Paper submitted for the subject Industrial Economics, June 2010, Universidade Católica Portuguesa, Lisbon.

Prof. Helder Vasconcelos

INTRODUCTION

One of the main bastions of the interventionist economists is the industrial organization field. Nonetheless there is one economic school of thought which advocates the non intervention in the free market in any case. That is the Austrian School of Economics. In this work we will have a look at the Austrian vision of industrial organization because we consider it a very interesting and unusual point of view of this particular economic field that would deserve our attention.

Given that this is not a work on mainstream economics1 we will not pay heed to what they say about our topic. We just refer the classic text books2.

The larger part of the work consists on a development of the Austrian position. We will see the Austrian concepts of competition, monopoly, entrepreneurship and market. Later on we will move to an applied case of the theoretical concepts previously learned, specifically we will discuss Microsoft Case. As it is well-known this case involved a benchmark of antitrust policies. Once more the Austrian position will differ widely from the mainstream.

But first of all we are conscious of that a brief look at the main characteristics of the Austrian School3 will be welcome. In order to be more synthetic (and clear) we decided to draw a comparative table between the mainstream paradigm and the Austrian one.

Points of Comparison

Austrian Paradigm

Neoclassical Paradigm

1. Concept of economics (essential

principle):

A theory of human action,

understood as a dynamic process

(praxeology).

A theory of decision: maximization

subject to restrictions (narrow

concept of “rationality”).

2. Methodological outlook:

Subjectivism.

Stereotype of methodological

individualism (objectivist).

3. Protagonist of social processes:

Creative entrepreneur.

Homo economicus.

4. Possibility that actors may err a

priori, and nature of

entrepreneurial profit:

Actors may conceivably commit

pure entrepreneurial errors they

could have avoided had they shown

greater entrepreneurial alertness to

identify profit opportunities.

Regrettable errors are not regarded

as such, since all past decisions are

rationalized in terms of costs and

benefits. Entrepreneurial profits are

viewed as rent on a factor of

production.

5. Concept of information:

Knowledge and information are subjective and dispersed, and they

change constantly (entrepreneurial

creativity). A radical distinction is

drawn between scientific knowledge

(objective) and practical knowledge

(subjective).

Complete, objective, and constant information (in certain or

probabilistic terms) on ends and

means is assumed. Practical

(entrepreneurial) knowledge is not

distinguished from scientific

knowledge.

6. Reference point:

General process which tends toward

coordination. No distinction is

made between micro and

macroeconomics: each economic

problem is studied in relation to

others.

Model of equilibrium (general or

partial). Separation between micro

and macroeconomics.

7. Concept of “competition”:

Process of entrepreneurial rivalry.

State or model of “perfect

competition.”

8. Concept of cost:

Subjective (depends on

entrepreneurial alertness and the

resulting discovery of new,

alternative ends).

Objective and constant (such that a

third party can know and measure

it).

9. Formalism:

Verbal (abstract and formal) logic

which introduces subjective time

and human creativity.

Mathematical formalism (symbolic

language typical of the analysis of

atemporal and constant phenomena).

10. Relationship with the empirical

world:

Aprioristic-deductive reasoning:

Radical separation and simultaneous

coordination between theory

(science) and history (art). History

cannot confirm theories.

Empirical confirmation of

hypotheses (at least rhetorically).

11. Possibilities of specific

prediction:

Impossible, since future events

depend on entrepreneurial

knowledge which has not yet been

created. Only qualitative,

theoretical pattern predictions about

the discoordinating consequences of

interventionism are possible.

Prediction is an objective which is

deliberately pursued.

12. Person responsible for making

predictions:

The entrepreneur.

The economic analyst (social

engineer).

AUSTRIAN VIEW OF COMPETITION, MONOPOLY AND CARTELS

From the mainstream point of view competition is understood to mean the situation in markets where there is no monopoly power. Hence, perfect competition refers the situation where each participant has not any power to influence product price or quantity. The conditions required to define such a perfect situation are indeed completely unrealistic4, including universal perfect information concerning all current market events and potential ones a well. It is this model of perfect competition which is, in mainstream economics, seen as the heart of the law of supply and demand, and which has, in the antitrust policy history, guided governmental efforts to maintain competition, that is to say, to enforce a structure of industry reasonably close to the “perfectly competitive world”.

