Irish Economy and Budget Watch / / /Emergency Budget Announced for April 7th

Roman viaducts were built with slave labour. Slave labour was one of the greatest wealths of Ancient Rome. I presume to have whatever model of socialism people are suggesting, we do not have to combine it with slave labour?

Alot of ancient marvels whether it be the pyramids or perhaps even the American dream, were built on the back of down trodden slaves. They are no model to look back to.

Quote :

Were the Roman viaducts built by the private sector, Ard-Taoiseach?

Why do you ask? Indeed in Roman times, "public" and "private" were largely interchangeable, most projects were completed merely as an act of patronage by rich Romans. The army were used as the labour force for these tasks. The idea of a State wasn't as clear cut then as it is today as politics was dominated much more by individuals with their own mandates and client networks. Nationalisations, privatisations and such like wouldn't exactly correspond to the Roman world and in any case even if you can prove that they were completely the work of government then I can simply point you to the fact that revenue collection was privatised. We can't apply our own circumstances to the Roman world exactly.

Don't be so suspicious Ard-Taoiseach I asked because I am interested and I know that you know a lot about the Roman Empire.

Rural electrification was a great thing in its day. I think we should have the same vision and cohesiveness now in getting Ireland up and running with an "all renewable" energy supply.

AT wrote:

When did I ever say anything about leaving things completely unregulated? There of course needs to be a certain level of regulations, but that needs to small, smart and subtle. Society will also only move if it is in its economic interest and we need to shape the situation so that it is.

For some reason the first bit of this regularly escapes those of socialist bent, while the second bit escapes the libertarians.

The only people who actually call for entirely unregulated markets are libertarians, and they have, frankly, no understanding whatsoever of how markets work. The only people, in turn, who believe that markets are entirely unregulated are socialists - and they have, frankly, no understanding whatsoever of how markets work.

There's plenty of scope for brown paper enveloping the regulator isn't there?

Auditor #9 wrote:

There's plenty of scope for brown paper enveloping the regulator isn't there?

You've just created a new market, how do you feel?

cookiemonster wrote:

Auditor #9 wrote:

There's plenty of scope for brown paper enveloping the regulator isn't there?

You've just created a new market, how do you feel?

Like capitalising ?

ibis wrote:

AT wrote:

When did I ever say anything about leaving things completely unregulated? There of course needs to be a certain level of regulations, but that needs to small, smart and subtle. Society will also only move if it is in its economic interest and we need to shape the situation so that it is.

For some reason the first bit of this regularly escapes those of socialist bent, while the second bit escapes the libertarians.

The only people who actually call for entirely unregulated markets are libertarians, and they have, frankly, no understanding whatsoever of how markets work. The only people, in turn, who believe that markets are entirely unregulated are socialists - and they have, frankly, no understanding whatsoever of how markets work.

So who are these people that you think do understand the working of the markets?

cactus flower wrote:

ibis wrote:

AT wrote:

When did I ever say anything about leaving things completely unregulated? There of course needs to be a certain level of regulations, but that needs to small, smart and subtle. Society will also only move if it is in its economic interest and we need to shape the situation so that it is.

For some reason the first bit of this regularly escapes those of socialist bent, while the second bit escapes the libertarians.

The only people who actually call for entirely unregulated markets are libertarians, and they have, frankly, no understanding whatsoever of how markets work. The only people, in turn, who believe that markets are entirely unregulated are socialists - and they have, frankly, no understanding whatsoever of how markets work.

So who are these people that you think do understand the working of the markets?

Pro-market social democrats? No, very few people understand what markets are or do - the Book Club reading material should help there though!

Doesn't every party have qualified economists i.e. bullshitters who can talk the talk whose job it is to try to coach the chiefs on talking it too? Do we even believe in markets here in Ireland - do they even exist except on a Friday in the carpark? Seriously, how extensive is markets in economics activity? As we said before, don't some markets e.g. television units dry up after a while and they need to invent a whole new technology? And eventually that initial mania dissipates and we're back to the point of a company just supplying the consumer and going through the motions and not even competing for market positions anymore it's just supplying the old stuff that either dies off, wears out, breaks ...

This is within a protected economics bloc however, and the introduction of competition from other blocs could well drive prices down and quality up. But Toyota will always generally sell X cars unless it makes inroads to a new arena of such and such vehicle or makes an entirely new vehicle but in the end they end up with a market that is not really a market anymore but it's just Toyota or IBM/Compaq/Microsoft replacing the old stuff and not doing any real competing ...

Auditor #9 wrote:

Doesn't every party have qualified economists i.e. bullshitters who can talk the talk whose job it is to try to coach the chiefs on talking it too? Do we even believe in markets here in Ireland - do they even exist except on a Friday in the carpark? Seriously, how extensive is markets in economics activity? As we said before, don't some markets e.g. television units dry up after a while and they need to invent a whole new technology? And eventually that initial mania dissipates and we're back to the point of a company just supplying the consumer and going through the motions and not even competing for market positions anymore it's just supplying the old stuff that either dies off, wears out, breaks ...

