Governments cause Cartels

Sidhesh answers KST's question on cartel formation, and how consumers need to be protected by stating that government intervention is the way to go.

I am afraid Sidhesh has got it completely wrong  The truth is government intervention is what in the first place aids cartel formation. In FREE MARKETS cartels can't exist!

Before I quote from Evan on how free markets dismantle cartels, here's my piece.

The proposition of 'consumer protection' is a front used by government to promote its own agenda, namely crony capitalism. The classic example to this is India. Years of protectionism since independence (locally called the License Raj) ensured the consumer got the worst products and services ever, while the scarce producer raked in the moolah. It was the opening up of Indian markets to competition from 'outside' that 'saved' the Indian consumer.

If consumers need protection (including from cartels), its downright stupid to assume the savior will be government.

The best protection the consumer has form being 'exploited' is FREE MARKETS!

Here's how ( Quoting from Evan's Easy Economics: #13 Monopolies Cartels and Other Myths):

Monopolies and Other Government Treachery

The majority of people who are against free-markets despise them simply because they think that without government intervention every company will pay below-sustenance wages and all the fat-cat CEOs will eat up the worlds resources and live like kings. This is such a gross, unfounded and completely backward claim that it needs to be addressed.

I challenge each of my readers to name one single long-lasting monopoly or cartel that was established or sustained without any assistance from government intervention: Any monopoly formed without the aide of an army, without the aide of any direct price control, any help form a subsidy or tariff, or any other piece of legislation. This means a single company, or group of companies, working together without hardly any competition controlling the prices and production of a good or service without the help of government in any way. I've searched, and I've not found a single example.

Many people might argue that the diamond cartel was established without government intervention, but this is false. I'll let Murray N. Rothbard discuss this:

“The government [of South Africa] long ago nationalized all diamond mines, and anyone who finds a diamond mine on his property discovers that the mine immediately becomes government property. The South African government then licenses mine operators who lease the mines from the government and, it so happened, that Io and behold!, the only licensees turned out to be either DeBeers itself or other firms who were willing to play ball with the DeBeers cartel. In short: the international diamond cartel was only maintained and has only prospered because it was enforced by the South African government.”

--(Rothbard, Murray, “Are Diamonds Really Forever?”, The Free Market, Vol. 10 No. 11, 1992)

The simple truth is that monopolies and cartels just can't exist without government intervention.

How could they? If a group of companies came together to control the price of, say, mousetraps, they would encounter such an uncontrollable number of free-market problems that the cartel would be impossible to sustain. First off, each company would still have an unbelievable incentive to cheat: if all your fellow members in the cartel are foolish enough to follow the rules, you could corner the market by simply lowering your prices!

But, even if, somehow, all the cartel members chose to play by the rules, they'd encounter the second problem: new competition. This is the leading problem for monopolies. If it costs 15 cents to make a mousetrap, but the cartel is forcing the public to buy them at $15, there would be an incredible incentive for normal everyday people to start their own mousetrap company – who wouldn't if there was an incredible 10,000% mark up (or whatever the percent of the cartel in question is)!

Now the cartel is being crushed by some guy making his own mousetraps who sells them at half the price they charged and they'd have to deal with a brand new competitor that they'll have to deal with for the rest of their existence! The only way to prevent new competition from emerging in a given industry is through government legislation - licenses, subsidies, or outright outlawing.

Even if a local government outlawed competition, new competition could still come about from a foreign producer selling their mousetraps cheaper. But this sort of competition could easily be crushed by legislation - tariffs, taxes, etc.

But even if our mousetrap cartel had the government legislation to prevent new competition from emerging, they'd have to deal with a third problem: each member is producing mousetraps of different qualities. Not every mousetrap is the same, and each company can not produce mousetraps with the exact same quality. Through the not-so-free-market, the people would still be voting with their dollars consistently buying the higher-quality mousetrap generating increased profits for one of the cartel members.

But even if all the previous cartel-busting attempts failed, the cartel would suddenly find a fourth problem: each company would be getting their resources at a slightly different prices. Laborers might demand less money at one company, energy might cost less for one company, or one might have better access to wood or the metals involved. The company that got their resources at a lower price would gain higher profits than their fellow cartel-mates. They would then be able to expand faster, or pay their employees more, or... whatever they chose to do with the new money. This would further the incentives to cheat in the cartel by all members.

The simple and undeniable fact is simply that monopolies can't exist without government intervention. This is why you hear constantly about “unfair trade agreements”, “unfair business practices”, or “making every company's accounting books open to the public”. These Orwellian arguments, straight out of the mouths of Orwell's “Animal Farm”'s pigs, all sound great to the ignorant layman, but they are simply attempts by the businesses to convince the public that the natural, relentless, unbeatable free-market cartel-busting checks and balances should be dissolved.

Walter Block tells a good joke pertaining to antitrust laws and how foolish it is to trust the government to protect the public from monopolies: (Block told the joke to a group of anti-trust lawyers)“There were three men in a U.S.S.R. gulag and were comparing why they were in jail. One said 'I came to work late, and they accused me of stealing from the people.' The other said 'I came to work early, and they accused me of brown-nosing'. The last said 'I came to work right on time! But they accused me of owning a western watch!'

 In America, there were three men in jail for breaking anti-trust laws and they were comparing stories. One told the others 'I charged more money than my competition, and they accused me of price-gouging'. The second man said 'I charged less than my competition, and they accused me of predatory pricing!' The third and last man said 'I charged the same amount as my competitors, but they threw me in jail and accused me of being a member of a cartel!'

...dead silence.”

Thomas E. Woods, Jr. briefly discusses how cartels are impossible in a free market in his lecture “A Libertarian Gallop Through American History” (linked). He discusses the hopeless attempt by a German cartel attempting to use predatory pricing,the act of lowering your prices to put your competitors out of business. Herbert Dow, who started the Dow Chemical company, was able to produce bromine for 36 cents a pound in Europe, while the German Cartel was selling it for 49 cents. In an attempt to crush Dow, the cartel began selling bromine in the U.S. for 27 cents. But Dow just started buying as much of the 27 cent bromine and began selling it in Europe for a profit. The Cartel was crushed.

Without government intervention, cartels and monopolies simply can't exist.