THE FEAR OF MONOPOLY PART II
Considering the area of monopoly and competition, the question before us relates to whether or not a free market tends to create competitive factors or whether it will inevitably drift toward the rigidity found in a monopoly.
It will be my contention that, given a free market, the various factors that will appear
will automatically tend to encourage competition, and that if we have a free market, in fact,
that is, there is no government intervention for any purpose, either to impede or to assist,
that the tendency will be to eliminate monopoly, or at least harmful monopoly, and will constantly
In addition to price and quality, which are two very basic items in competition, assuming
a free market, there are four other areas that are competitive that I want to examine
each in turn. These are direct competition, parallel competition, dollar competition and
market competition. What we call direct competition is an area of competition which in point of
fact even the government recognizes as existing. That is, it exists from time to time. Wherever
we have two or more entrepreneurs, businessmen, industrialists engaged in providing what is
is essentially the same good or service we have an instance of direct competition. That
is, if we have two or more steel companies manufacturing steel, two or more airlines serving
the same cities, two or more drugstores covering virtually the same retail territory, two or
For example, if you have, let us say, two textile mills, owned by two
are two different firms. They will vary their weaves. They will vary their patterns. They will do whatever they can to introduce variations that will make what they are doing better than what their competitor is doing.
But nonetheless, we call it direct. Even though it isn't precisely direct, it is direct enough so that we call it direct.
Another example would be, say, two motion picture exhibition houses, two moving picture theaters.
Theaters. Obviously they will be showing different films. It would be absolute direct competition
if two moving picture theaters, side by side, both opened up to show exactly the same picture.
Well then you would have really direct competition. But I don't recall ever having seen that.
Everybody varies it as much as they can. Just as two television stations, although we say
They are in direct competition. They certainly will have different programming, and two newspapers
will do what they can to vary the content and the presentation that they make. Nonetheless,
we call these instances of direct competition, and the argument is that if you do not have
a direct competitor, then there is a monopoly there.
Now, this is the only place where I am going to make a concession. Assuming a free market,
is possible for there to be, under certain conditions, the absence of a direct competitor.
That is absolutely a possibility in a free market.
For example, in fact, there are two ways that such a monopoly could occur given a free market.
When a new product is developed and introduced for the first time, obviously there is no
direct competitor because it is a brand new idea.
How can there be a competitor to my widget when I am the fellow that invented the widget?
Clearly there isn't one. So obviously, when a new product is introduced, there is no direct
competitor. Also, a direct competitor might be eliminated under the following condition.
Let us suppose that we have an entrepreneur who is so efficient, so good, so much better
that he is able to underprice his competition. Ultimately, he puts them out of business because
he is so much better than they are. In fact, he continues to operate this way. He is so
good and he keeps his quality so high that no one can touch him, and he keeps his price
so low that no one can get in there. He could get into a position of operating without a
Direct Competitor. That's true. So if that has been your fear that a free market could
introduce a case where there is no direct competitor, your fear is justified. That can
happen in a free market. But now I'm going to tell you it doesn't make any difference
if it does or not, because the direct area of competition is the least important. Now
that may come as a shock, but actually it is. It's very insignificant. Assuming you
Assuming you have a free market, whether or not you have a direct competitor at a given
moment is actually inconsequential. Let me go on to try to establish that as I make a
few more points first.
Let me take parallel competition next. Parallel competition is that type of competition that
is a competition between firms or industries that are in essence doing the same thing.
Now we have product competition. We have competition, for example, between airlines and bus lines.
Now, that's not the same. You have different bus lines competing directly. You have different
airlines competing directly. But there is also competition between airlines and bus lines,
and they're doing quite a different thing. And yet, the end result is an ultimate product
that is similar in each case. I could leave from this city and go to another city either
by Bus or by Plane. If I go by bus, I have the choice of two or three bus lines. If I
go by plane, I have the choice of several airlines. But whether I go by plane or bus
is a decision that throws me into one area or another, and that is called parallel competition.
