Saturday, October 4, 2014

Free Market Monopolies

Amazon is not a monopoly. But it seems to be getting closer to attaining "monopoly status", for all the reasons this article points out. If Amazon ever did overtake its competitors entirely (which seems impossible, given all the different markets Amazon is involved with), I don't believe it would be a bad thing.

The way monopolies are usually taught in entry-level economics classes, it seems clear that monopolies are inefficient; monopolies restrict the quantity of the good produced, and jack up the price. However, this conclusion requires us to assume the cost of production is the same for a monopolist as well as a perfectly competitive firm. If a monopoly can greatly reduce the cost of production as compared to a perfectly competitive market, that monopoly can turn out to be even more efficient.

Now consider a natural monopoly, i.e., a monopoly which arises solely because they have lower costs than anyone else. A classic example would be an automobile manufacturer. I know these aren't "monopolies" per se, but the cost advantage Ford has due to its size allows it to price its cars relatively low, keeping me from building trucks in my garage and competing with them, which would be very expensive. This is called Limit Pricing, and it serves as a barrier to entry for potential competitors.

To get back on topic, this is exactly what Amazon is doing. By reinvesting any and all profits into the company, they are lowering their costs: more warehouses means lower marginal costs for shipping. This allows them to lower the price, which attracts more customers, lowering the average costs of other services (such as amazon prime). In other words, more reinvestment, while consolidating the industry more and more, helps to make Amazon "leaner" as it grows.

If this trend continues, other businesses will have to follow suit. If they continue paying their CEOs multi-billion dollar salaries, they will (at some point) not have the cost-savings required to compete with the "leaner" companies. Thus, the free market will, in the long run, eliminate "wasteful" companies and replace them with efficient, well-oiled companies like Amazon. Whether or not these companies exist in monopolistic, ologopolistic, or perfectly competitive markets is irrelevant; they will be efficient.

1 comment:

  1. I'd like to point out alternatives to Amazon. For shoes, there is Sierra Trading Post, for clothes there's Zappos, for streaming services there is Hulu and Netflix, for video games there is GOG and Steam, for books there's AbeBooks etc. There's also Overstock, which not only operates on a different model (buying overstock wholesale and selling it online rather than containing mini-shops), but it also allows one to pay using BitCoin, which is one niche that Amazon hasn't tapped yet.