This is within a protected economics bloc however, and the introduction of competition from other blocs could well drive prices down and quality up. But Toyota will always generally sell X cars unless it makes inroads to a new arena of such and such vehicle or makes an entirely new vehicle but in the end they end up with a market that is not really a market anymore but it's just Toyota or IBM/Compaq/Microsoft replacing the old stuff and not doing any real competing ...

Class post. This makes me think about how strong the tendency is for firms to want to not compete - they form cartels and try to get into a monopoly position in which they don't have to compete. They use national interest to try to get protection for their markets and squeeze competitors out any way they can or buy them up.

The more an industry is capitalised, the more that brings about economies of scale - but it then wipes out weaker competition. It becomes very hard for a new firm to set up in competition with established firms. Microsoft, that still dominates our computers, is an extraordinary near-monopoly that has swallowed up competition. Half a dozen firms sell us nearly all our food. Globalism means that where this used to be at a national level it is now becoming world wide. If you look at what has happened in the last 100 years of trading and the growth of vast monolithic business empires you'd have to say that the tendency to monopoly is stronger than the tendency to competition.

cactus flower wrote:

Auditor #9 wrote:

Doesn't every party have qualified economists i.e. bullshitters who can talk the talk whose job it is to try to coach the chiefs on talking it too? Do we even believe in markets here in Ireland - do they even exist except on a Friday in the carpark? Seriously, how extensive is markets in economics activity? As we said before, don't some markets e.g. television units dry up after a while and they need to invent a whole new technology? And eventually that initial mania dissipates and we're back to the point of a company just supplying the consumer and going through the motions and not even competing for market positions anymore it's just supplying the old stuff that either dies off, wears out, breaks ...

This is within a protected economics bloc however, and the introduction of competition from other blocs could well drive prices down and quality up. But Toyota will always generally sell X cars unless it makes inroads to a new arena of such and such vehicle or makes an entirely new vehicle but in the end they end up with a market that is not really a market anymore but it's just Toyota or IBM/Compaq/Microsoft replacing the old stuff and not doing any real competing ...

Class post. This makes me think about how strong the tendency is for firms to want to not compete - they form cartels and try to get into a monopoly position in which they don't have to compete. They use national interest to try to get protection for their markets and squeeze competitors out any way they can or buy them up.

The more an industry is capitalised, the more that brings about economies of scale - but it then wipes out weaker competition. It becomes very hard for a new firm to set up in competition with established firms. Microsoft, that still dominates our computers, is an extraordinary near-monopoly that has swallowed up competition. Half a dozen firms sell us nearly all our food. Globalism means that where this used to be at a national level it is now becoming world wide. If you look at what has happened in the last 100 years of trading and the growth of vast monolithic business empires you'd have to say that the tendency to monopoly is stronger than the tendency to competition.

Businesses do indeed tend to monopoly or cartel wherever possible. The higher the 'barrier to entry' to a particular line of business - due to high setup costs, large economies of scale, or network effects - the harder it is for new companies to effectively compete with the established firms. Through a process of mergers and buyouts of the less successful by the more successful the industry will then tend to shrink to a handful of companies - who will if possible enter a cartel arrangement with each other - or one company - whereupos profits will tend to grow at the expense of the customer. That's the reasoning behind monopoly legislation (as well as anti-cartel legislation).

The situation is only meta-stable, though. Two endogenous effects can overturn the comfortable cartel - disruptive innovation is one, and the other is that the business grows sufficiently lucrative that it is worth an outsider with deep pockets entering the market, because the incumbents are so bloated and sluggish that even without economies of scale the venture is still rewarding. In addition, governments can intervene to break a business up into competitors (as was done with 'Ma Bell'), to foster new market entrants, or to change the regulatory environment in such a way as to remove the incumbent advantage.

However, this effect will never apply in the majority of markets, because the majority of markets have reasonably low barriers to entry and little or no economies of scale or network effects. It is immediately obvious in those markets it applies to, but even there nothing is permanent. Microsoft's operating system and office software hegemonies appear unshakable, but they are no more than a dozen years old - and IBM's grip appeared equally unshakable before Microsoft came along.

ibis wrote:

Businesses do indeed tend to monopoly or cartel wherever possible. The higher the 'barrier to entry' to a particular line of business - due to high setup costs, large economies of scale, or network effects - the harder it is for new companies to effectively compete with the established firms. Through a process of mergers and buyouts of the less successful by the more successful the industry will then tend to shrink to a handful of companies - who will if possible enter a cartel arrangement with each other - or one company - whereupos profits will tend to grow at the expense of the customer. That's the reasoning behind monopoly legislation (as well as anti-cartel legislation).