In this particular case, let me show you the ramifications of it. For instance, it would
be clear that if you have a newspaper and the newspaper is competing with another newspaper,
You have newspaper competition, but have you ever stopped to consider the fantastic competition
between a newspaper and a television station? Really, having been in both areas of endeavor,
I can assure you that as a newspaperman I would rather face another newspaper than a
television station. I think I could compete on a pretty good basis with another newspaper,
But the television station can do things I can't do as a newspaperman. And conversely,
if I'm in television, I would rather face another television station than to face a newspaper.
The newspaper can do things that I can't do. But the fact is they are competitors,
they are parallel competitors. The same advertisers are putting their money into television commercials
or into newspaper ads. And the same advertiser hasn't got a limitless number of dollars
to work with, so he buys the one rather than the other, or he spends more one place than
the other. And that certainly is competition. Additionally, we have found very few people
who read the newspaper while they're watching television, and vice versa. So if you've
got people who are going to be staring at their television sets, there really isn't
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
Company. There wouldn't be any competition. Oh, no. How about all the other metals that
we can make things with, besides steel? Copper, brass, aluminum, tin, iron. How about the
plastics? Are you aware, for example, that right now in the automotive line we are beginning
to make automobile fenders out of spun glass, which is a type of plastic? It's lighter.
It's very durable. It's a very good substance. How do you think the steel people feel about
about that. That's competition. That's parallel competition. And I can assure you
that parallel competition is often far more rugged, far more keen, far more merciless
than direct competition. You see, when you're facing a direct competitor, he can't do
anything you can't do. And you can't do anything he can't either. The question is
which one of you is smarter, better, more efficient? But when you face a parallel competitor,
He can do things you can't do, and now you have a problem, and to overcome that will
take a great deal indeed.
Those are instances of parallel competition.
There are some people who, of course, contend that there are certain areas where you have
natural monopolies.
That is, there are areas where there isn't any competition.
This occurs in the minds of people, at least, when we're talking in terms of utility sometimes.
They say, well, electricity is a natural monopoly. You don't want more than one firm handling
or supplying electricity because it would be inefficient. In actual fact, I'd like
to suggest that that's not true. You see, of course, electricity is a special type of
of Service, a special type of energy. But we do have different ways of getting it. That
is, assuming a free market. And some of the ways that we're not using to get electricity
might be far more efficient than what we have. The general idea in this country has been
it becomes more efficient as we centralize it. Well now, wait a minute. We've had some
Some fantastic blackouts because of centralization of electricity. Suppose instead we opened up
the market, the government no longer granted exclusive franchises to electric companies
and no longer got in to compete in this area by supplying electric current itself, supposing
instead we open up the field and we have the opportunity of improving the home generator.
The home generator, if we were to put that in a lab and begin experimenting with it and
coming up with ways of supplying fuel to it that are efficient, including the utilization
of the rays of the sun, can conceivably become so good that when we build a new home we would
build it with a home generator and supply the fuel, and the generator and the supply
And we can't compete. It's not that the market wouldn't let us compete. It is that the government
has preempted us from getting into this area. And then think of the other things that we
could do in addition to using electricity. I don't know that electricity is necessarily
the answer. I might point out that today there is a very, very good competitor even to the
The Municipal Electric Plant, and that's the municipal gas company. There are lots
of things that you can do with either gas or electricity. But you could also do them
with gasoline or kerosene or maybe with atomic energy or possibly with other types of energy
that we can get hold of. There are all kinds of competing factors if we'll open up the
market and let these factors compete. So as far as there being natural monopolies are
I would challenge that. Perhaps there are some. I don't know what they would be. Of course there is the idea that we all need water, and I would agree we certainly do need water. Here is a basic human necessity, but I'm not so certain that it has to be supplied by a municipal company.
In fact, I notice that whatever is supplied in the way of a public good, that's the
place where most of the pollution comes. The difficulties that we have today with our ecology
are not in the areas that are privately owned. They're in the areas that are quote and unquote
pro bono publico. They are for the public. Where do you get your problems? On public
Beaches, with oil slicks, in public water supplies, the public air, the public highways,
these are the areas that are polluted, of course, because they are not being managed
the way owners would manage them. And consequently you have pollution, you do not have efficient
management and you don't have the competitive factors at work. If you will put these things
in the Market, and let the government get out of the area, then we may discover that
there are still better ways of doing things than we yet have dreamed of.
I'm thinking, for example, of the telephone company. We're told that that is a natural
monotony. I'm not so sure.
