Besides, the $3,569 is most likely a legitimate charge to cover the vacation expenses of the president of Merciless Monolithic Media Masters Cable Television. I'll mail them a payment, we can forget about this little visit to the 4M office, and focus instead on the fourth basic fact of economic life:
FACT 4 MONOPOLY IS MORE THAN A GAME -- The benefits of voluntary exchange depends on the relative market control of each participant.
This fact tells us that the prices of the stuff we buy or sell depend to a great degree on whether the buyers or the sellers have relatively more control over the market. When sellers control the market, the price tends to be relatively higher -- good for sellers, bad for buyers.
(You don't suppose that 4M Cable controls the market for cable television in Shady Valley? Would that have anything to do with their lousy customer service and high prices? Let me think about that and get back to you later.)
But what if neither the buyers nor the sellers have any market control? Or what if buyers and sellers have equal control? And what do we mean by market control anyway? More importantly, how do you go about getting market control? (You might see a few possibilities with this market control thing, most of which lead to a beach in Acapulco and a sizeable balance in a Swiss bank account.)
To work up satisfactory answers for these questions, let's dig into the nuts and bolts of the market -- especially demand and supply.
A Moment or Two Pondering Demand
Let's think about the demand-side of a market exchange. In general, demand is your willingness and ability to purchase a good. Suppose, for example, that you want an acoustical guitar and are willing to trade some hard-earned income for it. How much are you, as a buyer, willing and able to pay for an acoustical guitar?
It depends. It depends on how much you want it -- your willingness. If you're thinking of forming your own folk/rock group to record the always popular Slim Whitman favorites, then you probably really, really want an acoustical guitar. However, if you only intend to play a few of the Slim Whitman favorites for family and close friends during the quiet, restful evening hours, then your desire for an acoustical guitar may not be as pressing. Perhaps an accordion would work as well.
Your acoustical-guitar demand also depends on how much you can afford to pay -- your ability. It doesn't do you much good to really, really, REALLY want an acoustical guitar, if you can't afford one. Your family and friends might be anxiously awaiting your rendition of the Slim Whitman top ten, but if you've already exhausted your income on the gold medal collectors' edition of Richard Burton reading the U.S. constitution (on three digitally enhanced CDs, or a handsomely packaged set of 10 cassettes), then you can't buy an acoustical guitar.
This means two things about demand.
First, as a buyer, you have a maximum price that you're willing and able to pay for a good. If for no other reason than when the price is too high, you simply can't afford to buy it. Let's call this maximum the demand price.
Second, as a buyer, you would rather pay a lower price than a higher one. You might be willing and able to pay $100 for an acoustical guitar, but you would rather pay $75. If fact, you would be just as happy if you could buy an acoustical guitar at a price of zero, zippo, nada, nil, nothing.
And A Moment with Supply
Now, let's have a brief visit with supply. Usually, sellers are willing and able to supply a good -- like an acoustical guitar -- if the price is enough to cover their production cost. We can call this minimum the supply price. In general, if the price is too low and does not give sellers enough revenue to cover cost, then they can't supply the good. Of course, suppliers will occasionally sell goods at a price less than cost, and eat the loss. This practice, however, won't keep them in business very long.
Sellers are more than thrilled, and I mean more than thrilled, if the price is above the production cost. The higher the price, the more ecstatic are the sellers. In fact, there is no limit as to how ecstatic sellers would like to be -- $10 gadzillion (plus tax) for an acoustical guitar is none too high.
A Balance of Primal Forces
Market exchanges work when we throw the buyers (who want lower prices) and sellers (who want higher prices) into the same room, then see who wins. Okay, so we don't actually need to "throw" buyers and sellers into a room to get a market exchange going. We could push them gently with an electric prod and get the same result. In fact, with modern telecommunications they don't even need to be in the same time zone, let alone the same room.
Getting back to this confrontation between buyers and sellers might bring to mind visions of sweaty, muscular, Roman gladiators engaging in battles to the death -- only the strongest survive. This analogy is a little gruesome, but it does help to illustrate the basic nature of markets. In markets, like gladiator battles, the strongest wins. If buyers are stronger than sellers, then buyers win and push the price down. If sellers are stronger, then they win and the price goes up. If both sides of the market have taken, so to speak, equal amounts of muscle-enhancing chemicals, and neither is more powerful or better able to control the market than the other, then the two gladiator forces balance out. Neither can take advantage of the other.
Are there really some "muscle-enhancing chemicals" that buyers and sellers take to increase their market control? Actually market control doesn't result from the exciting world of pharmaceuticals, but from a more mundane topic -- the number of competitors in the market.
- If buyers have fewer competitors than the sellers, they tend to have relatively more market control.
- If sellers have fewer competitors than the buyers, they tend to have relatively more market control.
