What is monopolistic behavior?

Even on this remote island “Mircosoft” is a household word, and news of the Microsoft anti-trust battle will be every much a topic of discussion here as it is in Seattle and New York.

For some bizarre reason, the economic issues of monopoly and anti-trust stuff are confronted by raw emotion in most cases.

Admittedly, a mere image of Bill Gates is enough to boil up the bile in most of us. But let’s look at the objective issue of monopolies, and in specific one element that nobody seems to have addressed: Just what is a monopoly, and what is monopolistic behavior?

Before addressing that “what,” let’s consider the “where.” The definition of a monopoly, sensibly enough, lies withing the realm of economics. Specifically, it can be found in the realm of “price theory.”

Price theory deals with two primary issues: How much stuff is produced, and how much the stuff is sold for. It is, in summary, concerned with “quantity” and “price.” I suppose it could just as legitimately be called “quantity theory.”

Unfortunately, it’s not a subject that can be conveyed in mere prose. It is a mathematical gig, based on graphs and formulas. Trying to stab this beast with mere words is an impossible task, but at the risk of sinfull egregious oversimplification, here we go….

There are two kinds of sellers out there: price takers, and price searchers. A typical farmer is a price taker: he takes his oranges to the market and sells them for the going rate. If the price is $1.00 a pound, then that’s what he gets. If he wanted $1.10 a pound, he’d have no buyers. If he accepted 90 cents a pound, he’d be losing out. His best option is to sell as much as he can at the going rate.

The key point is that there are a zillion farmers competing out there, and none of them produce a high enough percentage of the market’s goods to be able to influence market prices. If Farmer Brown decides not to sell his oranges on the market, the dent in the overall market supply of oranges is microscopic, and the overall market price won’t change.

Contrast that with a price searcher, which is a company that has such a large market share that the price of its goods is influenced by the size of its output. If Toyota, for example, was to produce only a thousand pickup trucks next year, the global price for pickup trucks (be they Toyota, Ford, or any other brand) would increase, because the global supply will have been measurably dented.

So, Toyota can produce a fewer trucks and get higher prices for them…or produce more trucks and get lower prices for them. The bigger Toyota’s market share is, the stronger the price vs. output relationship is.
Toyota will analyze this relationship and adjust its output in order to maximize its profits.

If Toyota was the only producer of pickup trucks in the world, its price searching behavior would result in the market having less trucks produced (in order to keep upwards pressure on prices) than would be produced if there were a number of competitors in the industry. And it is this–a theoretical “underproduction”–that defines monopoly behavior.

Is Microsoft a monopoly in this sense? I doubt it. I see no evidence that they are squeezing down the supply of the software they produce. I suspect, by contrast, that they try to produce and sell as much of it as possible–heck, Internet Explorer is even distributed free.

Of course, there are compelling arguments about whether Microsoft engaged in “unfair business practices.” That’s a legitimate point, because such practices can undermine the efficiency of markets. Having a near 100 percent market share, of course, increases the company’s power to engage in such alleged practices. This is, however, a totally different economic issue than the basic acid test of monopoly behavior as defined by the price and quantity relationship.

I’m no fan of Microsoft. But if everyone is getting whipped into a frenzy over the monopoly issue, it would be refreshing if they could at least get the economic facts straight and address it logically.