I once had this happen to me. It was years ago. A man came into my office, and he put
Put a telephone down on my desk. It was just the instrument itself, the cradle phone and
the base with the dial there. That's all. There were no wires leading out from it, nothing
else. He put it down on my desk and said, Call your wife. I thought he was joking, because
obviously the phone was not attached to anything. So I laughed. I said, Oh, sure, the phone
isn't connected. He said, No, I'm not kidding. Call your wife. Well, I thought I'll go along
along with the gags. So I picked up the receiver. There was a dial tone. I picked up the phone,
you know. It's not connected to anything. I said, how do you do that? He said, call
your wife. I said, okay. So I dialed a number. I got her. I said, honey, I'm talking to
you on a phone that isn't connected. She said, why don't you be home for supper?
I said, you know, never mind. But I said, how do you do it? He says, easy, short wave.
Now there is a kind of installation of phone that I had in my hand in the 1930s.
The firm that was putting this together had realized that it's a perfectly simple thing
to have telephonic communication over short distances by means of short wave.
And all you have to do is to have a central operator, which we had, and they had worked
out temporarily a deal with the telephone company for this experiment, you see.
And what happened when I dialed, it activated the central switchboard the same as if I had
been connected to it by a line, and so I got through the same way as I would anyway, now
with lines.
In other words, back in the 1930s we had a way of telephonic communication that could
have eliminated the telephone wires.
We didn't really need them.
We don't need them now.
But you can't find that out because this is an area that is protected by a government
franchise that grants an exclusive monopoly to one firm or another, you see.
So actually today, for example, just continuing on the telephone thing, most people feel that
we only have one telephone company in the country.
Actually, there are about 2,000 telephone companies in the country and the way they've
The telephone is a very beautiful thing. If I pick up the telephone on the West Coast, I can call anybody on the East Coast and my voice will perhaps go through equipment that is controlled by 10, 20, 30 different companies.
Each company gets a pro rata share of the price that I pay for the service and it is taken care of and all works out. So this can be done.
I am not so sure that the telephone is the best means of communication, with or without
the lines. We may have other ways of communicating if we just have a free market. I am only concerned
at the moment that you do recognize the fantastic efficacy, the fantastic creativity of a free
market where people can innovate, they can come up with new things, and nobody is there
to say, well, you can't make that because this other fellow is making something like
it, and therefore you're out of business. Instead, we could have a fantastic number
of new innovations coming along all the time, and, of course, probably most of them wouldn't
be as good as what we've got. But here and there, somebody would crack through and come
up with a real winner, and we could all have the benefit of that. But government is protecting
us from these things. So we don't get the innovations. We tend to simply go along with
Let's take dollar competition for a moment, a very important area of competition. Whenever
we deal in the market today, in a modern market, we deal in terms of money. We translate goods
and services that we have into money, and then we translate the money back into the
goods or services we want to buy. Money is the medium of exchange. Because money is scarce
and must be scarce or it wouldn't be valued, none of us have a limitless supply of money.
The consequence is that at the dollar level we are engaged in competitive actions all
the time. Let me give you an example of what I mean. Let's suppose I have to go to town
for some reason, and I go there and complete my errands, and I was going to stop over at
at the drugstore to pick up, say, some shaving cream that I want. But the drugstore is around
the corner from where I am, and there's a phone booth where I am right now. So I think
maybe my wife would like something. So I go into the phone booth, and I call her, and
I say, honey, I'm down here at the market. Is there anything I could get for you while
I'm here to save you a trip? And she says, gee, I'm glad you called. I want you to stop
I stop over at the bakery and get a loaf of vitamin-enriched daisy bread. It's a special type of vitamin-enriched bread, and we'd like to have it. And I say, what's it cost? And she says, well, it's 75 cents. I say, well, fine, I've got that much left. I'll go and get the bread for you. So I do so. I go and I buy the bread, and then I count the change in my pocket. Now, the shaving cream I was going to buy cost 89 cents. But all I have left is 30 cents. And that means I don't buy the shaving cream.
Does that mean that the baker who made the daisy bread is competing with the fellow who
made the shaving cream? Yes, in terms of my ability to buy both. I haven't got the resources
to buy both. I chose in favor of the bread, and that means I don't buy the shaving cream.
