Is Aggressive Competition Anti-Competitive?
from the what's-the-difference dept
For any company, one of the most important decisions it has to make is the price of its goods or services. Straddling the line between competitiveness and profitability is a task that’s made harder by the fact that from time to time, certain pricing decisions are deemed to be illegal, or at least the competition claims as such. We saw cries, earlier this year, that Microsoft’s decision to sell its anti-virus suite at a cut-rate price was anti-competitive. Of course, while Microsoft’s aggressive pricing may have been rough on the competition, it was a positive for customers, many of whom took to the offering. The Supreme Court is currently hearing an interesting case that involves paper and timber company Weyerhauser. The company is accused of buying too much lumber, to drive up the cost for their competitors, and then undercharging for the finished goods, again, to wreak havoc on their competitors profit margins and drive them out of business. It seems like the company has two valid defenses. The first is that you can’t demonstrate the company’s intent. Perhaps it really just wanted to buy up a lot of raw materials, and felt that it could still do well at that volume. The second is that even if the company took these actions for the express purpose of harming its competitors, then that’s just aggressive business. Naturally a company wants to see their competitors pay more for raw materials. And as in the Microsoft case, it would seem like the end user benefits from Weyerhauser’s actions, in the form of lower prices on end goods. Considering all of the questions surrounding intent, and the difference between being competitive and anti-competitive (which is an odd phrase), it definitely seems like a mistake to meddle in something as important as pricing.
Comments on “Is Aggressive Competition Anti-Competitive?”
This is the problem with our current system, it wants everybody to play ‘fair’ and in business (at least in real free market capitalism) there is no such thing.
The most efficent, the daring, and / or the smart businesses are the one’s who make the most profits. That is how it should be.
Personally I don’t see a problem nor do I have one. If the other companies want to compete let them either make sound business decisions (like Weyerhauser) or make killer deals (like Microsoft)
Darwin’s theory of natural selection works (be it in nature or business)… only the strong (i.e. smart) survive.
Re: Good Point
“This is the problem with our current system, it wants everybody to play ‘fair’ and in business (at least in real free market capitalism) there is no such thing.”
I think this is a good point and one that needs to be understood. While this country (U.S.) seems to consider itself a capitalistic economy, we are in fact not. We are certainly the closest thing the world has to pure capitalism, but we are in fact a mixture of a capitalistic and collectivist political economy. In a pure capitalistic economy, things like; Anti Trust Acts, Taxes etc. would be considered government interference and quite a hindrance to the evolution of the economy.
it’s funny, we say we have a “free” market, yet we despise the tactics of walmart.
we say we have a “free” market, but we place restrictions on how business opperate.
we don’t have a free or capatilistic market.
if we want everyone to play fair, we don’t have competition (akin to comunism anyone?) and if we let people be “aggressive” it hurts small business.
well, what do you want? don’t sit in the middle and claim one side is bad, while another is good, and you benifit from the middle.
if you want walmart and microsoft and the like harmed, pay out of the arse for goods, if you love cheap stuff, never buy a rolex. let’s see how that goes. we love to get what we can for what we can. would you buy a pen from tiffany’s to do random desk work? no. would you buy luxury watch (for excutive gifts) from walmart? no. but you’d spend the money deemed neccessary.
so, as i said, don’t say one thing is bad, and then flock to it when it suits your needs.
Re: Re:
The reason we criticize walmart is because they don’t support their employees. NOT because they kill competition.
Re: Re: Re:i love wal-mart
We all wish we had started WAL-MART.
I am in there 2-3 days a week, because they have what i want when i want it, at the right price
Re: Re: Re: Re:i love wal-mart
And it’s just all about you, isn’t it? Do you ever think beyond immediate satisfaction?
Re: Re: Re:rstr5105
Strange that a company that “does not support employees” has so many. Paying a fair wage, offering medical coverage, providing a safe workplace, WalMart does all these things. How do they not support employees? Your comment is contrary to all others on this blog. You obviously want to regulate WalMart to provide what you think is a “Living Wage.” People have no right to a specific wage. People are paid what they are willing to accept to do a specific job. It is free market. It is totally the employees choice what they are paid. If they do not like the wage, don’t take the job. If no one takes the job, obviously the wage is too low for that specific job. Unions are the problem, not solution.
