Anti-Capitalist Sentiment (with some morality)

[Renton]

A short version, ignoring math and graphs, the monopoly version of a road prices itself to max profit which typically is at a higher price and lower supply than perfect competition. This economic profit (profit beyond that received at free market price) is what you're saying is the incentive for a new supplier.

I agree with this, I just wanted to establish that the price is still limited by a min-maxing algorithm that attempts to sell the most tolls for a moderately high (albeit likely too-high) amount. I would only caution against the use of the term "free market price." It is extremely difficult (impossible) to know what that would be, so it is merely a theoretical construct that is of limited use in these discussions. One which we hope is less than the monopolist's price.

But 2 things effect this. Firstly the entry barrier of massive costs to enter the market ie build a new Road. Secondly the road has a maximum supply which the incumbent can take advantage of whenever it sees fit. This excess is pretty much the same as a factory increasing production capacity and not using it as a message to competition that it is willing to compete on price if required, thereby instantly removing the economic profit that exists in the status quo that is the incentive for a new entrant. And it's a very credible threat because the incumbent wants to maximise profits, hence it's current monopolistic pricing strategy. So a natural move for the incumbent upon realisation of a new entrant is one of 2 things. Either reduce price to competitive market points which will be standard profit maximisation or alternatively use the excess supply it has and reduce price below the competitive price at the cost of short term profit with the intention of crippling new entrant and then once new entrant fails increasing price back to monopoly profit maximisation point.

So with roads this is built in to the basic set up which is why it creates a quite natural monopoly.

So if I'm understanding you, your point is the following:

1. Monopolist owns the only reasonable route between A and B. His costs are $10,000 per day. He charges an extravagant toll that allows him to gross $40,000 per day in revenue. The price is set at a rate that will min-max his price*volume.

2. Would-Be Competitor considers building up an alternate route which might cost him $15,000 per day, at least initially.

3. Would-Be Competitor decides not to risk it for fear that Monopolist will simply lower his revenues to $14,000 per day (or $10,000 or $2,000), which will make it impossible for him to recoup his investment in a reasonable amount of time.

This is challenging, but I don't think its necessarily a market failure yet. For one thing, if Would-Be Competitor assesses the market value of the route at $20,000 per day (which is greater than $15,000), he may still choose to take the hit and weather the storm of price manipulation by the Monopolist, with the expectation that eventually the price will stabilize at around $20,000, and he will begin earning a $5,000/day profit. Monopolist cannot manipulate the market forever, he pays dearly every day. Would-Be Competitor can be capable of playing the long game if the profit potential is there.

The other thing is that while there may be no similar alternate, there are very likely to be inferior routes unless it's a single bridge to an island or something. The monopolist can only gouge his price to a height that will get people to grudgingly choose his route over inferior alternatives. Basically, that's one of a lot of fail-safes that prevent such blatant gouging from being practical.

Finally, lets be real. The state is going to stick its nose in and bust up suspected monopolies. It has a hair trigger for that sort of thing, often when there's actually no monopoly at all, so I wouldn't be that worried about it.

[wufwugy]

1. Monopolist owns the only reasonable route between A and B. His costs are $10,000 per day. He charges an extravagant toll that allows him to gross $40,000 per day in revenue. The price is set at a rate that will min-max his price*volume.

2. Would-Be Competitor considers building up an alternate route which might cost him $15,000 per day, at least initially.

3. Would-Be Competitor decides not to risk it for fear that Monopolist will simply lower his revenues to $14,000 per day (or $10,000 or $2,000), which will make it impossible for him to recoup his investment in a reasonable amount of time.

Given 1 and 2, 3 doesn't happen. Monopolist Company would be in shambles if it lowered revenues so much. I'm not technically savvy on economics enough to explain why, but we see the dynamic in play all the time.