On the other hand, in Austrian terms, competition has a totally different meaning, for understanding how market works and for formulating public policy regarding the economic structure. Austrians think the mainstream meaning of competition is not only useless, but even wrong in terms of economic understanding. It is clear that to seek to emulate an out-of-this-world state in which no single entrepreneur can influence on market price or quantity is in effect to seek to paralyze the competitive market process.

Entrepreneurship is always competitive, that is, once an actor discovers a certain profit opportunity and acts to take advantage of it, the opportunity tends to disappear, and no other actor can then perceive and seize it. Accordingly, the social process is competitive, in the sense that actors really compete, on purpose or not, to be the first to perceive and embrace profit opportunities. Every entrepreneurial act uncovers, coordinates, and eliminates social maladjustments, and the fundamentally competitive nature of entrepreneurship makes it impossible for any actor to perceive and eliminate maladjustments anew once they have been discovered and coordinated. One might mistakenly think that the social process driven by entrepreneurship could lose momentum and come to a stop or disappear, once the force of entrepreneurship had revealed and exhausted all of the existing possibilities of social adjustment. Nonetheless, the entrepreneurial process of social coordination never stops nor is about to end because of the essential coordinating act amounts to the creation and transmission of new information which necessarily changes among all of the entrepreneurs involved the general perception of ends and means. This modification in turn gives rise to the appearance of an unlimited number of new maladjustments, which spark new opportunities for entrepreneurial profit, and this dynamic process spreads, never comes to a halt, and results in the constant advancement of civilization. In other words, entrepreneurship not only makes life in society possible by coordinating the maladjusted behaviour of its members, but it also fosters the development of civilization by continually prompting the creation of new objectives and knowledge which spread in consecutive waves throughout all of society. Moreover, entrepreneurship performs the very important function of enabling this development to be as adjusted and harmonious as humanly possible under each set of historical circumstances, because the maladjustments which are constantly created as civilization evolves and new entrepreneurial information emerges tend in turn to be discovered and eliminated by the entrepreneurial force of human action itself5.

Focusing on our specific issue, Austrians6 characterize a competitive market as where no potential participant faces nonmarket obstacles to entry, not as a situation where no participant or potential firm has the power to create any difference, that is to say, a situation is competitive if no incumbent participant possesses privileges from the state that give him the chance to deter legally the entry of new competitors.

The achievements that free markets are able to get depend, therefore, on freedom of entry, let’s say it again, on the absence of public privilege. It is because the law of supply and demand (as Austrians say) depends on freedom of entry that this meaning of the term competition is so important. That is the reason why the antitrust policy can be seen as seriously harmful as obstructing the competitive-entrepreneurial market process.

By stressing the properties of the market processes rather than the allocative pattern achieved by the process, hightlights the total irrelevance of unreal concepts of perfect competition. From this point of view, to assess a real economy against the criteria of perfect competition is not simply to treat far too seriously any chance of perfect competition, that is to say, equilibrium in all markets, it is grossly to misunderstand the essential economic problem faced by modern economies. As a matter of fact the economic problem faced by society consists of the need to ensure that, as far as possible, the available pieces of dispersed knowledge of separate actors be by some means mobilized to contribute to outstanding decisions that influence the societal pattern of resource assignment. To try to measure the success with which a society hands its economic problem, with a criteria that shows a pattern appropriate to centralized knowledge, is similar to a try to allocate the efficiency of an assignment pattern for low resources by comparing its outcomes with those that could be imagined for a non-scarcity world, the entire problem is how to hand with scarcity. And the economic problem is, also, how to mange the undeniable decentralization of knowledge7.

For fairly successful coordination in a market order economy, the discovery process based on competitive and entrepreneurial alertness to reach opportunities is key. Attempts in order to make the competition better off by public intervention are likely to be relied on wrong data because the bureaucrats do not use the market discovery process of benefit pursuit and are likely to block or even distort the original market’s own delicate discovery process.