The situation is only meta-stable, though. Two endogenous effects can overturn the comfortable cartel - disruptive innovation is one, and the other is that the business grows sufficiently lucrative that it is worth an outsider with deep pockets entering the market, because the incumbents are so bloated and sluggish that even without economies of scale the venture is still rewarding. In addition, governments can intervene to break a business up into competitors (as was done with 'Ma Bell'), to foster new market entrants, or to change the regulatory environment in such a way as to remove the incumbent advantage.

However, this effect will never apply in the majority of markets, because the majority of markets have reasonably low barriers to entry and little or no economies of scale or network effects. It is immediately obvious in those markets it applies to, but even there nothing is permanent. Microsoft's operating system and office software hegemonies appear unshakable, but they are no more than a dozen years old - and IBM's grip appeared equally unshakable before Microsoft came along.

'Barrier to entry' - home pc manufacture seems to have a tolerable enough barrier to entry for new entrants and it's an interesting market to watch being quoted as a paragon of free marketism. The price is plummetting while you get more and more at seemingly shorter intervals. This is also happening with stick memory - one of the next big things as it can be responsible for reducing energy consumption as well as being a lot more durable and faster and lighter etc. etc. Do consumers watch these things though?

The Asus eee mini pc with linux installed is something which could dislodge Microsoft virtually overnight in home pcs now that we see Dell have gone mainstream with a similar mini pc. These things cost €300, fit in your handbag and basically connect to the internet and function as an overgrown ipod thus appealing to teenagers who know Bebo and music and not much else.

It's assembling components sometimes that's crucial but what about the components themselves? Is there a competitive market in screws, washers, diodes and all that bric a brac? Or do we not see (or need to get involved in) the haggling as it's done by wholesalers?

It seems to be the case that the beginnings of an industry shows battling, instinctual-like behaviour - aggression, competition, slaughter, buy-outs, mergers etc. all as a product is getting off the ground but afterwards there tends to be monopolies on certain things - google and yahoo and what else? is yahoo even that strong? And then afterwards again as knowledge grows or cost of production falls or a combination, there comes a plethora of items all vying for your money - cars, televisions, watches, portable dvd players... Which seems to operate in a free market scenario at that point.

Who controls the prices of springs, screws and washers though?

From the SBP today - Major cuts on cabinet agenda

Quote :

Major cuts in social programmes and the postponement of a range of investment projects are to be discussed by the cabinet today in a special meeting ahead of the most difficult budget of recent times.

It is understood that Minister for Finance Brian Lenihan will have to find spending cutbacks or fresh revenues well in excess of €3 billion as part of the budget negotiations.

Fears that corporation and capital gains tax receipts will plummet when they are paid in November are hampering government efforts to agree spending plans for next year.

There are particular fears about the €1 billion tax revenue which had been expected from companies in the IFSC, where many firms have suffered massive losses in the financial turmoil.

Money is down so cutbacks ...

Quote :

As revenues collapse, ministers will discuss a range of unpalatable options. Among the items which have been costed by senior public servants are:

* new restrictions on the wide range of child-related payments - many currently paid regardless of income level.

* the ending of free medical cards for everyone reaching the age of 70 and a return to the old system where those who qualified were means tested. Those who already have cards would not be affected.

Lenihan will today brief his colleagues on the worsening budgetary situation and the measures he proposes to regain control of the spiralling deficit in government finances. Even with major cutbacks, borrowing next year is still likely to be well above 4 per cent of GDP.

There are also cuts to the tune of 1billion rumoured in the HSE Kerrynorth P.ie thread on HSE budget slashing . Cuts will have to be made but is he making them in the right places? So far so good? - it looks like he is taking income into account for child benefit and medical cards and the low-paid won't suffer in that. It could of course pressure people who are homeowners but work in Govt deptartments or are moderately paid in the private sector.

Quote :

Sources believe that most government departments will get spending increases below the expected 3.5 to 4 per cent inflation rate. Spending may continue to exceed inflation in the health service, though this will be a sharp slowdown from the double-digit increases of recent years. The social welfare bill is likely to be considerably higher due to rapidly rising unemployment.

Lenihan could be judged on this budget and in particular the HSE budget and how he controlled it. The social welfare bill is in the order of 2 billion per year (is that right?) and I hope there aren't cuts in that

Quote :

Taoiseach Brian Cowen and Lenihan are believed to want to avoid any increase in the main income tax rates, but senior sources believe that considerable sums of revenue will have to be raised elsewhere.

Would a rise in the top rate be a disaster? It would be a reversal of promises made by the Govt at election time when they were all auction politicking before the people. The lower rate is low enough and could flex up small bit but within limits and should be very sensitive to money in the coffers each year. Raising the upper rate ... ? Wouldn't that be very harsh on a lot of people again?

