Monopoly Fallacy in Free Markets
Monopoly Fallacy in Free Markets

The idea of free markets is sometimes rejected citing the possibility of a monopoly. What lies at the base of such fears is the ignorance about the nature of the free market. Coercive Monopoly is impossible in truly free markets. By definition, Coercive monopoly is when a firm is able to raise prices and make production decisions, without risk of competition.

Karl Marx propagated the notion that development of a powerful monopoly is a result of free unregulated economy. This might be the worst fallacy in the field of economics as the exact opposite is true. Rather it is the free markets which prevent the monopolies. Coercive monopoly’s characteristic attribute is the absence of competition. The necessary precondition of a coercive monopoly is barring the entry of all competing producers from a given field. There is only one way can eradicate the competition in a particular field completely and that is law. In the entire history of capitalism, nobody has been able to establish such a kind of coercive monopoly. Any monopolies those might have existed anywhere in the world are created by the act of government. The government does this by means of franchises, subsidies, licenses, legislative action granting special privileges to a particular firm. These kinds of special privileges are not obtainable in the free market. For an instance, the Indian government has a monopoly over Indian Railways. Entry of any other firm is prohibited by law. If it is not for government legislation, no field can remain free of competition.

Questions are often raised that what if a large company keeps on buying smaller firms or forcing other companies out of business by selling their own products at loss. Wouldn’t it be able to gain control over the given field and then start selling its products at exorbitant prices with no fear of competition? The answer is No! It cannot be done! Assume a scenario in which a company ‘A’ bears heavy losses by selling its products at lower prices to drive out competitors. In the next stage, this company begins to charge high prices to recover its losses. One would argue that company ‘A’ has established a monopoly in this case. But on contrary, such a situation would act as an incentive to other companies to enter the market and take the advantage of profitability. These new competitors then would force the prices to the market level. Hence the attempts of Company ‘A’ of establishing the monopoly would fail.

It is the matter of historical records that no price wars have succeeded in establishing a monopoly. In a truly capitalist society, no company has succeeded in keeping the prices constantly above those determined through law of demand and supply. Price wars rather have proven to be beneficial to the common public as better products are available at lower prices with competition. Moreover, capital markets act as an incentive to productivity as they act as a regulator to prices but not necessarily to profits. Resultantly, free market leaves the individual producer free to earn as much profit as he wants. An Individual producer can lower the cost of a product by improving the efficiency in comparison to its competitors and earn the maximum profit. Free markets keep stagnation in a particular industry at bay by compelling firms to keep on inventing, adopting new technologies so that they remain competitive.

In truly free markets where free trade exists, anti-trust laws are redundant. The alleged purpose of the antitrust laws is to protect the competition. This purpose in itself is misled and is based on the socialistic fallacy that a free, unregulated market will inevitably lead to the establishment of coercive monopolies. Anti-trust laws are based on the assumption that legislative action is needed to protect the competition. But, In fact, free markets are a protector of themselves. No coercive monopoly has ever been or ever can be established by means of free trade on a free market. Every coercive monopoly that existed was created by government intervention into the economy by licenses, by special privileges, such as franchises or subsidies. Only Government interventions through legislative actions which forbid the entry of competitors in a particular field can ever lead to monopolies. Hence, monopoly fallacy in a free market is clearly baseless and the worst fallacy in the economic world! Rather, every producer can have their fair chance only in free markets driven economy. Free trade on free markets is the only way to avoid stagnation in an economy and make the economy thrive!

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