Political Theory

Re: Problems with natural monopolies (roads, railroads)

jdavidb — Tue, 14 Apr 2009 18:48:09 GMT

Ovah:
I can't really understand how you guys do not agree with me that high start up costs leads to less competition, which leads to higher prices at the expense of the consumers.

Less competitors is not necessarily a bad thing. Anyone is still (legally) free to enter the market, so theoretically, competition itself is infinite. Whether 3, 4, 5, 17, 99, or 1 road-service suppliers would be best is an open question which can only be answered by a free market process. 5 competitors is not necessarily better than 3; it may be the case that 3 can supply the needs adequately and the resources that would have been invested in the other 2 can be better invested in fulfilling some totally different need, like Dairy Queens or technological research or roadside rest stops.

If more competitors in the road industry is assumed to be a good thing, then the best thing possible for us would be for everybody in the country to quit their job and become a road owner. Obviously it is preferable to have less road suppliers than that. How do you find out how many is optimal? The free market, with its profit and loss system.

As others said, the high startup costs represent risk. They motivate people who are less sure about their ability to provide a good (profitable) road to consider doing something else. That is a good thing! "We" need those people allocated to doing something else.

Also, those high startup costs are not necessarily constant. They motivate entrepreneurs to come up with ways to reduce the costs, perhaps by innovating new road surfaces, or perhaps by innovating new business methods for funding roads, or perhaps by innovating new legal instruments for purchasing the land involved in constructing private roads. We need that innovative activity! Your alternative will just pressure us into doing it the same way forever, with no innovation.

With entrepreneurs free to attempt to reduce their startup costs, road users will see their costs decrease. Furthermore, there will be an incentive for entrepreneurs to innovate substitutes: private plane flight service, for example. "We" might not need anywhere near the number of roads we have now in "our" present subsidized and regulated system; if we would unsubsidize it and deregulate it, we would find out, and whatever we had would be a guaranteed net gain for us, all other things being equal.

Re: Problems with natural monopolies (roads, railroads)

jdavidb — Tue, 14 Apr 2009 18:39:15 GMT

Ovah:
I don't think most of you understand why I think this is a problem. Because yes the high start up costs do prevent competion as it is so difficult for any other firm to compete with them, because they have to have to pay the high start up costs, and then they would face price competion from the established firm.

So what magic fairy paid the high startup costs for the established firm when it got started?

Re: Problems with natural monopolies (roads, railroads)

banned — Tue, 14 Apr 2009 06:01:11 GMT

Ovah:
I don't think most of you understand why I think this is a problem.

I don't think you're grasping what we're implying in our criticism.

Ovah:
Because yes the high start up costs do prevent competion as it is so difficult for any other firm to compete with them

This may be true, but you've neglected to realize what a high start up cost implies: risk of investment. Greater entrapeneurial risk naturally implies less firms entering the market, but if profits (returns on risk) are so great that they extend beyond the risk involved in investing in a road, people will begin to invest in the road market.

So, if in your scenario, a road company is charging obscenely high prices, the return on risk to invest in a road is greater, since undercutting competition still yields profits.

So my solution is not that government should determine the optimal price, but just set a limit for how high price they are allowed to charge (this could be based on the prices in areas with more competition in the road-market).

I linked to an essay by Ludwig von Mises on price control, i suggest you read it.

Re: Problems with natural monopolies (roads, railroads)

liberty student — Tue, 14 Apr 2009 03:49:36 GMT

Ovah:
I don't think most of you understand why I think this is a problem

We do. You keep ignoring our criticism of your position.

Ovah:
Because yes the high start up costs do prevent competion as it is so difficult for any other firm to compete with them, because they have to have to pay the high start up costs, and then they would face price competion from the established firm. Therefore they will often choose not to challenge the monopoly on the market.

That's fine. That means the market is being provided for as efficiently as possible. That's the market working.

Ovah:
The monopoly on the market could set the prices very high, and since the elasticity of demand for the consumers is low, they could make really high profits and consumers would pay way too much I think.

But if the prices are too high, there is too much profit, someone else will compete. Again, a market solution to high prices.

Ovah:
I can't really understand how you guys do not agree with me that high start up costs leads to less competition, which leads to higher prices at the expense of the consumers.

