The Interview: Economic Theory

The Interview! Economic Theory

Wccftech: Hi John, welcome to the Wccftech interview! Thanks for agreeing to speak to us today. As a makeshift journalist, it’s important to me to try to spread awareness amongst technology aficionados. Let’s get you started with an easy question, just to cover our bases. What is a monopoly?

John Ip: (Laughs) A monopoly is really just a sole supplier of anything. As the sole supplier they obviously have various characteristics like the ability to set prices, which is generally considered a bad thing because being a monopoly with no other suppliers you basically set prices at the level you like and others have no choice if they want your goods or services they will have to pay your price. That’s why a monopoly is generally bad, especially for users of the monopoly’s services.

W: Ok, and now that we have one extreme of the spectrum covered, there must be an opposite, I assume this is perfect competition, what characterizes this market state?

JI: That means there are many sellers of the goods and services. Lots of suppliers and as a result, none of them has a dominant position and are more or less price takers. They can’t set a high price because if they do, others will set a lower price and undercut them and as a result they’ll go out of business. Normally, the cost of the good/service is more or less the marginal cost of supplying the final good or service in question and as a result, consumers generally will benefit because they’ll get the lowest price for that good or service.

W: And presumably the default scenario which we’re taught in economics is still accurate, namely that monopolies are bad for consumers is that fair?

JI: Yeah, that is fair, but in the real world you normally don’t get a pure monopolistic situation nor a pure perfect competition one. Perfect competition, included in that is information as well, perfect information. So in the real world you don’t have these sort of theoretical conditions normally.

W: Is this why many countries have some form of monopolies commission to try to maintain a degree of competition if monopolies in general are not good for consumers?

JI: Yes, that is generally true although not all countries have this sort of thing, but the western world that believes in free trade and free competition. Capitalist societies tend to. As mentioned before, in the real world you don’t always get pure monopolies or pure perfect competition, but there are certain industries that lend themselves to a monopoly and as a result, there are regulations not just to prevent monopolies from happening, but in cases where there are natural monopolies, they will regulate it so that they don’t price gouge the consumer.

W: But is it true that capitalism tends towards monopolistic power being more prevalent?

JI: Yes, there’s always that danger in the sense that monopolists used their market dominant position to drive competitors out and as a result, after they are gone they can start raising prices so one of the things that is needed to safeguard is entry. Is it easy for new business to setup and compete? Because it’s easy for them to cut prices and drive competition out but once they start raising prices, if there is free entry or the cost of entry is not high then people will come back in to compete and prevent them from driving up the prices again.

W: So, we have our two theoretical extremes of monopoly and perfect competition. You mentioned earlier that most markets fall somewhere in between… That’s fair to say?

JI: It’s fair to say that. Some industries tend to lend themselves to monopolistic setups like power distribution, you can’t have several power grids setup and competing, that would be very inefficient and very complicated for example so they are naturally a monopoly, a grid covers a whole country and as a result, they are regulated by the government so generally they are called regulated industries and then at the other end you can say that there are lots of markets that look like perfect competition, prices are very low but even then they are not quite perfect competition. Selling oil on the world markets is easily substituted, most people trading it know what the good is and information is reasonably widely available for example.

W: Because perfect competition assumes perfect information right? What does that mean?

JI: That means do you know who is selling and what prices you can get at etc, even then, OPEC is an attempt to try to manipulate the oil market, sometimes they succeed, sometimes they don’t like now for example oil prices are very low because they don’t have the market power to set prices. Even for oil, sometimes there are monopolistic suppliers like OPEC in the 70’s they managed to dominate.

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