At this point it should be clear that these disinterested, public oriented bureaucrats do not know how to reply the innumerable preferences curves8. There is no way they can know neither the proper price nor quantity for any particular good or service. There is nothing that could guide them to discover where market fails are.

Direct managing by government on quantities, qualities, or prices of production or input used will deter activities which no one has visualized so far. Where these blocked activities result to be profitable, maybe as an outcome of unexpected modifications in data, the probability of their being found out is therefore suddenly reduced. No necessarily intending it, the spontaneous free market discovery process has thereby been, to some extent, removed forever.

It is well known how important for the free market discovery process the potential for unfettered entry is by incomings entrepreneurs into markets. Inevitably, public restrictions prevent any entry. In this way, such restrictions are anti-competitive. They are going to frustrate the discoveries that the dynamic process is likely to create. Even where regulatory framework, maybe influenced by a mistaken ideal of market competition in which any significant size deserve to be erased, is designed to keep competition on for example by blocking mergers, which, actually, should be called as anti-competitive. For instance, this may prevent the dynamic process by which the optimum scale for the firm might be discovered onwards.

It is easy for regulatory bureaucrats to guess that they know what is good for the society they pretend to control. But, on the contrary, this is likely to mean that in the impressively advanced modern economies, it is easy for well-meaning individuals not to notice their nescience in specific instances. But, for private entrepreneurs, the device for the communication of such abrupt missing information is provided by the desirability of the market opportunities for gains which such missing information creates. Not only are regulators not able to take advantage of these discoveries; their direct performance in the market may barely fail to block the socially positive market process that depends on freedom of entry into markets for which the social attractiveness has not yet been set. It follows that the harmful effects of regulation are not needs found in evident failure. The harmful effects of regulation may show themselves as well in cases where there is a lack of coordination of which no one is aware. Our point is that public intervention may be responsible for such lack of coordination not being discovered. The prodigy of the dynamic market is its skill to inspire coordinative actions the very need for which would, in the lack of the market, never be unveiled. Indeed, the smithian invisible hand of the free market is invisible also in the sense that the deep problems of coordination it tends to fix are invisible even to the most brilliant of public regulators9.

Anyway high benefits attract, no matter neither where nor when, incomings into the market, which lower gains and demand that managers continuously innovate in order to stay ahead. This innovation can take the shape of better quality and service, but it may also mean lower prices. Moreover, it is far more likely that the merger would lead to lower prices, which is just what worries the competition10. Competition causes market tests that establishes which monopoly prevails until another entrepreneur temporally monopolizes the market. Monopolies that pretend to increase price or produce worse products will be quickly displaced by an incumbent firm11.

When a new firm is entering the market, the incumbent one faces market competition, and now it has three options: First, they can go out of business. Second, they can fight back by trying even harder to please customer and wants better than their rivals. And third, they can now cajole their elected representatives12 to intervene in the market process by contributing directly to them or to their pet causes, making it costly or even impossible for meaningful competition to develop in the market at all. The technical term that economists use for the third option is rent dissipation. It describes what happens when capital is invested in the political class rather than in productive efforts to satisfy customers. When this happens, the wealth-creation process is hampered considerably. The successful firms are those willing and able to “pay up” for the implied assurance that politicians will not throw obstacles in the way of the firms’ attempt to participate in the market13.

These incumbent firms, and every lawyer suing any random firm for antitrust, are not promoting any economic efficiency, unless one considers the prospect of spending billions of dollars to make attorneys wealthy as economically efficient14.  They are rent-seeking, not economic mechanics, but rather political points.  As long as these people were able to get some political gains by criticizing any firm, they will do it, simply because of they obtain some profit from these actions15.