Because you are wrong. Where there is potential profit, people will invest for returns. Accumulating start up capital where there is profit to be made is easy.

Ovah:
So my solution is not that government should determine the optimal price, but just set a limit for how high price they are allowed to charge (this could be based on the prices in areas with more competition in the road-market).

Government cannot set prices because prices are not static. A ceiling is the same thing as a floor. It limits any natural variance from market activity.

Ovah:
Do not misunderstand me, as I think there is no problem when the monopoly has conquered the market by producing at lower costs

Government planners cannot determine the correct price. That is up to the supplier and the customer.

I think first you need to understand how prices are created in a market. How it takes a buyer and a seller to agree on a price.

There is no reason for the government to get involved.

Re: Problems with natural monopolies (roads, railroads)

Ovah — Tue, 14 Apr 2009 03:23:46 GMT

I don't think most of you understand why I think this is a problem. Because yes the high start up costs do prevent competion as it is so difficult for any other firm to compete with them, because they have to have to pay the high start up costs, and then they would face price competion from the established firm. Therefore they will often choose not to challenge the monopoly on the market. The monopoly on the market could set the prices very high, and since the elasticity of demand for the consumers is low, they could make really high profits and consumers would pay way too much I think. I can't really understand how you guys do not agree with me that high start up costs leads to less competition, which leads to higher prices at the expense of the consumers.

So my solution is not that government should determine the optimal price, but just set a limit for how high price they are allowed to charge (this could be based on the prices in areas with more competition in the road-market). Do not misunderstand me, as I think there is no problem when the monopoly has conquered the market by producing at lower costs, since this would be better for the consumers (if this monopoly started charing too high, other competitors could challenge them more easily if start up costs were low).

And btw. I did not know what I was thinking when I said that there would be tailbacks on the private market. Obivious error from me.

Re: Problems with natural monopolies (roads, railroads)

jdavidb — Mon, 13 Apr 2009 19:20:59 GMT

Ovah:
I have never really heard any convincing arguments on why roads and railroads should be privatized.

Because it's immoral to subsidize an industry through theft, and because such subsidization crowds out private industry which would provide better options, and because socialism is a terrible way to provide anything, always leading to over or under allocation, and thus leading to decreased supply and quality.

That's not enough for you??? Or have you just never heard this?

Re: Problems with natural monopolies (roads, railroads)

banned — Mon, 13 Apr 2009 04:56:52 GMT

Ovah:
just pointed about that there probably would be some situations where the high start up costs would prevent competition, leading to lesser optimal production and higher prices for the consumers.

Less than optimal makes little sense here. It only seems obvious that there would be a high cost of investment for something that would yield large returns, else everyone would be taking the risk. Since people rely on roads for almost everything, the subjective value of road use is necessarily high. If a road company invested in a large toll highway, naturally they should expect to see large gains. If they were charging "too much" for the roads, they would see a loss in profit.

Cost of investment (risk) doesn't "prevent competition" in the way you're framing it. It's a fact for any entrepreneur that they will have to make risks. The fact that some are unwilling to make the investment necessary in starting up their own road (due to the cost of accumulating enough capital to make it profitable) doesn't show a lack of competition. It demonstrates that the owners of successful road companies are able and smart enough to handle the risk involved, while those who don't want to make the investment aren't, or don't believe they are. So the prices they are charging are directly related to the ammount of risk they are taking in creating their service, which doesn't seem the least bit undesireable.

Ovah:
In these situations I think government could set a limit of how much they are allowed to charge, so they did not abuse their monopoly extremely high.

... You're just substituting monopolies. Now you want a monopoly price fixer to remedy the monopoly road company.

Not to mention that price fixing just leads to diminishing quality, deficits, and more price fixing.

Re: Problems with natural monopolies (roads, railroads)

Stranger — Mon, 13 Apr 2009 00:36:40 GMT

Ovah:

So while government as always would produce and set prices ineffective, the costs for the consumers would be probably still be lower than what it would have been if it was entirely privatized. Any objection to my way of thinking?

Yes, I have an objection. The costs for consumers are higher for a public monopoly than a private one.

Re: Problems with natural monopolies (roads, railroads)

hayekianxyz — Sun, 12 Apr 2009 20:40:47 GMT

Jon Irenicus:

I'm not even sure what the issue with "high startup costs" is. There's many big firms out there seeking to diversify which markets they participate in, and besides you do not need to buy everything from scratch - you can just buy up the existing firm. So the issue to me is... largely not one.

