November 23, 2008

A Thought About Economic Endgames

Filed under: Uncategorized — numist @ 3:19 am

As you all know, dear readers, the conservative ideal of a free market is where companies all compete, and the market chooses the fittest and best to be the market’s victor. But then what? Whether or not you believe time to be infinite it certainly lasts a good long while, and once you have a market victor, you don’t have any guarantee that the merits that brought them there will continue ad infinitum.[1] Surely they must fall from power when they are no longer the best for the people. At such a large scale as a monopoly, there are all sorts of practices that do not benefit the consumer that help maintain market position. This is why we have antitrust law. To make sure that the market maintains competition.

For example, Bell System won their corner of the market and were divested starting in 1974 by the government after a successful antitrust suit. Of course, one company winning the market is what every company leader wants, but there are a lot of other possible cases where you can’t use antitrust law to make the market healthy again when it’s become stagnant and even abusive.

For example, sometimes you have to share the market. A market can also reach a maximal point when the companies competing all have comparable market shares that vary very little, without trends of significant gains or losses in market share between companies. An example of this is American automakers and the Canadian banking market.[2] Now, there are channels to attack an abusive “multopoly” such as if you can prosecute them for price fixing, or a number of other things that violate consumer protection laws, but there’s no real way to peacefully orchestrate a return to a good, heavily competitive market.[3]

There’s a lot of talk about a bailout for the American automotive industry. GM indicated in their financial report last quarter that given the current market (which shows no indication of improving), they could afford to continue operation through December. All the American automakers are in similarly bad financial states. The market reached it’s stable endgame, and they got comfortable. It’s why they were taken flat-footed when cars from Japan arrived on our shores. It’s why they’re failing now, this time crushed under their own weight.

This stuff is all pretty obvious. Why did I make this post? Well, I’d never considered that we’re seeing the dissolution of a market endgame right now. We’ve never actually seen a return to a competitive market without a lot of regulation and care (see again: Bell Systems, perhaps see also: Microsoft with regards to Internet Explorer[4]).

If there is no bailout, this will be a very interesting time to study.[5]

[1](ref) Don’t get me wrong, I like the conservative ideology for the same reason I like communism and “pure democracy”: they’re really neat ideas, and if we could make them work, we’d all be pretty well-off. The problem with both of them is that we’re talking about people here. No one can actually live strictly enough to such an idealistic philosophy to make it work.

[2](ref) although, the Canadian banking market is built with this endgame on purpose, and the market is highly regulated, something that American automakers can’t take advantage of (if you want to call it that) in a free market.

[3](ref) Another interesting new possible market topology involves the interaction of open source software and traditional commercial software. As example, VMware is the corporate leader in the virtualization space, but there is also a very strong open source showing in the market as well. It’s not hard to envision a market where a company and an open source project can share a market (as far as proliferation) as a multopoly, by competing on features and (the part that really justifies charging money) support and documentation. VMware has an enormous investment in support, and works very hard to address it’s customers’ issues. This has value that people are willing to spend money on. Old World economists are going to have the same trouble understanding this new market endgame as Old World software companies are having now, having to compete on merit with a product that’s given away for free.

[4](ref) It’s worth noting that the antitrust litigation against Microsoft with regards to Internet Explorer did not cause the return to a competitive market, but rather it was one of the stars that aligned at the right moment in time, the other main player being the creation and success of the Mozilla Project.

[5](ref) This statement does not indicate my support or opposition to a bailout of the automotive industry. I do support waiting until the companies actually declare bankruptcy though. Until then it doesn’t really feel like they’re serious, rather than just demanding a handout.


1 Comment »

  1. Four words on cozy ‘multopolies’/oligopolies: fucking cell phone carriers.

    It’s true, though; the entire business decision-making system, from what I know if it, is oriented around growth. More units sold, more customers, more revenue. The hockey-stick charts. When you have 10% of the market, you do what you can to get 20, then 30. When you have 50%, you start crushing your competitors, and you have to crush harder than they crush you. Or you buy them. But what do you do when you have 80, 90% of the market? There’s nowhere to go. All those investors who banked on you making 10 percent year-over-year returns… what do they think? You have to stabilize at some point, once you’re the only fish in the pond. But not before.

    The necessity of growth, and the profit motive, seem to me the two reasons we ordinary folk can’t ultimately trust the free market. I wish the system rewarded for doing the right thing, serving the public good, taking care of and respecting your customers, and building a quality product you can be proud of. Instead it seems to be built to reward just the exact opposites.

    Comment by Joe Auricchio — November 28, 2008 @ 8:04 am | Reply

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