever stopped to consider the fantastic competition between a newspaper and a television station? Really, having been in both areas of endeavor, I can assure you that as a newspaperman I would rather face another newspaper than a television station. I think I could compete on a pretty good basis with another newspaper, But the television station can do things I can't do as a newspaperman. And conversely, if I'm in television, I would rather face another television station than to face a newspaper.

8:12The newspaper can do things that I can't do. But the fact is they are competitors, they are parallel competitors. The same advertisers are putting their money into television commercials or into newspaper ads. And the same advertiser hasn't got a limitless number of dollars to work with, so he buys the one rather than the other, or he spends more one place than the other. And that certainly is competition. Additionally, we have found very few people who read the newspaper while they're watching television, and vice versa. So if you've got people who are going to be staring at their television sets, there really isn't of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money

9:21Company. There wouldn't be any competition. Oh, no. How about all the other metals that we can make things with, besides steel? Copper, brass, aluminum, tin, iron. How about the plastics? Are you aware, for example, that right now in the automotive line we are beginning to make automobile fenders out of spun glass, which is a type of plastic? It's lighter. It's very durable. It's a very good substance. How do you think the steel people feel about about that. That's competition. That's parallel competition. And I can assure you that parallel competition is often far more rugged, far more keen, far more merciless than direct competition. You see, when you're facing a direct competitor, he can't do anything you can't do. And you can't do anything he can't either. The question is which one of you is smarter, better, more efficient? But when you face a parallel competitor, He can do things you can't do, and now you have a problem, and to overcome that will take a great deal indeed.

10:32Those are instances of parallel competition. There are some people who, of course, contend that there are certain areas where you have natural monopolies. That is, there are areas where there isn't any competition. This occurs in the minds of people, at least, when we're talking in terms of utility sometimes. They say, well, electricity is a natural monopoly. You don't want more than one firm handling or supplying electricity because it would be inefficient. In actual fact, I'd like to suggest that that's not true. You see, of course, electricity is a special type of of Service, a special type of energy. But we do have different ways of getting it. That is, assuming a free market. And some of the ways that we're not using to get electricity might be far more efficient than what we have. The general idea in this country has been it becomes more efficient as we centralize it. Well now, wait a minute. We've had some Some fantastic blackouts because of centralization of electricity. Suppose instead we opened up

11:46the market, the government no longer granted exclusive franchises to electric companies and no longer got in to compete in this area by supplying electric current itself, supposing instead we open up the field and we have the opportunity of improving the home generator. The home generator, if we were to put that in a lab and begin experimenting with it and coming up with ways of supplying fuel to it that are efficient, including the utilization of the rays of the sun, can conceivably become so good that when we build a new home we would build it with a home generator and supply the fuel, and the generator and the supply

12:59And we can't compete. It's not that the market wouldn't let us compete. It is that the government has preempted us from getting into this area. And then think of the other things that we could do in addition to using electricity. I don't know that electricity is necessarily the answer. I might point out that today there is a very, very good competitor even to the The Municipal Electric Plant, and that's the municipal gas company. There are lots of things that you can do with either gas or electricity. But you could also do them with gasoline or kerosene or maybe with atomic energy or possibly with other types of energy that we can get hold of. There are all kinds of competing factors if we'll open up the market and let these factors compete. So as far as there being natural monopolies are I would challenge that. Perhaps there are some. I don't know what they would be. Of course there is the idea that we all need water, and I would agree we certainly do need water. Here is a basic human necessity, but I'm not so certain that it has to be supplied by a municipal company.

14:14In fact, I notice that whatever is supplied in the way of a public good, that's the place where most of the pollution comes. The difficulties that we have today with our ecology are not in the areas that are privately owned. They're in the areas that are quote and unquote pro bono publico. They are for the public. Where do you get your problems? On public Beaches, with oil slicks, in public water supplies, the public air, the public highways, these are the areas that are polluted, of course, because they are not being managed the way owners would manage them. And consequently you have pollution, you do not have efficient management and you don't have the competitive factors at work. If you will put these things in the Market, and let the government get out of the area, then we may discover that there are still better ways of doing things than we yet have dreamed of.