Quote :

In the coming weeks, ministers will discuss the abandonment or postponement of many capital projects, a development which will concern the Green Party, which believes that investing in public transport is crucial to reducing carbon emissions.

If there is a general slowdown then the rate of CO2 emissions will fall anyway, won't they? I'd hate to see some capital projects like the Galway-Ennis road being shelved as I think it is a key component in this Centres of Excellence hospital strategy as well as being an artery for Shannon airport from the Galway direction.

And this:

Quote :

Serious examination is being given to using money from the National Pension Reserve Fund to pay for some key investments, notably the electricity interconnector with Britain.

If we want to continue attracting investment in renewables - which we SHOULD - then this interconnector is important. It might indeed be worth dipping into this fund for.

ibis wrote:

Businesses do indeed tend to monopoly or cartel wherever possible. The higher the 'barrier to entry' to a particular line of business - due to high setup costs, large economies of scale, or network effects - the harder it is for new companies to effectively compete with the established firms. Through a process of mergers and buyouts of the less successful by the more successful the industry will then tend to shrink to a handful of companies - who will if possible enter a cartel arrangement with each other - or one company - whereupos profits will tend to grow at the expense of the customer. That's the reasoning behind monopoly legislation (as well as anti-cartel legislation).

The situation is only meta-stable, though. Two endogenous effects can overturn the comfortable cartel - disruptive innovation is one, and the other is that the business grows sufficiently lucrative that it is worth an outsider with deep pockets entering the market, because the incumbents are so bloated and sluggish that even without economies of scale the venture is still rewarding. In addition, governments can intervene to break a business up into competitors (as was done with 'Ma Bell'), to foster new market entrants, or to change the regulatory environment in such a way as to remove the incumbent advantage.

However, this effect will never apply in the majority of markets, because the majority of markets have reasonably low barriers to entry and little or no economies of scale or network effects. It is immediately obvious in those markets it applies to, but even there nothing is permanent. Microsoft's operating system and office software hegemonies appear unshakable, but they are no more than a dozen years old - and IBM's grip appeared equally unshakable before Microsoft came along.

A very good post ibis which points out the fallacy of thinking that markets are mere playthings of an oligarchical elite of large dominating firms. As you say, disruptive technology and the fact that a market's attractiveness can exceed its entry costs acts as a natural pressure valve on the cartelising and monopolising instincts of markets. In addition to this natural regulatory system inherent in markets, government intervention can also be used to force necessary competition into a sector.

Microsoft is often being used as the example of megalomaniacal corporate behemothry but, as you say, it is barely a teenager in its role as the world's leader in software. Indeed just as it toppled the previous kingpin IBM, so too may Google topple Microsoft. Furthermore, applying the principle of Moore's Law to software market leadership, effective market dominance could be halving every 18 months or so given the exceptionally disruptive nature of innovations of that sector.

Markets need to be be created sometimes first - that surely means a bit of acceptable "megalomaniacal corporate behemothry" for a while (putting that in my sig )

Ford
IBM
[fill in others here]

Auditor #9 wrote:

Markets need to be be created sometimes first - that surely means a bit of acceptable "megalomaniacal corporate behemothry" for a while (putting that in my sig )

Ford
IBM
[fill in others here]

There might be a bit of that at the start, but that's only as a result of the advantage conferred on early movers. Vodafone were effectively the first UK mobile operator, Eircell was Ireland's, Amazon dominated the early online bookselling market and Rockefeller's Standard Oil effectively monopolised the oil industry in the late 19th and early 20th century. Thankfully, through the interaction of the profit motive, enterprise and market forces, other companies set up to compete with the early mover and a sufficiently competitive market begins to develop.

"megalomaniacal corporate behemothry", does actually sound quite good!

Ard-Taoiseach wrote:

ibis wrote:

Businesses do indeed tend to monopoly or cartel wherever possible. The higher the 'barrier to entry' to a particular line of business - due to high setup costs, large economies of scale, or network effects - the harder it is for new companies to effectively compete with the established firms. Through a process of mergers and buyouts of the less successful by the more successful the industry will then tend to shrink to a handful of companies - who will if possible enter a cartel arrangement with each other - or one company - whereupos profits will tend to grow at the expense of the customer. That's the reasoning behind monopoly legislation (as well as anti-cartel legislation).

The situation is only meta-stable, though. Two endogenous effects can overturn the comfortable cartel - disruptive innovation is one, and the other is that the business grows sufficiently lucrative that it is worth an outsider with deep pockets entering the market, because the incumbents are so bloated and sluggish that even without economies of scale the venture is still rewarding. In addition, governments can intervene to break a business up into competitors (as was done with 'Ma Bell'), to foster new market entrants, or to change the regulatory environment in such a way as to remove the incumbent advantage.

