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Freemarket corrects its self?

Brain_crazy
Posts: 242
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11/2/2012 11:55:25 AM
Posted: 4 years ago
What's the evidence that supports the idea that a freemarket can and will simply fix itself? Where's the evidence that monopolies can't exist in a freemarket-unregulated-? I hear this claim quite often but is there actually anything backing it up or is it just an ideology?
darkkermit
Posts: 11,204
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11/2/2012 12:16:15 PM
Posted: 4 years ago
One example is that "robber barron" Rockefeller's standard oil actually decreases prices when he had a so called monopoly, and there actually was competition, he was just the dominant player.

You can see companies that have monopolies have to keep their prices low. Google, and Facebook could be considered monopolies (even though they aren't due to Bing and Google+) but they are free to use.
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RoyLatham
Posts: 4,488
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11/2/2012 12:50:44 PM
Posted: 4 years ago
A free market is one in which competitors are free to enter the market. If a monopoly exists, but the monopoly makes profits so low that it is unattractive for competitors to enter, then the monopoly can continue -- but why would anyone care? The usual pattern is that the monopoly raises prices, or they stick with outdated technologies when competitors come up with something cheaper and better.

The argument was made that some markets are so expensive to enter that competitors cannot raise enough capital to enter. Examples were the auto industry (when the three Detroit car companies dominated), the airline industry, and telecommunications. All have since fallen to competition. Kodak once dominated photograph; they are now bankrupt.

In terms of being self-correcting, the idea is that in a recession assets become cheap, so investors come in to buy, which then raises values. For example, housing dropped dramatically, so investors are buying. The government has tried to keep prices up and has passed severe restrictions on making housing loans, which has delayed the natural recovery. Anything that drops in price is potentially attractive to investors.

Right now, the cash reserves of large companies are huge. What's holding back investment is regulation and fear of more regulation.
quarterexchange
Posts: 1,549
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11/2/2012 8:02:57 PM
Posted: 4 years ago
At 11/2/2012 12:16:15 PM, darkkermit wrote:
One example is that "robber barron" Rockefeller's standard oil actually decreases prices when he had a so called monopoly, and there actually was competition, he was just the dominant player.


Whoa really? This would help me out in a lot of arguments I'm having with my friends. Can you show me a source for this so I can refer to it later?
I don't discriminate....I hate everybody.
darkkermit
Posts: 11,204
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11/2/2012 8:32:04 PM
Posted: 4 years ago
At 11/2/2012 8:02:57 PM, quarterexchange wrote:
At 11/2/2012 12:16:15 PM, darkkermit wrote:
One example is that "robber barron" Rockefeller's standard oil actually decreases prices when he had a so called monopoly, and there actually was competition, he was just the dominant player.


Whoa really? This would help me out in a lot of arguments I'm having with my friends. Can you show me a source for this so I can refer to it later?

Sure:

http://theunbrokenwindow.com...

http://www1.eere.energy.gov...
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darkkermit
Posts: 11,204
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11/2/2012 8:35:04 PM
Posted: 4 years ago
At 11/2/2012 8:32:04 PM, darkkermit wrote:
At 11/2/2012 8:02:57 PM, quarterexchange wrote:
At 11/2/2012 12:16:15 PM, darkkermit wrote:
One example is that "robber barron" Rockefeller's standard oil actually decreases prices when he had a so called monopoly, and there actually was competition, he was just the dominant player.


Whoa really? This would help me out in a lot of arguments I'm having with my friends. Can you show me a source for this so I can refer to it later?

Sure:

http://theunbrokenwindow.com...

http://www1.eere.energy.gov...

To be fair, the price of oil actually did increase in 1917, when standard oil was actually broken up. Although the price of oil then was much lower then modern day oil.

Its actually quite incredibly how much the price of oil has gone up, I should probably buy some oil stocks.
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Jake-migkillertwo
Posts: 67
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11/8/2012 2:04:46 PM
Posted: 4 years ago
At 11/2/2012 11:55:25 AM, Brain_crazy wrote:
What's the evidence that supports the idea that a freemarket can and will simply fix itself? Where's the evidence that monopolies can't exist in a freemarket-unregulated-? I hear this claim quite often but is there actually anything backing it up or is it just an ideology?

Well there's the empirical evidence, well, everywhere that free and competitive markets tend to produce more efficient outcome than any other system of organizing the factors of production. I mean, there aren't exactly a lot of OECD countries (read: none of them) that have collectivized farms and state-run factories.

Then we can use a few mathematical arguments. Let's build a simple model: the stock of labor and capital is given, and the relative marginal utility of certain factors is given. The most efficient outcome where the marginal utility of each factor is equal. This means that the marginal price of everything equals its marginal cost. At this point, total welfare is maximized.

Why do competitive markets tend towards this?

The reason is that whenever there is too much of one good (watches) being produced, necessarily there is too little of another (socks). So there now exists an opportunity for arbitrage. A person who recognizes this can see that there is an opportunity to make a profit by taking resources away from watch production and using it to produce socks. So people will keep producing fewer watches and producing more socks until the marginal cost and marginal price of each good are equal.