Take for example Teachers. They are hurt by unions. The union is out for its own best interest. They are now a corporation that needs to support itself and profit. So they get teachers in a union and take dues. Teachers can only get paid what the union says they can get paid. Take away the union and teachers are free market. A school can decide that it wants the best test scores in the country. They then can recruit the best teachers by paying the best wage, like private companies. Then teachers could stop whining about low wages.
Re: Re: Re: Re:rstr5105
Taxpayers are effectively subsidizing Wal-Mart, since so many of its employees are on welfare/food stamps. Growth that relies on government assistance is hardly “free market” capitalizm.
Re: Re: Re:2 Re:rstr5105
If there was no Wal-Mart just think how much we as taxpayers would be paying for welfare then. I LOVE WAL-MART!! It provides untrained workers a income to help low income or in between job workers a sorce to start.
Re: Re: Re:3 Re:rstr5105
awhell why don’t we just shut down wal-mart, burger king and mickyd’s to they all have low pay and little benifits but they make lots of money they must be bad
Re: Re: Re:2 Re:rstr5105
Taxpayers are effectively subsidizing Wal-Mart, since so many of its employees are on welfare/food stamps.
If there were better paying jobs, why would someone take a job at Wal-Mart? Oh, wait, I forgot, it’s because Wal-Mart ‘forced’ the closure of all those ‘mom and pop’ shops that supposedly pay better. But wait, every time I read or hear about some politician wanting to raise the minimum wage, I read or hear that raising the minimum wage would hurt the ‘mom and pop’ businesses. That would imply that the mom and pop shops are paying minimum wage. So exactly where are the better paying jobs that would take these people off social assistance?
What you really mean to say is that Wal-Mart is reducing the cost of social assistance and is therefore creating a benefit to taxpayers. It is unlikely that someone was NOT on social assistance before getting a job at Wal-Mart since that would imply they left a better paying job. Plenty of jurisdictions allow social assistance recipients to top off any earned income on the premise that these people may start saving some money to get ahead and/or buy the things they require.
If I was on social assistance, and the local laws allowed me to get a job but receive a top off, I would jump at the opportunity to get ahead. But you would rather keep people down and on social assistance.
You know what I like about users of this site. For the most part you all seem to be moderate leaning left or right but you all have an actual sense of “that’s right” or “that’s wrong” and not “Well this law over here benefits me so I won’t bring up how it hurts these people over here”
Re: Re:
For the most part you all seem to be moderate leaning left or right…
Shoot, I did forget to drink my V8 today…. Sigh..
The US, like all countries, a form a regulated capitalism. Completely unregulated capitalism is known as “anarchy.”
Re: Attn: Sarbo
“The US, like all countries, a form a regulated capitalism. Completely unregulated capitalism is known as “anarchy.”
This is absolutely untrue. First, you have to understand the meaning of anarchy, Society with out laws. Capitalism is not necessarily anarchy. If I ran a business and decided to shoot my competitor in the head, I would still be arrested for murder.
Capitalism removes government restraints from the economy, it does not allow people to do whatever the hell they want.
However, you are correct in that there has never been a truly capitalistic government. BTW, the terms regulated and capitalism are mutually exclusive. You cannot have regulated capitalism.
Re: Re: Attn: Sarbo
You just disagreed with yourself, yet failed to even provide an argument either way!
That is impressive.
Re: Re: Re: Attn: Sarbo
a. I don’t think I did disagree with myself, but if you think I did, then feel free to explain.
b. I don’t have the time to explain cpaitalism here, feel free to look it up.
Re: Re: Attn: Sarbo
“If I ran a business and decided to shoot my competitor in the head, I would still be arrested for murder. “
Which is to say that some regulations remain in place. Because “eliminating” the competition is still the most efficient way of “eliminating the competition”.
What do you think mob murders are all about?
Re: Re: Attn: Sarbo
There are “free market” extremest who would argue that you should not be arrested but that the “market” should be allowed to “punish” you by not buying from you if it thinks you deserve punishment. Likewise for deceptive trade practices, monopolistic practices, pollution, etc.. Let the “market” reward and punish.
