A Journal for Western Man

 

Israel Kirzner's View of Monopoly and Its

Real-World Implications

An Analysis of Israel Kirzner's Competition and Entrepreneurship: Part III

G. Stolyarov II

Issue CXVIII - August 14, 2007

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Statement of Policy

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            In Competition and Entrepreneurship, Israel M. Kirzner offers an innovative perspective on monopoly that challenges numerous mainstream economic assumptions. For Kirzner, monopoly is fundamentally a function of a producer’s exclusive control over certain resources – as opposed to the uniqueness of his product or the shape of the demand curve he faces. Kirzner’s analysis implies that many of the firms conventionally deemed to be monopolies – such as John D. Rockefeller’s Standard Oil and Bill Gates’s Microsoft – do not, in fact, qualify for such a designation.

            For Kirzner, if a producer is a monopolist, this has nothing to do with how many other producers sell the product that he sells. Rather, the only true monopolist is the producer who has an exclusive control over all the inputs required to make a given product:

Monopoly … in a market free of government obstacles to entry, means for us the position of a producer whose exclusive control over necessary inputs blocks competitive entry into the production of his product. Monopoly thus does not refer to the position of a producer who, without any control over resources, happens to be the only producer of a particular product. This producer is fully subject to the competitive market process, since other entrepreneurs are entirely free to compete with him” (Kirzner 1973, p. 103).

            For instance, simply because Rockefeller’s Standard Oil trust at one time controlled 90% of the oil market does not qualify it as a monopoly under Kirzner’s definition. Rockefeller never had exclusive control over oil; there existed numerous deposits in the earth that he did not own; other entrepreneurs were free to extract and refine these deposits and in fact did. Similarly, Microsoft cannot be a monopoly because it does not have exclusive control over any inputs in the production of computers or computer software; it does not own all of the world’s silicon or its transistors – nor does it employ all the skilled software designers in the world. Anybody is free to try to obtain the resources needed to compete with Microsoft – and entities such as Netscape, Apple, and Mozilla routinely do just that.

            What distinguishes the resource monopolist from a firm that simply happens to be the only producer in a given field? The key difference is the ability of entrepreneurs to enter the field by acquiring the inputs necessary to make the given product. Kirzner writes:

The notion of monopoly advanced here… does not depend on the uniqueness of the monopolist’s product. Although it is of course true that the profitability of a monopolist’s position will depend crucially on whether other producers are able to produce the same commodity, nonetheless the monopolist as defined here is a monopolist by virtue of his control over certain resources, which renders him immune from the competition of other entrepreneurs who might, in other circumstances, enter his field of activity. This immunity, however, in no way protects him from the competition of other entrepreneurs who may decide to enter very similar fields of activity…”  (Kirzner 1973, p. 105).

            Anybody who wants to and is willing to expend the necessary effort can compete against Microsoft today and could compete against Standard Oil a century ago. But even the entrepreneurs that want to cannot compete against a resource monopolist by producing the same good that the monopolist produces. They can, however, create similar competing products that do not require the monopolized input. For example, if Company X controlled the world’s entire supply of oranges, Company Y could not compete with it by producing orange juice. But Company Y could produce strawberry juice or carbonated beverages and try to persuade consumers of their substitutability for and superiority to orange juice.

            Yet this ability to compete via substitute products does not negate the monopoly’s effects. Kirzner points out that the monopolist, by controlling all of a given input, redirects the competitive and entrepreneurial activities of others away from the production of goods that require the monopolized input. If there were no monopoly on oranges, the orange-juice market would have seen more entrepreneurial activity than it does in our hypothetical case. The monopoly’s existence channels this entrepreneurial activity toward non-monopolized products like strawberry juice and carbonated drinks.

            For Kirzner, the harms of monopoly are manifested in the form of diminishing the incentive to use the monopolized resource in full accordance with consumers’ preferences. Without entrepreneurial competition to create a tendency toward ameliorating any mistakes regarding quantity of output and the product’s price, it is highly likely that the monopolist will persist in making these mistakes and will sell the product in sub-optimal quantities and at sub-optimal prices from the perspective of consumers:

The approach to the analysis of monopoly which we have suggested… sees its harmful effects, where they apply, in the incentive which monopoly ownership provides for not using a scarce resource to the fullest extent compatible with the pattern of consumers’ tastes in the market” (Kirzner 1973, p.  111).

            Kirzner furthermore points out the mainstream’s mistake in considering the monopolist’s gains from his privileged position as similar in kind to entrepreneurial profit. In fact, monopoly gains are not at all profits in Kirzner’s analysis:

For the notion of monopoly developed here, on the other hand, there is no room for possible confusion between monopoly profits and entrepreneurial profits. In fact, it should be apparent that in our view of monopoly the term profits is hardly in place in this context in general. What the monopolist is able to secure for himself … is a monopoly rent on the uniquely owned resource from which he derives his monopoly position” (Kirzner 1973, p.  109).

            In attempting to harvest a monopoly rent, the monopolist may see fit to deliberately restrict production of a good so as to raise its price and thus his own revenue. This is deleterious to consumers; according to Kirzner, it “means that consumers have been denied the additional output which the monopolized resource might have easily furnished, even though the urgency of their demand for output makes them willing to pay for the additional quantities of the other factors needed to elicit additional output at the intensive margin of use of the monopolized resource” (Kirzner 1973, p.  111).

            A real-world example of such a deleterious resource monopoly is De Beers with respect to diamonds. By controlling virtually all of the available (and politically accessible) diamond mines in the world, De Beers is able to artificially restrict production and sale of diamonds so as to sell them to consumers at tremendously high prices. Whereas, with free entry and exit into diamond production, diamonds would have become increasingly affordable, they remain incredibly expensive today. Consider that two diamonds the size of pinheads might cost as much as a car, and a diamond the size of a penny might sell for more than a house!

             But, overall, Kirzner’s analysis of monopoly greatly restricts the number of existing firms which can be genuinely called monopolistic. Most of these firms are monopolies by government decree – and their exclusive control over a given resource is artificially enforced by the state. Extremely few possibilities exist in the free market for monopolizing all of the world’s supply of any given resource – and companies such as De Beers are a rare exception rather than the rule. (Furthermore, it remains unclear how much of De Beers’s monopoly position is due to its relationships with various African governments. For instance, De Beers’s ventures in Namibia and Botswana are each 50% owned by the countries’ respective governments. Its operations in Tanzania are 25% owned by the Tanzanian government.) 

            Additionally, a non-coercive resource monopoly is inherently vulnerable to the discovery of additional supplies of any given resource. If a rare metal is initially monopolized by Company A, but Company B discovers a new deposit, the monopoly is thereby broken and full-fledged competition returns to the market for products involving that metal.

            Hence, Kirzner’s theory of monopoly teaches us that a free-market monopoly is a far less significant phenomenon in the real world than many of today’s politicians, economists, and commentators suggest. Quite the contrary, virtually the only pervasive source of monopoly comes from special government favors that render certain firms artificially immune from competition.

Works Cited

Kirzner, Israel M. 1973. Competition and Entrepreneurship. University of Chicago Press.

G. Stolyarov II is a science fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, Le Quebecois Libre,  Rebirth of Reason, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, weekly columnist for GrasstopsUSA.com, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. Mr. Stolyarov also publishes his articles on Helium.com and Associated Content to assist the spread of rational ideas. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. His most recent play is Implied Consent. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.

 

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This TRA feature has been edited in accordance with TRA’s Statement of Policy.

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