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This paper addresses the claim that monopolies arise naturally out of the free market. I show by comparing and contrasting two theories of monopoly-economic and political monopoly-that this is not true. This paper also demonstrates that the two theories of monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry. I show that only one of these theories of competition accurately describes the nature of competition in an economy. In addition, I show how these different theories of competition and monopoly are derived from diametrically opposed political philosophies: collectivism and individualism. I illustrate how perfect competition and economic monopoly have undermined economists' understanding of the actual nature of both competition and monopoly. As a part of my investigation of these very different theories of competition and monopoly, I apply them to show how, depending on which theories one accepts, one will come to very different conclusions about when monopoly power does or does not exist.
INTRODUCTION
It is often claimed that a free market leads to large firms gaining monopoly power and being able to restrict the output of the goods they produce to arbitrarily raise their prices (see Gwartney, et al., 2000, pp. 126-127 for a typical statement of this point). This alleged monopoly power is said to lead to greater economic inefficiency, a lower productive capability, and a lower average standard of living. Hence, it is said the government must step in to restore competition, such as through the antitrust laws. In this paper, I show that this claim is based on an invalid view of competition and monopoly. I show that the free market leads to the most intense competition that is possible in any industry and that deviating from a free market, with some form of government interference in the name of allegedly making competition more intense, actually decreases the intensity of competition that exists in the economy and thus decreases the level of economic efficiency, the productive capability, and the standard of living. This paper is based on chapter two of my book Markets Don't Fail! (Simpson, 2005, pp. 31-57).
ECONOMIC VERSUS POLITICAL MONOPOLY
There are two concepts of monopoly that exist and they do not provide an equally good understanding of...