However, this effect will never apply in the majority of markets, because the majority of markets have reasonably low barriers to entry and little or no economies of scale or network effects. It is immediately obvious in those markets it applies to, but even there nothing is permanent. Microsoft's operating system and office software hegemonies appear unshakable, but they are no more than a dozen years old - and IBM's grip appeared equally unshakable before Microsoft came along.

A very good post ibis which points out the fallacy of thinking that markets are mere playthings of an oligarchical elite of large dominating firms. As you say, disruptive technology and the fact that a market's attractiveness can exceed its entry costs acts as a natural pressure valve on the cartelising and monopolising instincts of markets. In addition to this natural regulatory system inherent in markets, government intervention can also be used to force necessary competition into a sector.

Microsoft is often being used as the example of megalomaniacal corporate behemothry but, as you say, it is barely a teenager in its role as the world's leader in software. Indeed just as it toppled the previous kingpin IBM, so too may Google topple Microsoft. Furthermore, applying the principle of Moore's Law to software market leadership, effective market dominance could be halving every 18 months or so given the exceptionally disruptive nature of innovations of that sector.

Yes, Ibis is also saying there is an inherent tendency to monopolies in the free market, and that State interference in them is sometimes the prerequisite for enabling competition. There was an interesting interview this morning on RTE with the CEO of Aer Arann in which he mentioned that he could never have got started if the incumbent on the main routes, Aer Lingus, had not been pushed off a couple of them by Bertie to make room for AA as a competitor. Now he is coming under the squeeze from Ryanair. Big airlines regularly run loss leader routes in order to keep out or squeeze out smaller competitors.

This is not to say that there is no competition - as Ibis says, at a certain point of market dominance the whole thing can fall apart because of change of technology, changing markets, aging plant and so on, or because of an emerging new area, like China, that uses forms of protectionism and state supports to foster its start ups.

I may not have understood your point properly Ard Taoiseach, but it has taken a lot longer than 18 months for any dent to be made in Microsoft, and the dents have been made by free products rather than conventional commericial enterprises.

cactus flower wrote:

Yes, Ibis is also saying there is an inherent tendency to monopolies in the free market, and that State interference in them is sometimes the prerequisite for enabling competition.

I don't think ibis is actually saying that there is an inherent tendency to monopolies in the free market since he says that barriers to entry in the majority of markets are tolerable so a good level of competition and a lack of monopoly exists in most markets. He does allow for State intervention in some respects and some markets and I do agree with him there. The government does have certain roles in certain markets at certain times. It's my view that these are quite rare and the genius lies in discovering what and when these are.

Quote :

There was an interesting interview this morning on RTE with the CEO of Aer Arann in which he mentioned that he could never have got started if the incumbent on the main routes, Aer Lingus, had not been pushed off a couple of them by Bertie to make room for AA as a competitor. Now he is coming under the squeeze from Ryanair. Big airlines regularly run loss leader routes in order to keep out or squeeze out smaller competitors.

This does happen from time to time, indeed Séamus Brennan pushed Aer Lingus off the Stansted route to give Ryanair a start to compete with AL and BA between Ireland and Britain. This is all very good since the government is doing what it should be, ie enabling and encouraging competition between private sector operators of a market. This makes the market more efficient, the product/service better, increases employment and improves productivity.

Quote :

I may not have understood your point properly Ard Taoiseach, but it has taken a lot longer than 18 months for any dent to be made in Microsoft, and the dents have been made by free products rather than conventional commericial enterprises.

Oh well that was me surmising from the fact that IBM held its market dominace for decades, Microsoft held it for about 12 years while Google might only keep it for a couple of years. The point I was making is that in technology, the speeded-up nature of the business means that eras of dominance are becoming increasingly short-lived.

Ard-Taoiseach wrote:

cactus flower wrote:

Yes, Ibis is also saying there is an inherent tendency to monopolies in the free market, and that State interference in them is sometimes the prerequisite for enabling competition.

I don't think ibis is actually saying that there is an inherent tendency to monopolies in the free market since he says that barriers to entry in the majority of markets are tolerable so a good level of competition and a lack of monopoly exists in most markets. He does allow for State intervention in some respects and some markets and I do agree with him there. The government does have certain roles in certain markets at certain times. It's my view that these are quite rare and the genius lies in discovering what and when these are.

Actually, I would argue that in most industries, there is a tendency towards monopoly. Whether that tendency to monopoly leads to monopoly is a separate question - but if we assume that there will always be a business, A, which is more efficient than all others in the industry, then in the long run A should dominate the market. If its rivals are publicly traded companies, it will be possible for A to buy them out one by one.