Now that's my level. Now you take people with more money than I have, and they make
decisions like this. A man goes out into the market and he decides this is the year for
General Motors is competing with, say, Pan Am, through money, because we have a limited
Supply of Money, and we can only spend each dollar once. So when we make up our minds
that we're going to spend it for X product rather than Y product, we put those two products
in competition. Whatever they are, they can be as diverse as bouquets of flowers, umbrellas,
insurance policies, and fountain pens. It doesn't make any difference. I have so much
money and that's all I have. And when I spend it, I don't have it anymore. So when I go
I go to the market, I decide among a vast array of choices I could make to take choice A, B, and C, and I stop there because I'm out of money.
And that means the choice D, E, F, G, H, and so on, ad infinitum, I just don't get.
And that means that A, B, and C are competing with D, E, F, G, H, and so on ad infinitum.
That's dollar competition. Does that occur in a free market? It sure does. It occurs everywhere.
everywhere. This is why we buy ads, to encourage people to buy our product. What we are saying
when we put an ad in the paper or we go on television or radio or however we advertise,
we are saying, spend your money with us. Buy my widget. I don't care what else you do.
Maybe you're going to go hungry, but buy my widget. Maybe you go without insurance,
but buy my widget. Maybe you don't have a car, but buy my widget. Because we realize
that we are competing for everybody's dollars. At the dollar level, we are in competition
with everybody else who might receive dollars. And we want to get as many dollars coming
our way as we can, and that's the kind of competition you will find given a free market.
Because in a free market, each of us chooses where we will spend our dollars. And if we
choose not to spend them, then they don't get spent. Or if we spend them one place,
Market competition is the kind of competition that exists only in a free market. If you
do not have a free market, this area ceases to be. Given a free market, anyone who wishes
is to, at any time, may go into any business he cares to or may get out of any business
that he is already in. In other words, free access, free entrance, free exit.
What does that mean? Actually it means that direct competition isn't very important
if you have a free market. Let us suppose that we have a case where we have an absence
of a Direct Competitor. And this man is operating at a certain price level and at a certain
level of quality. If this man does not keep his prices low or his quality high and we
have a free market, it means that somebody else will come in and he will have a direct
competitor in the morning. If he is protected, then he doesn't have to worry about where
Put it in your own mind for a minute. Let's suppose that you wanted to be a grocer. You'd
like to run a grocery store. Own one. You've got a little capital. You know where you can
When you can raise some other capital, you'd like to have a good grocery business, a supermarket,
where you can really do a job and make some money. That's what you'd like to do.
Where will you locate? Will you try to locate next to a supermarket that's doing a thriving
business that is well established, that knows what it's doing, has low prices, high quality,
efficient clerks, is courteous, extends credit, gives you service? If you go into business
next to them, you'll go broke and you know it.
What you're going to do is look for that grocery store that isn't doing a good job.
You're going to look for the fellow that has high prices, bad quality, is inconsiderate,
his clerks don't work right, there's no convenience, it's not run correctly.
You can go into business next to him because you can get some of his customers away from
him.
It would be easy.
So when you have a free market, the free market tends to discipline the entrepreneur, even
when there isn't a competitor. Now if you don't have a free market, you don't have
to be disciplined. Let me give you an example of that. Take the government operation of
the postal system. Here you have a prime example. There is no competition. Why? Because there
There is a law against it. The government passed a law to prohibit anybody from getting
into this area. So how efficient is the postal system? They don't have to be efficient.
Nobody can compete with them. What about dollar competition? It doesn't make any difference.
The postal system doesn't have dollar competition. It doesn't make any difference whether you
patronize them or not. You'll pay for it in taxes. So there's no dollar competition.
There's no market competition. There's no direct competition. But you know, even here
the government doesn't have a complete monopoly because there still is parallel competition.
You can communicate without writing a letter. So it shows even how difficult it is for the
government to nail down and create positively a monopoly.
In a free market, the factors of competition will exist and will flourish. You don't
have to worry about a free market moving in the direction of monopoly. On the contrary,
a free market will tend to sustain competition, it will continually introduce new competitive
factors, and the only danger you ever have for monopoly begins at the point where government
Thank you very much.