15:18I'm thinking, for example, of the telephone company. We're told that that is a natural monotony. I'm not so sure. I once had this happen to me. It was years ago. A man came into my office, and he put Put a telephone down on my desk. It was just the instrument itself, the cradle phone and the base with the dial there. That's all. There were no wires leading out from it, nothing else. He put it down on my desk and said, Call your wife. I thought he was joking, because obviously the phone was not attached to anything. So I laughed. I said, Oh, sure, the phone isn't connected. He said, No, I'm not kidding. Call your wife. Well, I thought I'll go along along with the gags. So I picked up the receiver. There was a dial tone. I picked up the phone, you know. It's not connected to anything. I said, how do you do that? He said, call your wife. I said, okay. So I dialed a number. I got her. I said, honey, I'm talking to

16:16you on a phone that isn't connected. She said, why don't you be home for supper? I said, you know, never mind. But I said, how do you do it? He says, easy, short wave. Now there is a kind of installation of phone that I had in my hand in the 1930s. The firm that was putting this together had realized that it's a perfectly simple thing to have telephonic communication over short distances by means of short wave. And all you have to do is to have a central operator, which we had, and they had worked out temporarily a deal with the telephone company for this experiment, you see. And what happened when I dialed, it activated the central switchboard the same as if I had been connected to it by a line, and so I got through the same way as I would anyway, now with lines.

17:06In other words, back in the 1930s we had a way of telephonic communication that could have eliminated the telephone wires. We didn't really need them. We don't need them now. But you can't find that out because this is an area that is protected by a government franchise that grants an exclusive monopoly to one firm or another, you see. So actually today, for example, just continuing on the telephone thing, most people feel that we only have one telephone company in the country. Actually, there are about 2,000 telephone companies in the country and the way they've The telephone is a very beautiful thing. If I pick up the telephone on the West Coast, I can call anybody on the East Coast and my voice will perhaps go through equipment that is controlled by 10, 20, 30 different companies.

18:06Each company gets a pro rata share of the price that I pay for the service and it is taken care of and all works out. So this can be done. I am not so sure that the telephone is the best means of communication, with or without the lines. We may have other ways of communicating if we just have a free market. I am only concerned at the moment that you do recognize the fantastic efficacy, the fantastic creativity of a free market where people can innovate, they can come up with new things, and nobody is there to say, well, you can't make that because this other fellow is making something like it, and therefore you're out of business. Instead, we could have a fantastic number of new innovations coming along all the time, and, of course, probably most of them wouldn't be as good as what we've got. But here and there, somebody would crack through and come up with a real winner, and we could all have the benefit of that. But government is protecting

19:08us from these things. So we don't get the innovations. We tend to simply go along with Let's take dollar competition for a moment, a very important area of competition. Whenever we deal in the market today, in a modern market, we deal in terms of money. We translate goods and services that we have into money, and then we translate the money back into the goods or services we want to buy. Money is the medium of exchange. Because money is scarce and must be scarce or it wouldn't be valued, none of us have a limitless supply of money. The consequence is that at the dollar level we are engaged in competitive actions all the time. Let me give you an example of what I mean. Let's suppose I have to go to town for some reason, and I go there and complete my errands, and I was going to stop over at at the drugstore to pick up, say, some shaving cream that I want. But the drugstore is around

20:16the corner from where I am, and there's a phone booth where I am right now. So I think maybe my wife would like something. So I go into the phone booth, and I call her, and I say, honey, I'm down here at the market. Is there anything I could get for you while I'm here to save you a trip? And she says, gee, I'm glad you called. I want you to stop I stop over at the bakery and get a loaf of vitamin-enriched daisy bread. It's a special type of vitamin-enriched bread, and we'd like to have it. And I say, what's it cost? And she says, well, it's 75 cents. I say, well, fine, I've got that much left. I'll go and get the bread for you. So I do so. I go and I buy the bread, and then I count the change in my pocket. Now, the shaving cream I was going to buy cost 89 cents. But all I have left is 30 cents. And that means I don't buy the shaving cream.

