thales/thales/content/regulate-or-well-all-be-playing-monopoly.md

Title: Regulate, or We'll All Be Playing Monopoly
Date: 2011-02-04 17:00:00
Category: Philosophy
Tags:

I recently encountered the following statement:

> Imagine that you sell oil to people.
> You sell at a price that people are glad to pay and you have fantastic customer loyalty.
> Next, imagine that RIAA Oil Company decides to move into your market.
> They GIVE oil away for a full year.
> They can afford this because they are RICH.
> You can’t compete with free.
> You try, but after a year, you are forced to go out of business.
> After you go out of business, RIAA Oil Company jacks up their prices.
> In a few years they recoup their losses.
> Prices are now much higher and consumer satisfaction sucks.
>
> You are unemployed.
> Nobody cares about you because you believed in the imaginary thing called a free market.
> But people are worried for the consumers who ultimately are the ones victimized by the RIAA Oil Company’s predatory policies.
>
> The free market does not exist.
> What we CALL a free market is really a bunch of people who fight like mad to try to dominate the marketplace by forming cartels and monopolies.
> If we don’t regulate them, they will regulate us–far more than any government can.
>
> The California law wasn’t enacted because liberal freakazoids had a theory that they needed to put into law (like the Tea Partiers and their theories).
> This law was the product of historical experience.
> Read about Standard Oil and what they did!!!!! Read about the Railroad companies at the turn of the 20th Century.
> Those businesses were absolutely ruthless and screwd consumers got these kinds of laws passed.

While I don’t expect the original author to read my response or think about it, I wanted to respond anyway because I encounter this argument often.

This quote creates a scenario, assumes a response, and then demands legislation based on the presumed response. It also appeals to some historical precedent for validity.

First, in his scenario RIAA Oil got rich somehow. Richness only comes by doing something people want – selling something, performing a service, investing correctly, something. So, RIAA Oil isn’t evil because it has money, it was doing something useful. But, let’s put that to the side and say that RIAA Oil has a bunch of money it was given by a large and whimsical rabbit. It decides to enter the oil business with the express purpose, not of providing oil at a reasonable price, but of putting out other businesses. Cue maniacle laughter. RIAA Oil is evil.

Now, they give away oil for a full year. People are happy. RIAA is spending all of the bunny-gotten gains in fulfilling their dastardly purpose of putting you out of business. And, *gasp*, they suceed. How evil.

RIAA now has cornered the oil market and is going to use its power to extract wealth from all of the poor oil-consuming fools of the world. So, they re-price their free oil at 10x the original price.

Deal done, easy, right?

Not really.

At that price point it would be trivial for a small business to contact a crude supplier, buy it at double the going rate RIAA Oil is paying and still beat RIAA Oil in the consumer market.

“But!” I can hear the original poster say, ” by now RIAA Oil has all of the suppliers in a 100-year contract they cannot break! They own all of the crude supplies!”

How did they get into this situation? What reason could the crude suppliers possibly have for that kind of lock-in? Because RIAA Oil is the only retailer, and hence the only consumer of crude, and refused to purchase crude without a 100-year contract?

A crude supplier in that situation would have two very large, very appealing options: retail oil themselves or encourage other businessmen to start a retailing business.

I could see the case for RIAA going for vertical integration, owning the entire chain from the crude extraction to the refinement to the retail. This still doesn’t prevent other entreprenuers from a) advancing alternative energies (oil from coal, for instance) or b) finding their own oil stores to tap. If there is a serious deficit of oil reserves, a will be more likely in proportion to the price of oil. If there is an abundance of crude, b will be more likely. There’s a finely-tuned balance here between cost and relative ease of using a competing product. If oil is extremely scarce and there are no alternatives to its use, the price should be high to reflect that. If oil is abundant and there are no alternatives to its use, competition will spring up very quickly and drive prices down. If oil is extremely scarce and there are alternatives to its use, those alternatives will be explored to drive the price down. If oil is abundant and there are alternatives to its use a monopoly will be extremely short-lived.

In the end, you see, unless people aren’t free, the market will find a way as people strive for a reduced price. RIAA Oil has a finite supply of money to use to influence that fact. They will, therefore, either make money if they are properly serving the market or they will loose money in the long term if they are not.