Classic Arguement
Of course, the rebuttal is always, “if you let the large companies drive competition out of business, they have no competition, thus no incentive to maintain low prices, thus we pay more in the end after the tactic has run its course.” As with most complicated issues, the government (not talking one party or the other, but large bureaucratic organizations in general) seems to foul things up by basing their actions on a minimally relevant precedent set 100 years ago instead of daring to evaluate modern issues in their appropriate context.
Simple definition...
Anti-Competitive: Any act by your company that makes it harder for my company to compete with you is anti-competitive.
Re: Simple definition...
So if I build widgets that are better than your widgets, they cost the consumer less, and I advertise them better, I’m being anti-competitive?
Time to rethink your definition.
Re: Re: Simple definition...
No, you got it perfectly. No need to rethink.
Most anti-competitive claims are exactly that:
“No Fair!!! He’s doing something I can’t/won’t do!”
Cornering the market and the dumping your goods is not innovative and does not offer the customer anything in the long term. It’s Texas Holdem business style. We don’t assume businesses will play fair, but we do assume they intend to make a profit. Government is intended to look after the concerns of it’s citizens, all of them, in long and short term views.
The problem for competition and the consumer is that when most of the competition is out of the way the prices will rise again and with only a few large company’s left then comes the price fixing problem and the question is there really a few large company’s or are they just different names all owned by one.
Haven’t we seen this before.
It's not about competitiveness
There is a line between competitive behavior that is sustainable in the long run and one that is not. If a company destroys all its competition, then raises prices ot lowers the quality of its goods, it eventually hurts itself by alienating its customers, making them organize against the company, potentially even hurting it in other ways. If the company is really powerful it can even hurt the overall economy, and hurting itself in that manner. It is in no one’s interest to allow a company to reach that point. Hence, we have laws that tell you when you have gone too far.
Re: It's not about competitiveness
“There is a line between competitive behavior that is sustainable in the long run and one that is not. If a company destroys all its competition, then raises prices ot lowers the quality of its goods, it eventually hurts itself by alienating its customers, making them organize against the company, potentially even hurting it in other ways. If the company is really powerful it can even hurt the overall economy, and hurting itself in that manner. It is in no one’s interest to allow a company to reach that point. Hence, we have laws that tell you when you have gone too far.”
No offense AC, but what you said shows a real lack of economics. As I’ve briefly explained in my article the scenario you paint WILL NOT HAPPEN. A company may, and I stress MAY, eliminate it’s competition, but it won’t be long for others to enter into the market to make money off that product/service. It happens all the time.
What really hurts society and the economy is government meddling in the natrual laws of economics.
And when I say meddling I mean from both sides of the fence: 1) granting special priviliges to companies that hurts competition but gives the big companies with influence an edge; 2) passing regulations/restrictions/laws supposidly to “help” society against big business or some other so-called immorality of business.
You have to understand that most laws passed by government to restrict business were actually the ideas of big businesses…because they can afford to adhere to stricter laws whereas smaller businesses cannot, and they know this, so they push for those types of regulations under the guise of “We have to protect people”.
Re: Re: It's not about competitiveness
No offence Liberty Dave, but what you said shows a real lack of (your understanding of) history. History is full of companies that went beyond the line, and caused all kinds of long term problems that, in some cases, we are still struggling to fix. in many cases, the problems were finally solved through violence (physical or economic). If we are smart, we hsould learn from what happened before us. Laws are based on lessons we have learned from history. Of course, if you believe in reinventing the wheel everytime, and violence is an acceptable way to solve problems, then you can remove the laws.
Re: Re: Re: It's not about competitiveness
“No offence Liberty Dave, but what you said shows a real lack of (your understanding of) history. History is full of companies that went beyond the line, and caused all kinds of long term problems that, in some cases, we are still struggling to fix. in many cases, the problems were finally solved through violence (physical or economic). If we are smart, we hsould learn from what happened before us. Laws are based on lessons we have learned from history. Of course, if you believe in reinventing the wheel everytime, and violence is an acceptable way to solve problems, then you can remove the laws.”