Finally, let’s have a look at a strategic point in the Austrian School: the respect to private property and its implications16. This is such a big deal, which divides Austrian economists from the mainstream paradigm. Mainstream, in favour of antitrust policies economists say that efficiency solutions may be released by the state without taking in to account the private property. Austrians, on the contrary, say that one can engage in true economic calculation only through private property. As Mises and Rothbard have discussed, economic calculation is impossible within a socialist commonwealth. Antitrust policies are mistaken because they are outrageous violations of private property.  Without private property, there is no meaningful economic calculation, and without meaningful economic calculation, there is only economic chaos. Consequently we may argue that antitrust policies fall under the same category, the impossibility

By accepting a natural rights point of view on property, the way to observe economic relationships changes totally. That means, for instance, to include the right to merge our property and create a cartel17. From an economic position, any interference with this legitimate right is inefficient. From an ethical point of view, it violates property rights as well. Hence, it is unethical. We are not talking only about mergers. It is possible to extend that short of analysis to price fixing agreements, tying agreements, or any cooperative behaviour in free markets. Any interference in the freedom to come to an agreement is considered a violation of owners. If we get this main point in the Austrian thought everything we have been talking about suddenly fits perfectly in our mind scheme.

THE MICROSOFT CASE

Now let´s move back in time ten years ago, when Microsoft case was at its height. In short, Microsoft was charged on monopoly abuse power on Intel-based personal computers in its handling of operating system sales and web browser sales. The issue central to the case was whether Microsoft was allowed to bundle its browser with its operating system. Bundling them together is alleged to have been responsible for Microsoft’s victory in the browser wars as every Windows user had a copy of Internet Explorer. It was further alleged that this unfairly restricted the market for competing web browsers (such as Netscape or Opera) that were slow to download over a modem or had to be purchased at a store. Underlying these disputes were questions over whether Microsoft altered or manipulated its application programming interfaces to favor Internet Explorer over third party web browsers, Microsoft’s conduct in forming restrictive licensing agreements with original equipment manufacturer, and Microsoft’s intent in its course of conduct18.

Successful firms waste large amounts of resources (money, time or effort) to satisfy the consumer with high quality service and the lowest price possible. Firms that do not do so, eventually will be expel out the market. Microsoft, a firm that has raised the well being of millions people all over the world, became a public enemy because it was making gains in the free process of serving its customers19. Microsoft is one of the largest and most successful firms nowadays because its products are well valued by millions of free consumers.

In the wake of Microsoft’s success lie the charred remains of many of its rivals who could not keep up with the fast pace that this firm sets in the computer industry. Lotus and Apple Operating System lost users to their Microsoft equivalent. Alan Ashton, president of WordPerfect, which has lost almost its entire market share to Microsoft Word, called Microsoft “a threat to everybody in the industry”. However, that is just the way it works-if the customers like a product, they will buy it. Microsoft’s policy of serving the needs of its customers by leading the software industry and adding zero priced software for better value is now an issue pending before the Supreme Court2021.

  Nowadays we are attending a pretty interesting fight among Explorer, by Microsoft; Firefox, by Mozilla; Safari, by Apple; and Chrome, by Google. That shows, clearly, the benevolence of free markets. In such modern and high technology market as internet is, in even thinking that one firm may monopolized the market is a woeful idea. Everybody knows other browsers, apart from Explorer, are available in the market. Personally I do not like Explorer so I decided install Chrome. But other people prefer Mozilla and, of course, Mac users use Safari. Some years after the suit against Microsoft Explorer the Austrian vision comes up strongly: if any market is free entry (in the Austrian sense already exposed) it makes no sense to be afraid of any allegedly “anticompetitive activities”. Let´s have a look at the current situation of the market. 22

As we may observe, Explorer keeps being the leader but is decreasing, yes, Explorer may not be anymore the leader if the trend is like this in the future. The reason is simply, there are other browsers preferred by consumers. For an Austrian economist it would not be a surprise at all if we could go back to the past as the suit against Microsoft was in its height and we were able to see that plot. Now, in speaking on Explorer and Netscape makes no longer sense. And, for sure, the competitors-to-be will be other that today they were even not born. This is competition, dynamic market, free entry and so on.

