First, let me say that I have always been a believer in the free market. Only years after reading Ayn Rand, Adam Smith, Thomas Sowell, and being a staunch libertarian for years did I start to question the system to which I adhered. The question this brief essay asks is simply this: does capitalism tend towards monopolies? My answer will be a qualified “yes.” In this case, the qualifications to my answer are most important and will be elaborated below.

Price is communication of supply and demand. Advertisement seeks to move the demand curve by changing communication. The recent phenomenon of mass media and its corresponding advertising is a new and frightening thing. The very word “advertise” (ad-vertere) means to “draw towards” something, away from other things. Advertisement changes free market communication in an attempt to move the demand-curve. This can happen either because of better communication, whether or not the product is better than other products. Once a monopoly is established, or even a significant “edge” over a competitor, profits can be channeled into advertising, drawing people’s attention away from better products. As long as the supply of a better product can remain uncommunicated, a less beneficial company can run out better companies and better products. As a company grows to hold a greater and greater percentage of the market, the “entry barrier” becomes virtually impossible to cross by new companies and the resulting monopoly has no motivation to improve. A company only has to distract consumers from other products in order to expand—it does not need better products, only better communicated products.

Even though advertising can result in lower prices, a monopoly can afford to lower prices (even temporarily) for a period in order to drive competition out of business. Predatory advertising is illegal, of course, but the goal of advertising in its very essence is consolidation—just like the goal of competitors is victory. This informative entry on the Concise Encyclopedia of Economics indicates that advertising doesn’t necessarily give rise to monopolies. Also, this defense of advertising (PDF). Perhaps capitalism in itself doesn’t lead to monopolies, but advertising seems to grow spontaneously out of capitalism. Whether or not there is a causal relationship, capitalism and rampant advertising coexist; since capitalism is a language, advertisement language must be discussed.

The more of a particular market is controlled by a company, the more can be spent on advertising; the more spent on advertising, the more a company controls a particular market even more. Here is the issue: people buy things they believe are beneficial. It is the Socratic Paradox: “No one does wrong knowingly or willingly.” The purpose of advertising is to convince people your product is best whether or not it is. The trends in advertising are obvious in this respect—no longer is quality the theme, but emotive clips designed to catch your attention. Products are no longer being sold, they are being pushed.

Advertising may be used when a monopoly may no longer provide the only, best, or cheapest beneficial product. In essence, advertising is little more than propaganda—memorable and meant to control communication. The motivation for a company not to have competitors is this: creativity is tiring. A monopoly has no reason to improve efficiency and when profits (or loans) can be channeled into advertising keeping people from buying other products, a monopoly starts to become more effective (getting the desired results) but not more efficient (reaching goals with less input). Effectiveness is the goal of efficiency, but efficiency is always subservient to effectiveness. For example, I could be very efficient doing ineffective things! But I could be inefficient at effective things and still maintain an inefficient but effective monopoly. Increased efficiency only becomes an issue when there is a significant threat within the market.

For example, when the old web browser Netscape was announced, Microsoft reacted by bundling the “free” Internet Explorer with its operating systems, forcing out the foothold Netscape should have gotten. As Microsoft bundled more for free, competitors began open source projects free of charge to the consumer. The most notable of these is perhaps Mozilla Firefox, which holds a 23.75% usage share, dragging Internet Explorer down from its 2002 peak of 95%. The emergence of the open source market is more than can be discussed thoroughly here.

The goal of advertising is to move the demand curve (D1) to (D2). The result of this can mean that a monopoly’s high prices can actually become the new equilibrium once demand is increased enough. It is not a matter of quality or benefit, but perceived benefit. This process can occur ad infinitum, needing only to manipulate the equilibrium point (E1) to another point (E2) where the price was originally kept. As long as an entry barrier can be established and an effective monopoly established, I see nothing to fix the problem of monopolies.

Even if you disagree with everything entertained above, government bail-outs give companies an excellent reason for creating monopolies: buy out competitors, operate with inefficient (but effective!) measures to consolidate to such a point that the federal government needs your monopoly to continue. Of course, only do this after you’ve paid yourself excessive salaries, then get bailed out and keep your inefficient and effective monopoly—now state-sponsored! Obviously the bail-outs were bad economics at best, immoral at worst. Adam Smith didn’t predict this. The Invisible Hand is a pleasant fiction; everyone pursuing her self-interest may benefit society, but the mistake is to believe this benefit is universal or even more than perceived. According to principles of evolution, Capitalism betters the human race at the expense of those who die under its weight. Competition is a violent force in every science but economics. This is a mistake. A species always seeks its self-preservation in the same way that a monopoly seeks itself own preservation at the expense of possible competitors.

So, to ask a practical question: how can advertising be controlled without harming free markets? I’d like to think there is an equation to show how monopolies tend to arise, if not out of capitalism itself, then out of the union of capitalism, mass media, and advertising. The sorts of monopolies that emerge out of this are likely to be effective at making money and grossly inefficient. The benefit of these monopolies will stagnate, especially if they are bought out by the federal government. This trend of advertising, buying out competitors, and intentionally going bankrupt are intimately related issues. Of course, I can’t think of a capitalist term to prevent these monopolies.

Most likely, this sort of competition is coercive and predatory, in which case it is anti-competitive. At which point can a company’s advertising be deemed “coercive” or “predatory”? That, I really can’t say. But it needs to be defined. Obviously, this brief essay is not the place for that. Capitalism as it exists today tends towards monopolies. Another question in this series should be how to prevent advertising monopolies within the language of the free market or whether we need to abandon free market terminology for something more suited to our condition.

Related posts brought to you by Yet Another Related Posts Plugin.