Please give me an example of one or more of these companies from history that has caused such problems. I’m sure that your examples would be the same false examples that are taught in the classroom, but I’m still curious as to what companies have caused problems in the past that we’re still “dealing with” today.
Awesome
I’m pleased to see so many comments that are right on the mark about how true this article is, and the free market in general.
I can’t stand it when people moan and complain about how a big business is hurting it’s competitiors. That’s what businesses are supposed to do!
What business should NOT be able to do is use any type of physical threats or property damage or fraud against other companies to get ahead. But working with the market without physically harming someone’s person or property should always be okay.
The other thing people need to understand is that the theory that one company will sell good/services at super low prices in order to drive compeitition out of the market even if that company loses money to do so…well that doesn’t happen, and hasn’t happened in history very often at all. The reason it doesn’t happen (even though we’re led to believe it happens a lot from history lessons) is that a business can’t continually do such a thing.
Let me explain: Say a company drives all competitors out of business by utilizing this tactic. In order to drive them out of business they’ll have to
1. Expand production, which means an increased investment in materials, space, labor, etc.
2. Then they have to lower their prices so they’re making less of a profit (which business don’t want to do, they want to make the most profit they can make).
3. Then they have to wait while they drive the competition out of business…which can take a long time. No business will go down with a fight.
4. Now let’s say this strategy has worked, they just drove competitors out of business. Now they have lots more business, and they have to expand production further. However, if a company is making a profit at something others will come back into that same market to make some money also…so in comes MORE COMPETITION AGAIN.
So now this big company that expanded production and drove others out of business now has to deal with lower sales because competition comes back, as it always does, and they have larger overhead costs associated with all the expansion they did to drive out all the competition. So now they’ll have to do the same tactic to drive out competition again…it’s an endless cycle that companies just can’t do over and over again because it’s too costly.
Even Wal-Mart has competitors that do reasonably well against them.
If capitalism is followed it always will work to the benefit of society.
shouldn't all company's be anti-competitive?
In my thinking i never just wanted to be competitive with my comptiters i wanted to do more sell more then my comeptitors. that means I make more money then you and I can expand and do and sell even more. ANTI-COMPETITIVE IS FOR LOSERS
What does this kind of thinking do to the environment? Surely government interference in this aspect of business is beneficial, so we don’t see business razing the face of the Earth for their bottom line? Let them do business, but at a pace that won’t leave our planet looking like Venus in a couple hundred years.
Another thing I know would happen if all governent controls were released is that two or three monopolies would eventually rise to the top, cooperate to dissolve all government so they can kill competitors, and become power-mad despots vying for world domination. Hiel Wal-Mart-AOL-TimeWarner-WB Inc.! For the good of mindless Darwinism!
re: spoon?!?!
This kind of thinking protects the Enviroment. Think Tuna. Why is there dolphin safe tuna? Government? no. The dolphins are safe because of the free market and the consumer. The consumer did not want to eat Flipper. They stop buying the offending brand of tuna. Offending brand starts losing money, makes tuna dolphin safe, fixes brand image and consumer buys again. This senerio works everytime. Who has done more to fix enviromental polition that big business? Not the government.
Re: re: spoon?!?!
So why doesn’t every company just “claim” that their tuna is “dolphin safe” regardless of whether it really is? Because government regulation supposedly prevents them from doing so (although there are claims that some are doing so anyway). So even your example does not work without government involvement.
Distorting the Market
I think I’m gonna be disagreeing with the majority of commenters and the original post. While competitive pricing is great for the consumer, when aggressive pricing manipulates the market it is bad, and bad for the consumer. Markets have failures such as the Flipper example from The Man. Governments can protect us from failures in markets such as the failure of pricing forests or other environmental situations where the market isn’t able to properly value the good.
My contention with price competition, and over competition which turns anti-competitive, is that goods and services should be priced based on their value by the market (not a company), and when a company undervalues or overvalues a good something is wrong. Normally, the market will correct this problem in valuation, but when the company itself is able to manipulate the valuation placed by the market, and the market is no longer able to revalue the incorrect valuation, then the market and consumers are harmed.
Re: Distorting the Market
I think I am going to have to disagree with you.