Also, 1 and 2 are not assumptions representative of how the economy would have worked up to this point. There is continual competition at every stage, and we wouldn't see one company get so far ahead. The perfect analogy in this is tech. Apple very quickly got lots of competition and it's probably only like 20% chance it will lead in smart phones in 15 years. Microsoft has even gone so far as to "lose" tons of money in Bing because it knows it has to in order to compete in the market on a broader stage. Microsoft was once considered a great case for a monopoly. The government stepped in, which did basically nothing to change their status, but now, by market forces, a couple decades later it is the underdog and overhauling much of its business model in order to survive.

I'm sure you know this, I just wanted to point out that the framework that creates this private road monopoly is not sound. Sadly, I would need a bit better economics understanding to give the exact details for why.

[rong]

I agree with this, I just wanted to establish that the price is still limited by a min-maxing algorithm that attempts to sell the most tolls for a moderately high (albeit likely too-high) amount. I would only caution against the use of the term "free market price." It is extremely difficult (impossible) to know what that would be, so it is merely a theoretical construct that is of limited use in these discussions. One which we hope is less than the monopolist's price.



So if I'm understanding you, your point is the following:

1. Monopolist owns the only reasonable route between A and B. His costs are $10,000 per day. He charges an extravagant toll that allows him to gross $40,000 per day in revenue. The price is set at a rate that will min-max his price*volume.

2. Would-Be Competitor considers building up an alternate route which might cost him $15,000 per day, at least initially.

3. Would-Be Competitor decides not to risk it for fear that Monopolist will simply lower his revenues to $14,000 per day (or $10,000 or $2,000), which will make it impossible for him to recoup his investment in a reasonable amount of time.

This is challenging, but I don't think its necessarily a market failure yet. For one thing, if Would-Be Competitor assesses the market value of the route at $20,000 per day (which is greater than $15,000), he may still choose to take the hit and weather the storm of price manipulation by the Monopolist, with the expectation that eventually the price will stabilize at around $20,000, and he will begin earning a $5,000/day profit. Monopolist cannot manipulate the market forever, he pays dearly every day. Would-Be Competitor can be capable of playing the long game if the profit potential is there.

The other thing is that while there may be no similar alternate, there are very likely to be inferior routes unless it's a single bridge to an island or something. The monopolist can only gouge his price to a height that will get people to grudgingly choose his route over inferior alternatives. Basically, that's one of a lot of fail-safes that prevent such blatant gouging from being practical.

Finally, lets be real. The state is going to stick its nose in and bust up suspected monopolies. It has a hair trigger for that sort of thing, often when there's actually no monopoly at all, so I wouldn't be that worried about it.

We'll not really. And central to this is that it's selling off existing Road networks as opposed to starting from scratch as I said in the post following the one you quoted.

But let's say there is a road between a and b. Let's say it's a trunk road connecting to towns or whatever. There are currently shittier routes through the country or though neighbourhoods or whatever but the big main road is considerably quicker.

The state sells the roads and company A gets this big one.

It is already big enough to handle all traffic as it stands with quiet times and very busy times.

Let's say the going rate in a competitive market is £5 per car. He charges £8 per car and due to the lack of real alternatives there is some reduction in demand due to car pooling and maybe people don't always make the journey they otherwise might have but there is enough demand still for it to be an optimal price.

If company b wants to enter that market, he's never getting that economic profit of £3 per car, because it ceases to exist once he enters. Now to compete it's not a case of a cost of £10k per day it's upfront investment of maybe £30 Mil (estimated cost to build one mile of motorway so probably a lot more but whatever) and then a cost of £10k per day (or whatever). Now the road that already exists could handle all the traffic that exists at competitive market prices anyway (the excess capacity I referred to earlier) so there isn't a need for another Road and the increase in supply would reduce prices further in the new competitive market.

So company b would need to be willing to invest a huge sum upfront (the entry barrier) when he knows the incumbent has the excess capacity which will force prices down as well as the financial muscle to enter a price war if required.

That's a perfect setup for a monopoly, surely?

And did your last line say the government would step in? Well ok glad we agree the government has some value, but I thought we didn't have one of them in your world.

[Renton]

We'll not really. And central to this is that it's selling off existing Road networks as opposed to starting from scratch as I said in the post following the one you quoted.

