Competition and the Number of Sellers

foundationsofeconomicsChapter 10 of Shawn Ritenour’s Foundations of Economics treats us to an analysis of three phenomena that have been the subjects of much discussion, not to say hand-wringing, over the past 150 years: cartels, monopolies, and labor unions. In the process of explaining these arrangements, Ritenour provides us with an important understanding of economic competition.

First, we are reminded that entrepreneurs and the owners of factors of production have no ethical obligation to offer goods or services for sale at prices we like, nor do they have an ethical obligation to compete with each other so that we can enjoy lower prices. These alleged obligations, in which many people tacitly believe, cannot be deduced from any principle of human action discussed earlier in the treatise. Thus arrangements such as cartels may be unobjectionable from a Christian perspective, provided they do not violate anyone’s real rights. The oft-cited notion of “consumer sovereignty” is a description of what a free market usually produces, not a prescription for public policy.

A cartel is an arrangement formed by agreement among producers of a particular good or service (Ritenour uses the example of barbers) to increase their profits by acting as though they were one firm. This involves attempting to take advantage of price inelasticity by reducing supply and raising prices.

Ritenour writes that in a free market, cartels tend not to survive for long. Usually, one of three things will happen in short order:

  1. Competition from outside the cartel will increase supply and lower the price of the good or service in question, leading the cartel members to abandon the arrangement.
  2. One or more of the cartel members will “cheat” by increasing supply and lowering prices in an attempt to maximize his own revenue, again leading to the cartel’s disintegration.
  3. If the cartel members find they like the arrangement and are able to keep outside competition at bay, they will take the logical next step of merging their concerns into a single firm.

The final point above provides a nice segue into a discussion of monopoly, something that people seem to fear more even than cartels. Ritenour gives a nice discussion of the problems involved even in defining the term “monopoly.” The etymological definition of “one seller” is not helpful, because depending on how broadly or narrowly we define a product, either everyone or no one could be a “monopolist.” Ritenour favors a definition common in the 19th century, that of a state-granted privilege to be the exclusive seller of a particular product.

However, the most commonly used definition today is “a firm that has market power,” in which “market power” means “the power to charge a monopoly price” as opposed to the “competitive price” that “ought” to prevail in the marketplace. Ritenour points out that the problems of definition for these terms are also significant. All entrepreneurs attempt to maximize their revenue, as we’ve already seen, and this includes taking advantage of price inelasticity where it exists. Does this make every entrepreneur a monopolist? Nor can the reduction of output be used as an infallible test of a monopoly because entrepreneurs frequently reduce their output of a product in response to losses. Ritenour concludes that in a free market the concept of monopoly is practically meaningless.

Like cartels and monopolies, labor unions attempt to increase their revenue by restricting supply of a service (in this case labor), but a major difference is that the union restricts not the labor of its own members, but that of non-members. The union typically attempts to negotiate higher wages for its members in part by getting the employer to agree not to hire non-members. When the union strikes, pressure is put on non-members not to cross the picket line to work for a wage deemed too low by the union. Where unions are successful, they lower the wages for workers in non-unionized industries because the supply of labor for those industries increases as the supply of labor in the unionized industry shrinks.

Ritenour maintains that, as in the case of the cartel, there is nothing inherently wrong with labor unions as long as they do not violate other people’s rights in the pursuance of their ends. However, he acknowledges that in modern society, such violations often take place.

Concluding the chapter, Ritenour notes, “Competition should not be understood in an artificial way that presumes a certain large number of sellers who have perfect information about the market and who never make mistakes.” If we avoid this fallacious way of thinking, we will recognize that economies where property rights are protected do in fact manifest true competition, even if we don’t always like the results of that competition.

About Dr. J

I am Professor of Humanities at Faulkner University, where I chair the Department of Humanities and direct online M.A. and Ph.D. programs based on the Great Books of Western Civilization. I am also Associate Editor of the Journal of Faith and the Academy and a member of the faculty at Liberty Classroom.
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