A company is part of the market. Goods and services are priced according to what the company believes will maximize their profit. Competition may drive those prices down. Then again, it may not. One competitor may market their product as being superior and thus may charge more, when in reality there is no apparent difference in quality between their product and a competing product.
An “incorrect valuation” implies some type of value judgement: you believe the price being charge exceeds what the ‘market’ would value that product at. But If someone voluntarily pays the price charged by a company, how can the market or the consumer be harmed or how can that be considered an “incorrect valuation”?
Re: Distorting the Market
To MyNameIsMatt,
What you said makes no sense whatsoever. A company cannot manipulate the price of a good. Please give an example of how this is possible. If a price of a good/service is too high people will not purchase it, and will find an alternative.
If a company uses the government to manipulate, which they often do thanks to our huge government with special interests, then that IS wrong and should not be allowed.
But the free market will always win.
You’re statements of how the markets fail lack examples, it’s just anti-capitalistic rhetoric. The markets wouldn’t “fail” in the pricing of forests, lakes, streams, etc. Actually the market would be best thing for the environment, not big government.
Re: Re: Distorting the Market
The problem is that some people view a ‘market failure’ as a bad or negative thing that must be corrected. I would argue that a ‘market failure’ is the market correcting itself – something didn’t work and the market is saying “I don’t think so, go try something else”.
If I started to gather up all the water in the world and start to sell it for cheap, it would certainly make other companies try to match my prices or beat them for a time until they go out of business because they can’t sustain as long since I have more product and resources….
Once they’re gone and there’s one or two companies supplying water, are you going to be happy if they decide to slowly raise the price over time until you pay almost as much for water as you do for all other utilities combined?
Of course that’s an extreme because we all NEED water but it’s the same principle. Since only some people NEED lumber or specific goods for their business, it helps every person understand what they might experience if companies do these type of things with the wrong intentions.
It all comes down to trying to lawfully control someones morals.
Walmart Vs. Microsoft
Not that Microsoft is all about forcing out competition because of unfair pricing models, but I see people banging the pricing drum around Walmart for misguided reasons and Microsoft is a nice example of having done some damage to a market because of anti-competitive pricing.
Walmart’s employee treatment is a separate issue from it’s pricing practices (I know employee costs could potentially drive up prices, although it could arguably drive them down too if employees were treated better and perform better, but that’s another discussion). While Walmart has low prices that has made owning a mom and pop or general small business harder, it’s forcing those businesses to reinvent themselves along a line that can compete with Walmart, which they can.
The problem with pricing occurs when (as I’ve said) a company manipulates the market and incorrectly valuates a good, which can’t be corrected by competitive forces driving prices toward their proper valuation notably their marginal costs. Prolonged price competition kills innovation, and if competitors are forced to compete on price at the expense of innovation, then the other company is potentially manipulating the market, although not necessarily.
One can see the ripple effects of anti-competitive forces from the MS IE vs. Netscape battle. Microsoft understood that the internet was a valuable market, and underpriced it’s product. However, because of its size, the market was not able to correct the problem, and competition was killed off. Now, the market around the internet has been hindered from years of a bad product manipulating the market and leaving an inferior poorly priced prodcut in control. MS broke the market and competition has taken years to come back into the picture, and during that time IE has done little to innovate or better the situation (because of a lack of proper competition which was caused by its price manipulation of the market).
Walmart isn’t killing the market. It’s reshaping it, and it’s employment practices may be rather unethical and should be corrected potentially, but I think it’s harder to argue that Walmart is miss pricing it’s goods in a way that the market can’t compensate for. In comparison, that’s not true for the IE vs Netscape battle.
Re: Walmart Vs. Microsoft
Oh my Matt, there are so many things incorrect with what you’re saying, I dont’ know where to start, but I’ll try my best.
“Microsoft is a nice example of having done some damage to a market because of anti-competitive pricing.” – How has Microsoft “damaged” the market? What “anti-competitive” pricing are you talking about? Are you saying that consumers should be forced to pay MORE for MS products in order to make things fair?
“The problem with pricing occurs when (as I’ve said) a company manipulates the market and incorrectly valuates a good…” – How can a company manipulate the market? That’s impossible without the help of big government, which is the ONLY way companies are able to manipulate anything unnatrually.