However, there certainly are industries which are naturally monopoly-resistant. We tend not to even think of them as industries, though - for example, hairdressing, luxury restaurants - largely because of their small and fragmented character. Characteristics would include a very strong component of individual skill, the difficulty of standardisation (or the customer desire for differentiation), low capital requirements, minimal economies of scale - etc etc.

I'd also argue that the main market role for government is as a regulator and 'scene-setter' (market designer), and that that role is both pervasive and vital. Actual interference, though, I tend to agree, is rarely useful - and, indeed, probably argues poor market design in the first place.

Ard-Taoiseach wrote:

Quote :

I may not have understood your point properly Ard Taoiseach, but it has taken a lot longer than 18 months for any dent to be made in Microsoft, and the dents have been made by free products rather than conventional commericial enterprises.

Oh well that was me surmising from the fact that IBM held its market dominace for decades, Microsoft held it for about 12 years while Google might only keep it for a couple of years. The point I was making is that in technology, the speeded-up nature of the business means that eras of dominance are becoming increasingly short-lived.

Probably the case...mind you, both of those related to disruptive shifts in technological paradigm - IBM missed the mainframe-to-PC revolution, and Microsoft to a fair extent has never entirely grasped the desktop-to-internet revolution. Luckily for Microsoft, neither have most of their customers.

ibis wrote:

Ard-Taoiseach wrote:

cactus flower wrote:

Yes, Ibis is also saying there is an inherent tendency to monopolies in the free market, and that State interference in them is sometimes the prerequisite for enabling competition.

I don't think ibis is actually saying that there is an inherent tendency to monopolies in the free market since he says that barriers to entry in the majority of markets are tolerable so a good level of competition and a lack of monopoly exists in most markets. He does allow for State intervention in some respects and some markets and I do agree with him there. The government does have certain roles in certain markets at certain times. It's my view that these are quite rare and the genius lies in discovering what and when these are.

Actually, I would argue that in most industries, there is a tendency towards monopoly. Whether that tendency to monopoly leads to monopoly is a separate question - but if we assume that there will always be a business, A, which is more efficient than all others in the industry, then in the long run A should dominate the market. If its rivals are publicly traded companies, it will be possible for A to buy them out one by one.

However, there certainly are industries which are naturally monopoly-resistant. We tend not to even think of them as industries, though - for example, hairdressing, luxury restaurants - largely because of their small and fragmented character. Characteristics would include a very strong component of individual skill, the difficulty of standardisation (or the customer desire for differentiation), low capital requirements, minimal economies of scale - etc etc.

I'd also argue that the main market role for government is as a regulator and 'scene-setter' (market designer), and that that role is both pervasive and vital. Actual interference, though, I tend to agree, is rarely useful - and, indeed, probably argues poor market design in the first place.

Ard-Taoiseach wrote:

Quote :

I may not have understood your point properly Ard Taoiseach, but it has taken a lot longer than 18 months for any dent to be made in Microsoft, and the dents have been made by free products rather than conventional commericial enterprises.

Oh well that was me surmising from the fact that IBM held its market dominace for decades, Microsoft held it for about 12 years while Google might only keep it for a couple of years. The point I was making is that in technology, the speeded-up nature of the business means that eras of dominance are becoming increasingly short-lived.

Probably the case...mind you, both of those related to disruptive shifts in technological paradigm - IBM missed the mainframe-to-PC revolution, and Microsoft to a fair extent has never entirely grasped the desktop-to-internet revolution. Luckily for Microsoft, neither have most of their customers.

Where there is fragmentation, there you will find a franchise, or similar, that squeezes out real competition. Top of the market hairdressing in Ireland is dominated by two franchised chains. Even luxury restaurants are increasingly run in strings nominally by celebrity chefs.

ibis wrote:

Actually, I would argue that in most industries, there is a tendency towards monopoly. Whether that tendency to monopoly leads to monopoly is a separate question - but if we assume that there will always be a business, A, which is more efficient than all others in the industry, then in the long run A should dominate the market. If its rivals are publicly traded companies, it will be possible for A to buy them out one by one.

I see and you're very right to draw a distinction between whether a tendency actually leads to a reality. On the rest of it, the fact that Business A puts the rest out of business simply by being more efficient than the others isn't in itself as bad as it might sound. They have won market share fairly by being the better company. If they relax, become complacent and loosen their efficiency in their monopoly situation, another more efficient firm will be attracted to enter the market and greater efficiency will be restored. Markets exist to find the most efficient solution to problems and this is how they do it by weeding out the weak, inefficient and out-of-date firms while leaving us with the best.

Quote :

I'd also argue that the main market role for government is as a regulator and 'scene-setter' (market designer), and that that role is both pervasive and vital. Actual interference, though, I tend to agree, is rarely useful - and, indeed, probably argues poor market design in the first place.

As would I. I fail to see how the government can both be the referee and player in economic activity. This leads to conflicts of interest and excess and misguided intervention. The government should restrict itself to being a laissez faire referee.

