If Shell and Exxon are competing to sell oil...everyone anywhere near the oil industry benefits.
All oil consumers, all oil resource owners, and anyone who works in the oil industry (rig workers, petroleum engineers, decision science folks, wildcatters, etc.).
As soon as competition pops up...and it does as long as there's more than about 3 parties, and the parties aren't forced to cooperate via violence...
The return on capital drops quickly to its historical level of about 5%. ALL of the $ made from oil gets spread between the folks who own the oil source (because the oil companies are competing for crude) and the folks who work for the oil company (because the oil companies are competing for talent)...and every efficiency possible gets squeezed out of the production process, almost all of which ends up as benefit to the consumer. Only people who get screwed by competition are the owners of Shell and Exxon.
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices"
So...the natural goal of business folks is to attempt to restrict competition...honestly, it's the ONLY way to keep prices high. Fortunately for the rest of us...the NORMAL path to restricting competition (cartel) suffers from two major problems. First, there's the prisoner's dilemma. It's better for everyone in the cartel to cheat than to follow the agreement. Second...new entrants are not a member of the existing cartel, and either new entrants will undercut cartelized prices, or the new entrants will be cartelized as well, thus diminishing returns for the existing members and increasing their incentives to cheat...AND increasing the incentives for further new entrants.
As far as I've been able to tell...the ONLY cases EVER where cartels have been maintained and successful were in 2 categories.
1. Government enforced monopolies or cartels. AT&T was built via government action. Microsoft was built off patents (government monopoly on an idea). All the government ventures (Post office, schools).
2. Limited natural resources. DeBeers successfully ran the diamond industry for years because there are only about 2 places in the world you can mine diamonds. OPEC controls a substantial portion of the petroleum deposits known to the world over the last 50 years. This seems to be shifting, though...and it's never done a very good job of control, due to the prisoners dilemma issues. 1970s oil shortages were price-control induced, not OPEC-caused.
Competition -- bad for the competitors. Good for everyone else.
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4 comments:
This was a good post, but you can have monopoly via trade secrets, if your product is hard enough to reverse-engineer. There was a successful monopoly on Greek fire for centuries - in fact the trade secret was so well-kept that the invention was lost.
WIAN,
Indeed, it seems theoretically (and historically possible).
But...
Do you have any good examples from the last 2000 years? As far as I've been able to tell, mechanical devices and chemical devices are largely solved as a replication problem. Is this notion of the not reverse-engineerable still a useful notion, or just a historical curiosity?
Greek fire is the last 2000 years, so let's say last 1000 years. I guess it depends how narrowly or widely you want to define a monopoly, and what you consider a substitute.
Coca-Cola have a monopoly on Coke, but not a monopoly on cola products generally. Magicians may have a monopoly on a particular magic trick which only they know how to perform (a monopoly they may sell), but they don't have a monopoly on the performance of stage magic generally. For many years WD-40 had a monopoly on its product, although it seems there are rivals now.
In fact almost every product will have some sorts of trade secrets behind it, and some kinds of differential substitutes. The economic idea of "perfect competition" is bogus.
I suppose there are also so-called "natural monopolies" like infrastructure.
WIAN,
Coca-Cola has a monopoly on Coke, significantly because of IP law -- government granted privilege.
Magicians monopolies on tricks lasts only a James-Randi year or two.
Trade secrets do a VERY poor job of maintaining uniqueness in the world of non-rival goods (goods that you and I can both use at the same time).
Right now, I'm inclined to believe that we have no functional examples of (non-government enforced) trade secrets...in say, the last 200 years.
Natural monopolies are a different case...that I ought to address.
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