21:06Does that mean that the baker who made the daisy bread is competing with the fellow who made the shaving cream? Yes, in terms of my ability to buy both. I haven't got the resources to buy both. I chose in favor of the bread, and that means I don't buy the shaving cream. Now that's my level. Now you take people with more money than I have, and they make decisions like this. A man goes out into the market and he decides this is the year for General Motors is competing with, say, Pan Am, through money, because we have a limited Supply of Money, and we can only spend each dollar once. So when we make up our minds that we're going to spend it for X product rather than Y product, we put those two products in competition. Whatever they are, they can be as diverse as bouquets of flowers, umbrellas, insurance policies, and fountain pens. It doesn't make any difference. I have so much money and that's all I have. And when I spend it, I don't have it anymore. So when I go

22:31I go to the market, I decide among a vast array of choices I could make to take choice A, B, and C, and I stop there because I'm out of money. And that means the choice D, E, F, G, H, and so on, ad infinitum, I just don't get. And that means that A, B, and C are competing with D, E, F, G, H, and so on ad infinitum. That's dollar competition. Does that occur in a free market? It sure does. It occurs everywhere. everywhere. This is why we buy ads, to encourage people to buy our product. What we are saying when we put an ad in the paper or we go on television or radio or however we advertise, we are saying, spend your money with us. Buy my widget. I don't care what else you do.

23:17Maybe you're going to go hungry, but buy my widget. Maybe you go without insurance, but buy my widget. Maybe you don't have a car, but buy my widget. Because we realize that we are competing for everybody's dollars. At the dollar level, we are in competition with everybody else who might receive dollars. And we want to get as many dollars coming our way as we can, and that's the kind of competition you will find given a free market. Because in a free market, each of us chooses where we will spend our dollars. And if we choose not to spend them, then they don't get spent. Or if we spend them one place, Market competition is the kind of competition that exists only in a free market. If you do not have a free market, this area ceases to be. Given a free market, anyone who wishes is to, at any time, may go into any business he cares to or may get out of any business

24:30that he is already in. In other words, free access, free entrance, free exit. What does that mean? Actually it means that direct competition isn't very important if you have a free market. Let us suppose that we have a case where we have an absence of a Direct Competitor. And this man is operating at a certain price level and at a certain level of quality. If this man does not keep his prices low or his quality high and we have a free market, it means that somebody else will come in and he will have a direct competitor in the morning. If he is protected, then he doesn't have to worry about where Put it in your own mind for a minute. Let's suppose that you wanted to be a grocer. You'd like to run a grocery store. Own one. You've got a little capital. You know where you can When you can raise some other capital, you'd like to have a good grocery business, a supermarket,

25:51where you can really do a job and make some money. That's what you'd like to do. Where will you locate? Will you try to locate next to a supermarket that's doing a thriving business that is well established, that knows what it's doing, has low prices, high quality, efficient clerks, is courteous, extends credit, gives you service? If you go into business next to them, you'll go broke and you know it. What you're going to do is look for that grocery store that isn't doing a good job. You're going to look for the fellow that has high prices, bad quality, is inconsiderate, his clerks don't work right, there's no convenience, it's not run correctly. You can go into business next to him because you can get some of his customers away from him.

26:38It would be easy. So when you have a free market, the free market tends to discipline the entrepreneur, even when there isn't a competitor. Now if you don't have a free market, you don't have to be disciplined. Let me give you an example of that. Take the government operation of the postal system. Here you have a prime example. There is no competition. Why? Because there There is a law against it. The government passed a law to prohibit anybody from getting into this area. So how efficient is the postal system? They don't have to be efficient. Nobody can compete with them. What about dollar competition? It doesn't make any difference. The postal system doesn't have dollar competition. It doesn't make any difference whether you patronize them or not. You'll pay for it in taxes. So there's no dollar competition.

27:32There's no market competition. There's no direct competition. But you know, even here the government doesn't have a complete monopoly because there still is parallel competition. You can communicate without writing a letter. So it shows even how difficult it is for the government to nail down and create positively a monopoly. In a free market, the factors of competition will exist and will flourish. You don't have to worry about a free market moving in the direction of monopoly. On the contrary, a free market will tend to sustain competition, it will continually introduce new competitive factors, and the only danger you ever have for monopoly begins at the point where government Thank you very much.