To see why this happens, let's scamper through the workings of a market in which neither side has any market control.
A Bunch of Buyers and A Bunch of Sellers
What if a market has so many buyers and sellers, falling into the gadzillion category, that each is nothing but a nameless, faceless entry on a sales receipt? What if none of the buyers have ever met? Or, what if there were so many sellers that, even if they knew each other, it wouldn't make any difference?
This situation is what economists like to refer to as a competitive market. It's competitive in the sense that no one -- none of the gadzillion individual participants -- has any control over the market; none whatsoever; zippo; nada; nil. The buyers can buy as much of the good as they want at the market price. The sellers can sell as much as they want at the same price. None of them is willing or able to buy or sell at any other price. How so?
It works because both sides have so many participants that everyone always can find a trading partner. For each buyer, there are a gadzillion potential sellers. For each seller, there are a gadzillion potential buyers. You can always make an exchange at the going price -- if you're willing and able. There's no reason to trade at any other price. There's also no way to trade at any other price.
To see why, let's say that you're selling dirt. Nothing fancy about this dirt. It's just plain dirt. It's great for potted plants, landscaping, mudpies, keeping your feet firmly planted in, and dozens of other uses. It's also, however, quite plentiful, and offered for sale by a gadzillion suppliers -- leading to a bunch of competition on the supply side. There's also a bunch of competition on the demand side with a gadzillion buyers willing and able to pay the market price of, say, $5 per bag. Competition among your fellow suppliers means that there's no way to sell dirt for more than $5. Competition among buyers means that there's no reason to sell for less. You're stuck. You sell your dirt for $5 -- no more, no less.
The same thing, in reverse, works for a buyer. You never need to pay more than $5 for a bag of dirt, because there are a gadzillion sellers offering their dirt for that price. If you offer one of the sellers less than $5 for their dirt, they'll laugh in your face in the most unkind way (and probably dump a bag of dirt on your head), because they have a gadzillion potential buyers who are willing to pay $5. Take it or leave it.
Dreaming About Competition and Efficiency
When we have a market with gadzillions of buyers and sellers, we end up with efficiency in the allocation of our limited resources. Recall from Fact 1, Our Limited Pie, that scarcity exists because we have unlimited wants and limited resources. We want to use our limited resources to get the most satisfaction possible. Competitive markets do a pretty good job of this. Here's why.
When the dust clears from the room, with our dirt buyers and sellers doing their dirt buying and selling, the dirt is traded at the final take-it-or-leave-it price. This is pretty darn important because:
First, the demand price is the value or satisfaction the buyers get from consuming the dirt. (Of course, I don't actually mean consuming the dirt as in eating it. Consuming is when we satisfy our wants and needs with a good. Thus, consuming includes watching television, driving a car, or receiving a penicillin injection. Yet, if you actually wanted to eat dirt, then I suppose that would also be consuming.)
Second, the supply price is the opportunity cost of the resources used to make a good, which is the satisfaction that other buyers don't get from other stuff because our resources are being used to supply dirt.
In that a competitive market equates the demand price with the supply price, the value of the dirt is equal to the value of stuff not produced. If we tried to make and exchange more or less dirt and less or more of other stuff, we would not get as much satisfaction of our unlimited wants. With competitive markets we have efficiency.
In fact, competitive markets squeeze the most satisfaction from our planet's limited resources that we can possibly squeeze. Not a bad deal. Unfortunately, most markets aren't all that competitive. Few if any have a gadzillion buyers and sellers. As such, many markets have some degree of control by one side or the other, or both. Okay, let's get down to the nitty-gritty. Let's see how the lack of competition lets one side of this market win the game of market control.
One Monopoly Seller and Many Buyers
Consider what would happen if a market, such as that for shoestring straighteners, has only one seller -- OmniStraight -- but a lot of buyers. Here's the story on shoestring straighteners. They are, of course, an essential product for anyone with a pair of shoes and OmniStraight is the company -- the only company -- that sells this handy little utensil. The key for any seller who aspires to market control is to find a product that is highly demanded, but is also unique.
While OmniStraight has a gadzillion customers, the buyers have only once source of shoestring straighteners -- OmniStraight. (Say, does this sound like cable television?) The buyers obviously don't have a great deal of choice.
This sort of market, with one seller and a gadzillion buyers, is what economists have long referred to as a monopoly. In fact, the best-selling, ever popular board game Monopoly is based on the goal of controlling the real estate market. You win when you own it ALL.
Complete control of the shoestring straightener market by OmniStraight, lets it control the market price. Because OmniStraight prefers a higher price to a lower one, it will seek to raise the price. It won't, however, raise the price in a haphazardly fashion. Rather, it keeps a close eye on its profit. That's because, if OmniStraight pushes the price too high, then no one will buy shoestring straighteners. With no sales, OmniStraight's profit will also be very low -- as in zero. The trick for OmniStraight, and any other monopoly, is raising the price just enough to keep people buying, and to rake in as much profit as possible.