CONCLUSSION

This brief work on monopoly, market and competition pretended to confirm the Austrian thesis, that is, what is required to promote that strong entrepreneurial and dynamic process upon which the market depends is just the freedom of entry to anyone who want and owns an idea to please consumer better than the incumbent contestants. It is important not to forget that no claim is made that freedom of entry entails that competitors refrain from attempts to monopolize markets. They may attempt to do so; and certainly their efforts may possibly place the consumer in a worse position (than he might be under a system reflecting perfect knowledge). The Austrian claim is that since no such perfect knowledge can exist, we must rely on the competitive-entrepreneurial process to reveal how the consumer may be better served. To obstruct this process in the name of competition is to undermine the only way through which the tendency toward social efficiency is possible. By obstructing or preventing entrepreneurial steps taken that do not fit the “perfectly competitive” model of universal utter powerlessness, even if such obstruction or prevention stems from the best of intentions on behalf of consumers, government is necessarily tending, to a greater or lesser extent, to paralyze what is truly the competitive process23.

Let us finish the work up with an old famous joke24 what is over there. It says that three prisoners were sitting in a U.S. jail, found guilty of economic crimes and were also comparing stories. The first one said, I charged higher prices than my competitors, and I was found guilty of profiteering, monopolizing and exploiting consumers. The second one said, I charged lower prices than my competitors, and I was found guilty of predatory pricing, cutthroat competing and under-charging. And finally the third prisoner said, I charged the same prices as my competitors, and I was found guilty of collusion, price leadership and cartelization.

In sum, the Austrian School states let the market work in long-run, embrace the freedom, trust in competition, not in government, and trust in free people, not in people behind antitrust lawsuits. And overall, respect property rights

REFERENCES

Anderson, William L.; Block, Walter; Di Lorenzo, Thomas J.; Mercer, Iliana; Snyman, Leon and Westley, Christopher. 2001. The Microsoft Corporation in Collision with Antitrust Law. The Journal of Social, Political and Economic Studies (Winter) Vol.26, No.1

Anderson, William L. 2001. Antitrust Violates Rights. Mises Daily. July 12.

Anderson, William L. 2002. The Wreckage of the Microsoft Case. Mises Daily. November 07.

Armentano, Dominick T. 1978. A Critique of Neoclassical and Austrian Monopoly Theory. In Spadaro, Louis M. New Directions in Austrian Economics pp. 94-110, republished in 2005 by the Mises Institute.

Armentano, Dominick T. 1985. Efficiency, Liberty, and Antitrust Policy. Cato Journal (Winter) Vol.4, No.3.

Armentano, Dominick T. 1998. The Anatomy of Antitrust. The Austrian Economics Newsletter (Fall) Vol.18, No.3.

Armentano, Dominick T. 2005. Microsoft in Wonderland. The Free Market. Mises Institute (April), Vol.26, No.4.

Benson, Bruce L.; Grenhut, M.L.; Holcombe, Randall G. 1987. Interest Groups and the Antitrust Paradox. Cato Journal (Winter) Vol. 6, No. 3.

Block, Walter. 1977. Austrian Monopoly Theory. A Critique. Journal of Libertarian Studies Vol.1, No.4, pp 271-279.

DiLoreznzo, Thomas, 2001. The Microsoft Conspiracy. The Free Market. Mises Institute (March) Vol.19, No.3.

Elzinga, Kenneth G. 1985. “Public Choice and Antitrust”: A Comment. Cato Journal (Winter) Vol.4, No.3.

Kirzner, Israel. 1982. Competition, Regulation, and the Market Process: An “Austrian” Perspective. Cato Policy Analysis No. 18

Kirzner, Israel. 2000. The Irresistible Force of Market Competition. Ideas on Liberty (March) Vol.50, Issue 3.

Huerta de Soto, Jesús. 2000. La escuela austriaca: mercado y creatividad empresarial. Editorial Síntesis, Madrid.

Malek, Ninos P. 2004. Anti-trust is Anti-Competitive. Mises Daily. July 13.

Salin, Pascal. 1996. Cartels as Efficient Productive Structures. The Review of Austrian Economics Vol.9, No.2: 29-42.

Terrel, Timothy D. 1999. Path Dependence and Antitrust. Mises Daily. November 09.

Tollison, Robert D. 1985. Public Choice and Antitrust. Cato Journal (Winter) Vol.4, No.3.

Westley, Christopher. 1999. The Message of the Microsoft Case. Mises Daily. December 28.