I’m sorry, I’ve talked about this before.

What this comes down to is an argument made by concocting an ever-increasingly arbitrary situation to prove a point.

So what about Standard Oil? Isn’t it the best example of a monopolistic company that abused the consumer market?

From [wikipedia](http://en.wikipedia.org/wiki/Standard_Oil):

> Standard’s actions and secret[citation needed] transport deals helped its kerosene price to drop from 58 to 26 cents from 1865 to 1870.
> Competitors disliked the company’s business practices, but consumers liked the lower prices.
> Standard Oil, being formed well before the discovery of the Spindletop oil field and a demand for oil other than for heat and light, was well placed to control the growth of the oil business.
> The company was perceived to own and control all aspects of the trade.
>
> In 1904, Standard controlled 91% of production and 85% of final sales.
> Most of its output was kerosene, of which 55% was exported around the world.
> After 1900 it did not try to force competitors out of business by underpricing them.
> [21] … Standard’s market share fell gradually to 64% by 1911.
> It did not try to monopolize the exploration and pumping of oil (its share in 1911 was 11%)
>
> Standard Oil’s market position was initially established through an emphasis on efficiency and responsibility.
> While most companies dumped gasoline in rivers (this was before the automobile was popular), Standard used it to fuel its machines.
> While other companies’ refineries piled mountains of heavy waste, Rockefeller found ways to sell it.
> For example, Standard created the first synthetic competitor for beeswax and bought the company that invented and produced Vaseline, the Chesebrough Manufacturing Company, which was a Standard company only from 1908 until 1911.
>
> The company grew by increasing sales and also through acquisitions.
> After purchasing competing firms, Rockefeller shut down those he believed to be inefficient and kept the others.
> In a seminal deal, in 1868, the Lake Shore Railroad, a part of the New York Central, gave Rockefeller’s firm a going rate of one cent a gallon or forty-two cents a barrel, an effective 71% discount off of its listed rates in return for a promise to ship at least 60 carloads of oil daily and to handle the loading and unloading on its own.
> [citation needed] Smaller companies decried such deals as unfair because they were not producing enough oil to qualify for discounts.

So, Standard Oil succeeded by doing the following:

* Buying competitors and shutting down inefficient operations
* Turning waste products into retail products
* Making deals with transportation to gaurantee a high level of traffic in exchange for lower rates. ‘Buying in bulk’ in essence
* Lowering the price of product below its competitors.

Standard did not do the following:

* Raise prices to leverage its monopoly status
* Monopolize exploration and pumping to price out retail competitors

Standard did do a bunch of things that were found to be illegal. Those things generally surrounded secret contracts and pricing with suppliers of things like transportation:

> 1) secret and semi-secret railroad rates; (2) discriminations in the open arrangement of rates; (3) discriminations in classification and rules of shipment; (4) discriminations in the treatment of private tank cars

This boils down to one major compliant: descrimination. What is descrimination? The freedom to treat someone differently from someone else, ie, to descriminate between them.

Again from wikipedia:

> Some economic historians have observed that Standard Oil was in the process of losing its monopoly at the time of its breakup in 1911.
> Although Standard had 90% of American refining capacity in 1880, by 1911 that had shrunk to between 60 and 65%, due to the expansion in capacity by competitors.[32]

As I said, if a company no longer serves people by being efficient, offering something unique, or otherwise justifying high price, the market will route around it. Insofar as Standard itself was inefficient and high-priced, it lost share in the market to upstarts.

In the end, Standard was brought down essentially for one major reason:

> One of the original “muckrakers” was Ida M. Tarbell, an American author and journalist.
> Her father was an oil producer whose business had failed due to Rockefeller’s business dealings.
> After extensive interviews with a sympathetic senior executive of Standard Oil, Henry H. Rogers, Tarbell’s investigations of Standard Oil fueled growing public attacks on Standard Oil and on monopolies in general.
> Her work was published in 19 parts in McClure’s magazine from November 1902 to October 1904, then in 1904 as the book The History of the Standard Oil Company.

That is, someone was personally affected by Standard and decided to use the government as a club to bash something she didn’t like. After all, if you can’t compete, legislate. Or, in this case, [judicate](http://www.urbandictionary.com/define.php?term=judicate).