What can the gadzillion buyers do when OmniStraight raises its price? Nothing, or almost nothing. They either pay the price set by OmniStraight or do without shoestring straighteners.
A consequence of OmniStraight's shoestring straightener monopoly is that the price of shoestring straighteners will be pushed up to the buyers' maximum demand price. This price, however, will be no where near the minimum supply price that OmniStraight needs to pay production cost. Because the buyers' price is greater than the opportunity cost of production, we don't have efficiency. Monopoly is an example of inefficiency at its best -- or rather worst.
One Monopsony Buyer and Many Sellers
Let's reverse the tables now, and see what would happen with one buyer and a gadzillion sellers -- a sort of market economists refer to as monopsony. In a monopsony, the buyer controls the price and the sellers must take it or leave it. In contrast to a monopoly, the monopsony price is equal to the sellers' minimum supply price that covers production cost, but not even close to the buyers' maximum demand price. Yet another glaring example of inefficiency.
Most professional sports operate like monopsonistic markets when they hire athletes. There's really no competition among buyers', but there's a lot of competition among sellers. The National Football League, National Basketball Association, and Major League Baseball are THE employers of football, basketball, and baseball players. A gadzillion high school and college athletes willingly sacrifice their knees and other fragile body parts for the chance to supply their services. While you might think that athletes are overpaid, their wages are actually lower than they would be if professional sports were more competitive.
One Monopsony Buyer and One Monopoly Seller
What if we have but a single seller and a single buyer in the market? What happens to price in this case? Is it high? Or low? Let's say that our shoestring straightener seller -- OmniStraight -- sells its shoestring straighteners to a single buyer -- Mega-Shoes, Inc. Neither side has any other options. Mega-Shoes must buy it's shoestring straighteners from OmniStraight and OmniStraight must sell its shoestring straighteners to Mega-Shoes.
In this case, market control and price depend, not on the number of competitors, but on other factors, such as negotiation skill or who has the best information. If the buyer -- Mega-Shoes -- is a better negotiator than OmniStraight, then the price is likely to be closer to the OmniStraight's minimum. Or, if OmniStraight has better information about such things as Mega-Shoes' willingness to buy shoestring straighteners, then OmniStraight is likely to get the price closer to the Mega-Shoes' maximum.
This is pretty much the one-on-one situation you face when buying a house or car. When you're to the point of haggling with a car dealer over price, it's you (the monopsonist) versus the dealer (the monopolist). The same thing occurs when a house is sold -- one buyer and one seller negotiate the price. Before we consider some consequences of market control, here are a few practical tips worth considering:
Consumer Tips on Market Control
- As a buyer, you should search for markets with more competition among sellers and less among buyers. For example, try travelling during the off-season when possible. Surprising as it may seem, the lines at Disney World are incredibly short on Thanksgiving Day. Other bargains can be had if your timing is right -- and you avoid the competition.
- The converse for a seller is to search for markets with more competition among buyers and less among sellers. For example, when selecting a career or pursing a job, you're better off if you're the only seller with a number of buyers. You can do this -- as people like Michael Jordan and Arnold Schwartzenegger have discovered -- if you have a unique talent or skill.
- Consider the benefits of being contrarian -- one who buys when others are selling and sells when others are buying. For example, try to sell your house when everyone else is buying, and buy when everyone is selling. Contrarians, however, need to be careful. If houses are for sale because their owners just discovered the ground is saturated with toxic chemicals or the town's largest employer is closing its doors, then buying might not be a good idea.
- Also, be wary of nationally broadcast financial information. If everyone in the country knows that Omni Conglomerate, Inc. is the best buy on the stock market, the price will rise because of competition among buyers. If you aren't among the first to act, then it's probably too late to take advantage of the information.
Why Markets Aren't Competitive
Markets in the real world are seldom as competitive as economists would like. A big reason for this can be found with the basic scarcity problem and the unequal distribution of the economic pie. Here's why?
- Because we have limited resources and unlimited wants and needs, resource ownership tends to be more concentrated than wants and needs. There are usually fewer competitors on the supply side of most markets for consumer goods than on the demand side -- market control by the producers. For example, most of the five and a half billion people on this planet probably want a car, but limitations on resource ownership and control put the number of car suppliers in the range of fifty or so.
- Natural resources and capital tend to have more concentrated ownership than labor. Most of the five and a half billion people on the planet have labor (potentially at least), but the natural resources and capital, tend to be owned by a much smaller share of the population. This means the demand for labor tends to much less competitive than the supply -- market control by the factory and resource owners. There are fifty or so car companies in the world who hire the services of gadzillions of autoworkers.