——-

1 We will denominate mainstream economics the neoclassical one.

2 Tirole, Jean (1988). The Theory of Industrial Organization. MIT Press.

3 Again we have to recommend some references for further explanations. Speaking about Austrian School of Economics we strongly recommend a careful lecture of the most important names of this tradition such as Menger, Böhm-Bawerk, Mises, Hayek, Kirzner or Huerta de Soto, among others. Specially important is the Israel Kirzner´s work on competition, entrepreneurship and market process. Moreover this work relies largely on his studies.

4 Salin (1996) has brightly showed that the concept of perfect competition should belong to socialist analysis when he says: perfect competition can only exist when a great number of (identical) producers produce a homogeneous good. In fact this theory does not describe a real process of competition between real entrepreneurs, but the technical organization of managers in a non-innovative system, for instance the managers of plants in a Soviet- style centralized system of production: It is assumed that there is one single technique-an optimal technique from a purely technical point of view-to produce a given good and all (numerous) managers have to apply exactly the same technique to produce exactly the same good. In that sense, it can be said that the theory of pure and perfect competition is in fact a theory of central planning.

5 Huerta de Soto (2000).

6 Block (1977) explains the two existent avenues in the Austrian School: the Mises-Kirner view, where monopoly pricing can exist on the free market, and a necessary part of its definition is a purposeful withholding of resources on the part of the monopolist; and the rothbardian one who states, in his own words, a monopoly as a grant of special privileges by the State, reserving a certain area of production to one particular individual or group (Rothbard, Man, Econonomy and State). Armentano (1978) also critisized the Mises-Kirner´s monopoly theory of monopoly defending the rothbardian theory. Along this work we will work on the Rothbard´s theory.

7 Kirzner (1982).

8 Yet, we must not forget that this concept is fully rejected by Austrians.

9 Kirzner (1982).

10 Malek (2004).

11 Terrel (1999).

12 One cannot forget the importance of interest group have in this process because at some point it becomes a political deal more than economist. Starting on Niskanen and others´ work on bureaucracy, which suggest that a bureau will produce more output than would be most preferred by the legislature; and when the enforcement of a rights assignment is the output, the result will be over-enforcemen. Because the favored interest will prefer a rights assignment larger than the legislature will grant, overenforcement by the enforcing agency will benefit the special interest. This explanation applies not only to all types of regulation but to antitrust as well. Special interests will prefer that the enforcement of rights be delegated because the rights will be over-enforced, increasing the special interest’s benefits. As Niskanen observed, agency managers’ incentives are closely linked to the size of the agency’s budget; and although his model was applied generally to bureaucracy, it fits antitrust as well (Benson et al., (1987)). So that we should have into account in the antitrust process many political interest are involved.

Other interesting point of view is given by Tollison (1985) who claims for the link between the public choice theory and the study of antitrust cartel policy. Tollison asks: How do judges behave ad why? The flat answer is tha we simply do not know. Two good comments on Tollison paper are Elzinga (1985) and Armentano (1985).

13 Anderson et al. (2001) and previously Westley (1999).

14 Anderson (2001).

15 Surrounding the Microsoft case some authors see a conspiracy, as DiLorenzo (2001)

16 For further explanations on the economic calculation under a socialist regime we truly recommend the lecture of Mises, Socialism; and Huerta de Soto, Socialism, Economic Calculation and Entrepreneurship.

17 Even if the market fails and some cartel is created Salin gives a way different point of view. He redefines the concept of cartels as follows. Taking in mind the Austrian paradigm the point is not the monopoly power creation but the homogenizing goods, as far as the process of monopolization by cartels is spontaneous. Moreover, Salin states that one cannot define a cartel by the existence of collusion but rather by the fact there is homogenization of goods produced by different producers.

18 Taken from Wikipedia.

19 But without rendering proper deference to its political masters.

20 Anderson et al. (2001).

21 The repercussion of Microsoft case has been critically analyzed in Anderson (2002). Although it seems unlikely that this unwarranted antitrust case is going to disappear anytime soon given the political proclivities of the parties seeking legal action, even if the settlement holds, it gives us no reason to cheer.  Once again, we have found that the political classes have engaged in wholesale looting, pillaging, and destruction, all in the name of “protecting consumers.”

23 Kirzner (2000).

24 At least one heard about it long time ago.

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