But let's say there is a road between a and b. Let's say it's a trunk road connecting to towns or whatever. There are currently shittier routes through the country or though neighbourhoods or whatever but the big main road is considerably quicker.

The state sells the roads and company A gets this big one.

It is already big enough to handle all traffic as it stands with quiet times and very busy times.

Let's say the going rate in a competitive market is £5 per car. He charges £8 per car and due to the lack of real alternatives there is some reduction in demand due to car pooling and maybe people don't always make the journey they otherwise might have but there is enough demand still for it to be an optimal price.

If company b wants to enter that market, he's never getting that economic profit of £3 per car, because it ceases to exist once he enters. Now to compete it's not a case of a cost of £10k per day it's upfront investment of maybe £30 Mil (estimated cost to build one mile of motorway so probably a lot more but whatever) and then a cost of £10k per day (or whatever). Now the road that already exists could handle all the traffic that exists at competitive market prices anyway (the excess capacity I referred to earlier) so there isn't a need for another Road and the increase in supply would reduce prices further in the new competitive market.

So company b would need to be willing to invest a huge sum upfront (the entry barrier) when he knows the incumbent has the excess capacity which will force prices down as well as the financial muscle to enter a price war if required.

That's a perfect setup for a monopoly, surely?

My point was that (using your example, not mine) if the Would-Be Competitor's overhead is less than the estimated competitive market value of £5, then he could still enter, even though he won't get the additional £3. If you're claiming that by merely entering the market, he would lower the market value from £5 to even lower, that sort of invalidates idea of a £5 "competitive market value," doesn't it? This harks back to what I was saying about being careful with that term. If there is only one reasonable route between point A and point B, then necessarily that is a very valuable road. It isn't gouging to attempt to sell your product for as much as you can if its a legitimately invaluable product. The "monopolist" is well within his right to charge a high price, and a high price is a merely a problem for the market to solve.

There's only a monopoly if the incumbent is actively sabotaging alternatives from emerging. It is quite difficult to do this without the use of force or state influence, both of which are morally wrong and hopefully illegal.

And did your last line say the government would step in? Well ok glad we agree the government has some value, but I thought we didn't have one of them in your world.

I'm a realist. If there's a stateless world in our future, I'm sure it is hundreds or thousands of years away. I prefer to apply free-market sensibilities to expected reality. My personal opinion is that anti-monopoly laws do more harm than good, and that true monopolies are nearly impossible to form. I can safely assume that a minimally-corrupt state will squash anything that even comes remotely close to the type of monopoly you're imagining here, for better or worse.

[rong]

My point was that (using your example, not mine) if the Would-Be Competitor's overhead is less than the estimated competitive market value of £5, then he could still enter, even though he won't get the additional £3. If you're claiming that by merely entering the market, he would lower the market value from £5 to even lower, that sort of invalidates idea of a £5 "competitive market value," doesn't it? This harks back to what I was saying about being careful with that term. If there is only one reasonable route between point A and point B, then necessarily that is a very valuable road. It isn't gouging to attempt to sell your product for as much as you can if its a legitimately invaluable product. The "monopolist" is well within his right to charge a high price, and a high price is a merely a problem for the market to solve.

There's only a monopoly if the incumbent is actively sabotaging alternatives from emerging. It is quite difficult to do this without the use of force or state influence, both of which are morally wrong and hopefully illegal.



I'm a realist. If there's a stateless world in our future, I'm sure it is hundreds or thousands of years away. I prefer to apply free-market sensibilities to expected reality. My personal opinion is that anti-monopoly laws do more harm than good, and that true monopolies are nearly impossible to form. I can safely assume that a minimally-corrupt state will squash anything that even comes remotely close to the type of monopoly you're imagining here, for better or worse.

I worded that badly. It would still be £5 per car. However demand receives at £5 per car, which would have to be the minimum profitable price, would be split between 2 roads. So your return on investment would be much lower than normal which means you'd be likely to seek alternative investments instead.