“which can’t be corrected by competitive forces driving prices toward their proper valuation notably their marginal costs. Prolonged price competition kills innovation, and if competitors are forced to compete on price at the expense of innovation, then the other company is potentially manipulating the market, although not necessarily.” – It’s crazy to say that competition kills innovation. Competition is what DRIVES innovation. When computers were first introduced for example they were very expensive and offered very few features. After years of competition where other companies were coming up with ways to compete with each other, offering a better product at a lower price with more features, guess what happened? Amazing innovation! It happens in ALL facets of the market, Matt. When clothing was being made by hand back in the 19th century companies competed with each other for your dollars. Innovation caused someone to develop the loom and other great machinery to make clothing faster, higher quality, and cheaper. Your idea here is just plain wrong, Matt.
“One can see the ripple effects of anti-competitive forces from the MS IE vs. Netscape battle. Microsoft understood that the internet was a valuable market, and underpriced it’s product.” – How in the world did MS “underprice it’s product”?!? Who’s the judge of what a “fair” price is, Matt? You? The government?!? No, the true judge of what’s “fair” is the consumer. Many consumers got angry about Microsoft beating Netscape out of the market, but not enough people really gave a crap, so Microsoft won out. And now look, there’s MORE COMPETITION in the browser arena with Firefox, Opera, etc. It’s false to make blanket statements about someone “underpricing” it’s product. It may be YOUR opinion, but if people purchase it and don’t go with alternatives then that product will win in the marketplace. And there’s nothing wrong with that.
“Now, the market around the internet has been hindered from years of a bad product manipulating the market and leaving an inferior poorly priced prodcut in control.” – This is just your opinion, not economic fact.
“MS broke the market and competition has taken years to come back into the picture, and during that time IE has done little to innovate or better the situation (because of a lack of proper competition which was caused by its price manipulation of the market).” – again, this is just YOUR opinion, not an economic fact. The gist of the matter is that, like I’ve said before, and is evident throughout history in a free market, competition will always come back to offer competing products/services where there’s a public need.
The discussion has revolved around the damage that competitors can do to each other, and that’s fine.
BUT
“2) passing regulations/restrictions/laws supposidly to “help” society against big business or some other so-called immorality of business.”
The laws regulating businesses to “help society” were caused by the damage businesses were knowingly doing to their customers. Upton Sinclair’s 1906 book The Jungle launched a government investigation of the meatpacking plants of Chicago, and changed the food laws of America.
I hope you think that was a worthwhile “help to society”, and not unwarranted meddling in capitalism.
Based on history, including very recent history, we should have no expectation of “moral” business practices without reasonable regulations.
You only have to surf this very site or read the daily papers, to see what I mean.
PS
I am in business, and always have been.
The Man said, “This kind of thinking protects the Enviroment. Think Tuna. Why is there dolphin safe tuna? Government? no.”
Actually, it was the government responding to citizen demands that created the Dolphin Safe tuna laws.
Please check your facts, and while you’re at it read up on how and why the unions came into being. (yes there are bad unions – but also good ones)
BTW, this has been a pretty reasonable discussion, for the most part. Why do you sound so angry?
Freedom and rules
It may sound paradoxical, but you cannot have freedom, whether economic or otherwise, without rules. You can’t be truly free if you are in constant fear of being victimized by those who are stronger than you. This is why (for instance) there are laws against mugging people. This is also why there need to be rules that make the giant corporations play nice. Because without said rules, they can and will victimize those who are weaker than them.
So, yeah, a free economy needs rules.
Re: Freedom and rules
well said
It seems so simple and yet, so many just don’t get it
Re: Freedom and rules
this is a false analogy. Mugging is criminal assault and theft. Charging “too little” for a product is only harmful to competitors that charge “the right amount.” It is beneficial to the general public.
The only rules a truly free society needs is no murder, no stealing, and no slavery. Regulating a business so that they don’t charge too little or too much is a form of slavery. Taking people’s money via mob rule and calling it “taxation” is stealing. Using that stolen money to fund illegitimate wars in the middle east to kill thousands of innocent people is murder.