Quote :

Probably the case...mind you, both of those related to disruptive shifts in technological paradigm - IBM missed the mainframe-to-PC revolution, and Microsoft to a fair extent has never entirely grasped the desktop-to-internet revolution. Luckily for Microsoft, neither have most of their customers.

Exactly, and since innovations in the tech sector occur at an increasingly blistering pace, the idea that any one firm can build a long and lasting grip on dominance is not feasible. The titans of the industry build their empires on foundations of quicksand.

http://www.business-standard.com/india/storypage.php?autono=326662

Monopolies don't attain and maintain their position by neutral good practice. Most monopolies, if they are not a natural monopoly such as a utility or airport, result from predatory and ruthless exclusion of competitors by fair means and foul and spend vast amounts in the courts battling to resist regulation. Once they attain their monopoly position, far from providing ultra efficient services and goods, the exploit their position with higher prices and phony innovation. We have just stripped of the latest version of Microsoft Office from new pcs as it lacks a lot of features in older versions and is slower to use.

When there is not a single monopoly operator, there is often a cartel operating between a few big players in order to keep prices up and to avoid pressures to innovate.

This is clearly not the whole story about capitalist production: the firms that become monopolies and cartels may in their time have been highly innovative and competitive. Monopoly provides a certain stability of production. Microsoft dominance overcame the problem of compatibility between different forms of software. But overall, monopoly is a disaster customers, who can be milked, with no option of going elsewhere to buy.

Just one example from the link
"..similar type of abusive behaviour and unfair practice has been observed in segments like microchips. Intel dominates the world market for microchips with an 80 per cent share, while the other US-based firm, AMD, has a 20 per cent market share. In a recent case filed in the US District Court of Delaware, AMD claims that Intel paid off Acer, Dell, major Japanese manufacturers, system builders and distributors ‘to close their doors to AMD'. Where it could not buy exclusivity from PC makers, AMD alleged that Intel focused its payments on keeping away computers based on AMD microchips from large business customers.

Recently, while the cases in the US and Europe are still being adjudicated, Korea has been the first country to charge Intel with a ¤16.5 million fine for rebates offered to Samsung and Trigem to buy only its chips and not from AMD."

The whole question of monopoly cannot be addressed without understanding the implications of pricing mechanisms; plus there are a whole load of other issues such as product life cycle, zero-game theory, human nature and regulatory (imposed or mutually agreed) frameworks. Imo, the essence of monopolisation can't be discussed without understanding how a company barters its product for a other products, services or assets. (Money is merely an intermediary facility that makes transactions easier and establishes a market price for the commodity/asset being sold.)

The purest form of pricing mechanism is an auction whereby a provider of one commodity/asset barters (sells) his/her asset for another buyer's asset. Intel is a good example here. Each day, week or whatever, in a truely free market, Intel would put so many chips up for auction. End users, such as a PC company or mobile phone manufacturer, would bid against each other in order to win the chips. The auction would be in €'s but the buying companies are really trading on their ability to sell their finished products; the € merely acting as a proxy for the delivery of one asset class (microchips) for another asset class (pc or mobile telephone). The € has acted as a financial lubricant and made the markets more efficient by not requiring the bidders to deliver bulkly assets to Intel, who in turn would have to sell those assets, but instead trust the fiat currency to be valueable enough to price their trade and ultimately recoup the other end of the barter deal when selling the assets to consumers.

[Of course, the ultimate end users, the consumer, merely trade their time, labour and choice-set as their only assets. I'm particularly fascinated by the introduction of consumer non-currency transactions such as direct deposit/withdraw. I increasingly hear of people complaining that they're working every hour possible only to find when they go to a whole-in-the-wall that the mortgage company, auto financier, utility companies and insurance companies have drained their accounts so that they are pushed to make ends meet. I hear: "I'm not working for myself but for these big companies." If enough people coalesced this though pattern at one moment in time, they'd understand the essence of their shared existence. This has to put fear into the heart of our governors and probably why currency will be around for some time to come.]

Anyhow. The problem with auction pricing is that it is inefficient in the manufacturing process. A manufacturer would not know at any given time what price and ultimate income they'd receive for their asset. They'd have a hard time planning for the future. They'd have an idea given past data on previous auction sales but their ability to plan for the unexpected would severly limit their ability to take on price risk. In order to fix this uncertainty, they would ideally wish to enter into forward or futures agreement which would eliminate some of the pricing uncertainty.