When we combine the markets for consumer goods with those for labor, what we see emerging is a pattern of market control that favors the second estate over the third. The business leaders of the second estate have greater ownership and control of our economy's productive resources. Most can count their competitors on a single hand. The third estate, however, has thousands, millions, or even billions of competitors in most markets for consumer goods, labor, or whatever.
If the topic of market control was nothing more than the inspiration for a boardgame, played to waste away the hours, then this discussion would end here. In fact, it would have never started. Market control, however, is intertwined with the economy and, most importantly, the politics of government.
The Politics of Market Control
Market participants often look to the government for greater control. As we see with the next fact of economic life, the government has the ability to control the economy in a wide variety of ways. Government laws have, well, the force of law. If one seller can get the government to make it illegal for others to sell and thus limit competition, then market control is, shall we say, greatly enhanced.
Of course, few participants come right out and say that they want greater market control. They usually have other "valid" explanations, some that even have a small grain of truth. The bottom line, however, is fewer competitors.
Let's consider a few examples.
Foreign Trade. One of the more patriotic proposals any red-blooded American business can make is to ask the government to keep those no-good foreign companies from selling their American-job-destroying products within the boundaries of this great land of ours. Unfortunately for the red-blooded American consumers, restricting imports reduces the number of competitors in a market and thus gives more market control to domestic firms. Domestic firms then respond in a typically patriotic way by raising prices.
Health Care. The provision of health to the ill and infirmed is not to be taken lightly. We need the best and the brightest, the most skilled and the most highly trained professionals to administer health care. So goes the line given to the government by doctors and their professional groups, such as the American Medical Association. This ensures that only those professionals who licensed by the government are allowed to practice medicine. But, by restricting the number of licensees, there are fewer suppliers and each one has more market control.
Professional Sports. The major professional sports leagues in the United States have a recognized monopoly status that is even sanctioned by the U. S. Congress. Citing the unique nature of professional sports, such as the need for organized on-field competition among the different "firms," professional teams have gained market control over resources (hiring athletes) and over their output (selling tickets and broadcast rights to the networks). The consequence, however, is higher ticket prices and lower athlete wages.
Our list could go on, almost indefinitely, because virtually everything the government does affects the number of competitors, and thus control, in one market or another. Some of this is unintentional, but it's often designed to benefit the constituency of an elected official.
But (and here's another one of those important "buts"), whenever market control is increased through political action, the whole country suffers the slings and arrows of inefficiency. The members of the third estate, we might note, tend to suffer most.
The Market Control of Politics
Politics and market control work in both directions. Wealth and income are generally redistributed from those with little or no market control (third estate) to those with a great deal of market control (second estate). In a monopoly market, sellers extract higher prices from buyers, and thus get a portion of the buyers' income. In a monopsony market, buyers force a lower price on sellers, and thus get a portion of the sellers' income. Wealth and income tend to accumulate in the direction of greater market control. And politicians, surprising as it may seem, tend to respond more readily to those who can contribute large sums to re-election campaigns.
What Does It All Mean?
Our economy makes extensive use of markets to allocate resources and to voluntarily satisfy some of our unlimited wants with limited resources. Under some circumstances -- some of which are more realistic and reasonable than others -- markets do a pretty good job of accomplishing this goal.
There is, however, a strong tendency for participants to seek and attain control over a market. They often do this with the cooperation and blessing of our first estate -- the government. Businesses of the second estate that supply goods to the consumers of the third estate, have the greatest ability to seek and gain market control. Because resources are unequally distributed, those with a greater share of our pie get more market control. This contributes to an even greater concentration of wealth and resources.
The third estate, the consumers, workers, and middle-class taxpayers of our economy, are seldom in a position to gain market control. But that's what this book, A Pedestrian's Guide to the Economy, is all about -- to inform you of the potential dangers and hazards that lurk behind the smiling faces of the first two estates.
There is, however, some hope. The government does, on many occasions, try to reduce market control and increase competition. Various government agencies, at both federal and state levels, devote their full-time efforts to promoting competition and reducing market control using antitrust laws. A few of the more notable agencies are the Justice Department, the Federal Trade Commission, and branches in most state attorneys general offices. This, however, is an ongoing process. In that government is subject to the tugs and pulls of different political views, it offers more protection against the abuses of market control for consumers, taxpayers, and workers during some periods than others.
This sounds like the government plays a key role in the economy's allocation of limited resources. Perhaps I should forget about my 4M cable bill and head over to the Shady Valley City Hall where we can check out the government's part in the economy. Besides, my semi-annual property tax bill is due. I really hate to pay taxes -- sales taxes, income taxes, property taxes, excise taxes, park fees, turnpike tolls, and the list just seems to keep growing. Wouldn't it be nice if we could just eliminate taxes? Let's explore that possibility.