Even if you don't buy up an existing company, if investors think you have a viable business plan they'll extend you a loan.

Re: Problems with natural monopolies (roads, railroads)

ProudCapitalist — Sun, 12 Apr 2009 20:37:18 GMT

Jon Irenicus:
I'm not even sure what the issue with "high startup costs" is.

I don't know either what Ovah is going for there. But it is a very common type of argument used by some, who are much less articulate and less curious than Ovah, in some web forums. So it needs to be understood and explained.

I think it often has to do with not understanding how future money flow corresponds to a present value via a "discount factor" reflecting risk and time preferences. That concept is indeed not common knowledge and also a bit counter-intuitive and abstract. I think this misconception has something to do with people valuing stocks (or houses) not in terms of their expected dividends or cost savings over time, but only in terms of hopes about how much they suddenly, without any explanaition asked for, might jump up in price. The buy low - sell high mentality. With bonds it is much more intuitive that interests paid over time actually is what what the bond should be worth. But when it comes to stocks, or direct investments such as the construction of a road, that concept of valuing todays effort by what it might bring in the future, seems to not enter many peoples minds too easily.

An even worse misconception, not rarely met on forums, is that "only the goverment can mobilize enough money to make such a large investment"... Hell no, I could do it, if me too I could simply use force to rob everyone from everything I desire!

Re: Problems with natural monopolies (roads, railroads)

Jon Irenicus — Sun, 12 Apr 2009 20:23:11 GMT

I'm not even sure what the issue with "high startup costs" is. There's many big firms out there seeking to diversify which markets they participate in, and besides you do not need to buy everything from scratch - you can just buy up the existing firm. So the issue to me is... largely not one.

Re: Problems with natural monopolies (roads, railroads)

hayekianxyz — Sun, 12 Apr 2009 20:15:48 GMT

Ovah:
Libertystudent: Monopolys do not produce efficienly, no doubt, which is why there is heavy traffic. But thee free market is not that perfect either? Lets say in a market there is 40.000 potential customers. Each firm can handle 35.000 customers without there being any tailbacks. 35.000 + = tailbacks. The problem is that it is not profitable for another company to challenge the existing monoply and the end result would be a suboptimal solution in the free market because of the high start up costs. Off course the free market do better than government, but I still se the extreme high start up costs as a problem in which I favour government interference.

If there's excess traffic the company charges higher prices, this is simply economics here: a downwards sloping demand curve.

Re: Problems with natural monopolies (roads, railroads)

liberty student — Sun, 12 Apr 2009 20:10:37 GMT

Ovah:
I did not predict the future?

You did. Precisely as central planners do. You attempt to make your own evaluation of the market, and based upon your own capacity to envision solutions, declare a market feasible or not. Someone could come along and find a revolutionary way to compete and increase efficiency, but if the planners are determining if competition can happen, then the limits of economic progress will always be restrained by the capacity of the people making those determinations. And successful entrepreneurs are almost never bureaucrats.

Ovah:
I just pointed about that there probably would be some situations where the high start up costs would prevent competition, leading to lesser optimal production and higher prices for the consumers.

But this is false. First, you cannot know that. Second, if that situation arose, then it is optimal. As soon as it is feasible for competition, there will be competition. The higher the price and the lower the efficiency, the more likely free competition will arrive.

Ovah:
In these situations I think government could set a limit of how much they are allowed to charge, so they did not abuse their monopoly extremely high.

Why not just let the threat of competition determine that? Why price fix? How do the planners know what the optimal price should be?

You're going in circles. There is absolutely no reason for government to be involved. Every concern you have can be addressed and improved upon in the market. It's very contradictory to admit monopoly is poor in the free market, then insist that a permanent state monopoly be established.

Re: Problems with natural monopolies (roads, railroads)

ProudCapitalist — Sun, 12 Apr 2009 20:03:37 GMT

Ovah:
With high start up costs it is very expensive for a new firm to build a new road (they have to buy the land and then build a road, would cost lots of money).