Such a system already exists for all basic commodities but such a system would be considered unwieldy for every business sector. Hence, sectors such as chip manufacturing rely on private agreements in order to arrive at a pricing mechanism. They have to agree a price with a mobile phone manufacturer. Intel wants the highest price per chip but the mobile manufacturer is able to tell Intel that at a certain price it cannot buy the chips because the average consumer would not be able to afford to buy a mobile phone. So they agree a mutual price based upon consumer wealth, habits, manufacturing capabilities, transporation cost, etc. It is when the private price agreement takes place that all market transparency disappears. The ultimate end user, the consumer, is in ignorance of the non-market pricing agreements. When we add on the ultimate desire of a company to satisfy their shareholders requirement of increased profits every quarter, every year and so forth, we bwgin to see where the manufacturers's "agreed" price allow them to begin to set internal market monopoly prices in order to satisfy the shareholder's desire for ever increasing profits.

To "consumer wealth" we should add - availability of credit to consumer.

Weve seen the effect of pricing part-based on "consumer wealth" in Ireland over the past six years or so. With little competition on food prices, a housing shortage on the one hand and cheap credit, and plenty of earned income on the other, pricing of some commodities was simply pushed to the limit the market would bear. After the cost of production was recouped there was a hefty profit margin. '

Profitability began to be squeezed by increasing wages costs, greater regulation, more costly technology, competition usw. The paye worker worked for a living - food, car and pay the mortgage, and the small business person worked all the hours squeezed between the banks, the staff shortages, rising costs and the increasingly saturated market. A whole layer of people just got a miniumum wage job, and couldn't afford debt.

As it turned out, the only people who were coining it on a grand scale were the financiers, who pushed the loans out. Low interest rates were an inducement to banks to maintain profits by increasing the amount loaned. In so far as that money can't be recouped, it is gone - or was gone until Messrs. Paulson and Bernanke came along and suggested that we should make it all right for the lenders. At the same time these gentlemen have presided over the greatest shift towards monopoly of control over finance since the system began, with the numbers of banks decimated in the interests of consolidation - this process is far from finished.

Are you suggesting that all tendering processes should be published so that the public and other suppliers can see how the price was arrived at?

It would be interesting to see what Smith says about pricing, too.

cactus flower wrote:

As it turned out, the only people who were coining it on a grand scale were the financiers, who pushed the loans out. Low interest rates were an inducement to banks to maintain profits by increasing the amount loaned. In so far as that money can't be recouped, it is gone - or was gone until Messrs. Paulson and Bernanke came along and suggested that we should make it all right for the lenders. At the same time these gentlemen have presided over the greatest shift towards monopoly of control over finance since the system began, with the numbers of banks decimated in the interests of consolidation - this process is far from finished.

Are you suggesting that all tendering processes should be published so that the public and other suppliers can see how the price was arrived at?

It would be interesting to see what Smith says about pricing, too.

You've hit the nail on the head. So much of the new derivative products are only traded among a small number of market players and the actual prices quoted (bid/ask) are set by these players, and only know by these players. The market pricing mechanism is completely hidden from all other players affected - mortgage lenders, credit card lenders, insurance companies. etc., etc., etc. Meanwhile, the regulators and the governments of the world chose to ignore a $400 trillion (supposed) market by allowing the players to account for these products off their balance sheets. There was zero accountability and zero transparency in the pricing mechanism.

The near-monopolistic pricing mechanism worked just fine as long as the few players in the game would sell and buy among themselves at makey-uppey prices in the absence of an auction market. As the long as the underlying collateral (loans) performed, everyone from governments to regulators were happy to let the game continue. In fact, it continues to this very day. Although I've heard that banks are quietly agreeing to eliminate offsetting transaction and thereby the dollar value of the entire market is shrinking somewhat.

The affect of this private monoply pricing mechanism is somewhat subtle in two main ways. First it gave the impression that these derivative markets had high and sustainable values which lead to over confidence in the market's observation of asset prices. More importantly, in the absence of an auction market, the assets risk value was greatly under-reported. Many market buyers of the derivative securities were mindful and somewhat suspicious of the price of their securities due to the absence of a more transparent pricing mechanism. This uncertainty has, in turn, lead to greater fear in the market and the rush to mark down prices below their true values in some cases.

The $700 billion rescue package will be dealing with the purchase of just one small segment of the derviatives market - i.e. mortgages and mortgage backed securities. One of the biggest stumbling blocks to the passage of the legislation has been on how much the new government agency should pay when buying up all these "distressed" securities. No-one, and I mean no-one, knows how much these things are really worth. The govt agency could end up paying too much for them and giving the Wall Street bankers a huge capital infusion and get peanuts in return.

The mortgage market is only one segement of this whole derivative shell game. There is the credit card, auto, consumer loan and many other variants all waiting to be priced. Trillions of assets are laying around in which no one can definitively arrive at fair market value. If anyone thinks that the mortgage bailout is a panacea, I suggest they think again. The people who are losing their jobs on "main street" USA won't be paying back their auto, credit card, etc. loans either; so the underlying security collateral will deteriorate. The proverbial will be hitting the fan for years to come.