Alan Greenspan once said monopolies cannot exist in a free market...?

Question

For those who are familiar with his reasoning on this, what is the backbone of this theory?

Essentially, with a free market economy, why is it that monopolies cannot exist? Does his view hold water? and why?

If you are not familiar with his work on this subject, please don't bother answering as the point of this is not to get a series of answers calling the idea crazy without even knowing what his philosophy on the subject is. Thanks : )

Answer 1

Greenspan did not say that monopolies cannot exist in the free market only that coercive monopolies cannot exist. A coercive monopoly is one which maintains its monopoly through force usually via the government. In a free market monopolies can exist but only by providing a good or service so well that competition is unable to arise, or compete, a good example of this is alcoa, which produced aluminum so efficiently and cheaply that no one else could successfully challenge them. They were eventually brought down however by the government. In a free market the odds of doing so well as to negate competition is very hard however, because as a general rule someone else can innovate a better product and gear their business accordingly, where as the monopoly would have to retool their entire operation which would be extremely costly. Also in a free market, abusing ones monopoly would be all but impossible for once profit margins increase competition will return. And any subsequent price war would only serve to benefit the consumer, and per unit would hurt the larger company more. As a side note, i would like to point out that we do not live in a free market economy, we live in a "mixed market" economy, which is a fancy way of saying socialism, where the government readily intervenes in the economy, and simply leaves the operational control of a business in private hands while the state itself remains supreme over all. Able to control the economy through a variety of means, such as: taxation, quotas, interest rates, subsidies, tariffs, duties, anti-trust laws, and patent confiscation, etc.

Answer 2

Greenspan's neo-classical foundations form the underpinning of this assertion. However, it is not a universal supposition, but rather Greenspan was considering only coercive monopoly, ie a monopoly where there is no fear of interdiction by competitive forces.

Essentially, the free market precludes an enduring monopoly through sheer competition. By Greenspan's reasoning, if there is a monopoly now, and it wasn't brought about by government intervention (ie, granting of special rights), just wait until a competitor arises.

Greenspan's reasoning does not prevent a non-coercive monopoly from arising. This is a monopoly that remains such by sheer magnitude of efficiency. No competitor enters (or if it enters, it does not survive) because the monopolist is so efficient.

Note that this concept of a non-coercive monopoly runs counter to most classical assumptions of monopoly.

In summary, then, monopolies cannot exist in a free market UNLESS there is government intervention to prevent competition.

Answer 3

While I believe that in theory it is possible for a monopoly to occur, in practice it is highly unlikely for a monopoly to occur in a true free market. Since capitalism assumes that everyone is trying to make the most profit with as little effort as possible, as a company comes very close to being a monopoly, meaning consumers have very few choices, the company will tend to increase prices, because consumers have little choice, meaning if they want the product they will pay the monopoly the higher price. Quickly, another company will realize that if they make the product and charge slightly less, they can make a profit, and so they will do so busting the monopoly. Also in practice on a large scale minus government regulation, it is impossible and impractical for a single company to corner an entire sector, although it is possible for a handful of large companies to push out smaller ones. This is not a monopoly, though, all the companies will take some actions jointly which may appear as though it were.
Finally, in the US and most modern free market countries, their is anti-trust laws that all but make monopolies illegal

Answer 4

Mono = One ::: Poly = Seller ::: Monopoly = One seller.

Principal person who proved this within capitalism is economist Adam Smith.

Answer 5

Monopoly is a great game if you have the time to play it. Bingo and checkers do not take as long.