The real criminals are not businessmen, but politicians and the voters that support them.
Re: Re: Freedom and rules
But lying should be perfectly OK?
Users are the problem
Specificially, dumb users who actually pay for anti-virus software are the problem.
Avast Antivirus has always been free and kicks the bloody **** out of any other product out there. If you’re looking for other free ones, I’ve heard good things about AVG and Comodo.
And these are just a few of the free AVs on the Windows platform. I’ll let one of the Linux fanboys toot a horn about what’s good on various Linux distros.
Two Questions
There are two questions that do not get asked enough:
1) What exactly is a market failure? Yes, Wikipedia has a very detailed entry on market failure, but it does use the phrase “on the other hand”. There is even a discussion about the term.
People like to cite a monopoly as a market failure. Lets say I discover some mineral on my property that has unique properties. People look for the mineral on their property, but it seems that the mineral is only located on my property. I mine and process the mineral. I charge what the market can bear (yes, even monopolies are bound by supply and demand). I make lots of money. I’m not seeing the market failure?
2) Why does the government have to protect us from market failures?
This is a valid question. If were are allowed to benefit from market successes, why are we not allowed to learn from market failures? Why do we feel the need to have the government step in and fix or correct a supposed market failure? Aren’t market failures an example of the market correcting itself?
Re: Two Questions
Let’s make the example similar to what frequently happens in the U.S., for example, and say “People look for the mineral on their property and find plenty of it, but I influence the government to pass laws allowing only the first found (mine) to be sold. I make lots of money.” Is this a market failure or success? Should lawmakers be part of “the market” and owned by the highest paying “donors”?
Market Failures
Market failure in the basic sense is when a market, made up of producers and consumers, is ineffective at pricing and allocating goods and services. For instance, when people die up in Washington State because the gas prices are too high and they freeze to death in the winter (yes, this actually happens) that is a market failure. Also, a market failure occurs when the market is unable to value a good or service such as when a large company applies excessive pricing pressure on a market that it has excessive control over.
“Goods and services are priced according to what the company believes will maximize their profit. Competition may drive those prices down.”
This is the essence of the pricing turning anti-competitive argument. When there is a failure from competition to create a market force that drive prices toward marginal costs (by offering a diversified product) there is a market failure. Companies SET prices and markets DRIVE prices (through competitive pressure), but when a market is unable to drive the price, there is a failure in that market. If that failure is caused by the main competitor by underpricing a good, then its anti-competitive pricing (because it causes a market failure), which is much much more effective at driving competition out in early stage markets than mature markets (think the IE vs Netscape) especially when the main competitor is well established elsewhere (Walmart doesn’t fall into the IE/Netscape situation because it entered a mature market that is more capable of competiting even with extreme pricing forces).
“But If someone voluntarily pays the price charged by a company, how can the market or the consumer be harmed or how can that be considered an “incorrect valuation”?”
I think one of the disconnects is that while a company attempts to maximize it’s profits, it’s the overall market that’s of interest. So, people will buy similar goods at various prices from different companies based on their own judgments. That’s perfectly acceptable if you only look at the people willing to buy X from company Y. However, you need to step back and find out if the competition is also offering similar products at various prices that are not solely based on the pricing of company Y.
Now that doesn’t mean that the pricing is anti-competitive. Maybe company Y has a revolutionary produce that is simply better and cheaper to make. Great! We all win and the competition is forced to change. However, if that’s not the case, and company Y is just the largest company in the market (and maybe competes in other markets profitably) allowing it to drive prices down without considering of other factors, forcing competition in that market to follow suit, then you have anti-competitive pricing that harms the consumer because person X can only buy product Y at a set price at any company, and the market because competition can’t thrive and diversify on other factors beyond pricing (which loops back and doubly hurts the consumer).
Courts claim to do that all the time. It’s just up to the judge’s psychic ability to look inside someone’s mind (i.e. the judge’s “opinion”).
It does seem that there are often unfair penalties to be paid for being too successful. Can you imagine that you make the world’s best antivirus product, and it is so good that everyone wants it…then you have to defend yourself because your product was so good that it killed the competition. It just seems to go so strongly against the very nature of business..