No, it's not a "cost" to buy land and construct a road. It is an investment, an exchange of cash into physical assets. If it becomes a cost or a profit depends of how valuable those physical assets will turn out to be compared to the value of the cash forsaken for it. The sum of investment might be large, but it is no problem to mobilize even tens of billions of dollars by using the international financial markets, if you have a good case to show the potential investors.

So if a company decides to challenge a established monopoly on the road market, they would be required to be sure to be able to earn money on the business. The established monoply though want to scare the competitor and would likely start a price war, which would be good for the consumers, but very dangerous for the challenger, and this combined with the heavy start up costs, would require heavy capital and the risk of losing I guess would often make them decide not to challenge.

If the established only-road-going-there-owner chooses to toll traffic so cheap that it isn't profitable to build a second road, then how is that economically inefficient? People benefiting from using the road has no right to do it without sharing some of the benefit they get by paying the price the supplier demands (that voluntary sharing of benefits created between enjoyers to providers in the shape of paying a mutually agreed upon price, is what I personally call "solidarity").

But what if the first road-owner keeps very high prices all the time until he cuts prices sharply under maintenance costs once the new entrant has started his new road construction? That's the price war scenario. And an all-out price war could ultimately, as the maximum "victory" possible for the first road owner, only result in the other party going bankrupt. That means that the ownership of the competitor's road will transfer to creditors, and likely sold on to some of the most efficient road managers in the world. They do not need to care at all about the sum of initial investments making the build of the road possible, but they need to consider only the market value of the road on buying day, what they had to pay for it. They will of course not choose to pay more than what they think that they can gain. And then the price war starts all over again. And again. And again... There is no winning it for the original only-road-owner, no matter how many times he makes the counter party go bankrupt.

During these price wars, all road users will enjoy very cheap road tolls. Wealth will actually be transfered from the loss making price warriors to the road using customers. So, there will not be any significant price war.Instead pricing will reflect the attractiveness, and the maintenance costs, of the respective roads. The one building a second road will get traffic which reflects how competitive this new road is compared with the old road.

I think the likely result would be a heavy monoply or a an oligopol fixing prices at the expense of the consumers.

Yeah! Like the oligopoly of CPU making is "fixing" prices to fall by 50% every 18 month... Oligopoly is a splendid way of competition. Btw, competition is actually definied as being ALLOWED to take up competition. If only one company is doing a certain thing, then that reflects the fact that noone can do it any better. Hence it would be foolish to try to compete (and to no use for any customers). Only when the single established provider starts to lag behind what others can do, only then there begins to be a reason for there to be actual competition in the shape of more than one single company doing that stuff. But on a free market there is always competition about everything everywhere in the shape of entrepreneurs who are looking for better ways to do things, armed with the liberty to try out their ideas at will.

Liberty, and only liberty, is "perfect competition"! Who then actually chooses to do what, however, is totally irrelevant to the concept of competition.

If the alternative to paying big bucks to use the roads or railroads is to walk in a private society, I rather choose the government solution. For me the point of minimizing government is that government is mostly destroying wealth, and I don't agree with abonding government just of principle. But I might be wrong in my analysis

I think that you wouldn't agree with yourself if your suggestions here were looked at closely. Government means "use of force", and it sounds as if you are pro-government as long as you can profit from it (as long as it doesn't destroy (your?) wealth). Someone owning a road and charging price from others to travel on it, is hardly any "destruction", unless you compare it to what you could've stolen if the government had used force against the road owner on your behalf.

Re: Problems with natural monopolies (roads, railroads)

Ovah — Sun, 12 Apr 2009 19:54:15 GMT

I did not predict the future? I just pointed about that there probably would be some situations where the high start up costs would prevent competition, leading to lesser optimal production and higher prices for the consumers. In these situations I think government could set a limit of how much they are allowed to charge, so they did not abuse their monopoly extremely high. This would not have any effect on the markets where there is room for more competing roads, which therefore could be 100 % privately run. Another solution could be that government gave discount on the start up cost for the private firm, but then we got the problem of using tax payers money for firms, who might fail because of their incompetence. So this is probably a lesser good solution. But if e.g. most road companies had a road price pr. mile like 0,5$, and one monopoly decided to take a price of 2$even though the quality of the road was the same, and there was not any extraordinary reasons for them charging that high a price, other than abusing the low price elasticity of the consumers and their monopoly status, then I think government interference would benefit the society.