It is always the argument of those who call for protection against "unfair competition" be it too large or efficient a domestic competitor or an overseas one, that the competitor will "undercut" everyone by selling at a loss, but they will then harm the consumer by charging excessive prices once they control the market. Of course, they pretty much have to say that, as who is going to support a company which says "it is unfair for you to get cheap goods, you have to be forced by law to pay my higher prices"? So they have to pretend that somehow their competitor will establish  the dread "monopoly" and harm the consumer. Of course, the truth is they simply want protection of either their high profits or protection for their inefficiency against a more nimble competitor, but at least they sound sincere.

Now there are some cases of foreign nations subsidizing their companies, but again I have to ask what the harm is. After all, if France subsidizes French exports, that amounts to taxing French people and spending that money to make goods cheaper for Americans. If France wants to send tax money overseas to us, who am I to complain? Yes, it means there will be some market dislocations, but such is life. Every action causes changes to the market. I don't see why the foolish generosity of French politicians should be ignored and imports blocked to keep a few industries as they were. The market is not static, things change. Why does the preservation of specific jobs come before a windfall to consumers?

Well, it doesn't really matter, as the argument is always the same. The competitor is always painted as providing cheap goods only to gain market control, and at that point they will stop selling at a loss, subsidizing the industry, selling cheap abroad and deal at home, or whatever other scheme has been supposedly used to control the market.

I have shown before in an abstract sense how this is impossible. How, so long as no artificial political barriers are raised against entry into the market, any attempt to exploit control of the market will simply result in an influx of investment and a whole host of new competitors who will force the would be monopolist to once again lower prices, and how this cycle will continue until such a time as the monopolist either goes out of business (if they are selling at a loss), or realizes they must sell at the lower price (if they are more efficient). In the first case, the monopoly fails, in the second case consumers end up with cheaper goods despite the monopoly, so in neither case do I see any real harm done. Yes, some people "unfairly" lost business, but that is life. Competitions is not always "fair". This isn't a board game or sporting event, some companies have "unfair" advantages, and sometimes the best man doesn't win. It is not the purpose of the government to make life "fair", simply to protect rights.

However, having shown this abstractly, many still don't seem to believe me. They simply argue that it is nice in theory, but it doesn't work in practice. So, let me show you how this works in reality, using a very simple example, cheap lighters from dollar stores.

Before I begin, let me confess to the worse than capital crime of smoking. As it appears to be the one unforgivable sin of the modern era, I know I will be shunned and driven form polite society for this revelation, but, before you tar and feather me and run me out of town, if not draw and quarter me, at least listen to the rest of the argument, then you can stick me in the stocks and brand my cheeks with the "S" of shame and hang some insulting sign around my neck before asking the townspeople to pelt me with rotting fruit and vegetables.

As a smoker, I am confronted daily with the need to generate flame at random locations. In the past, I solved this by using the relatively expensive "premium" lighters found in gas stations, drugs stores, and elsewhere. When I did not have a lighter, I would use the matches provided free from some cigarette vendors (as well as the very few bars and restaurants which continue the anachronistic practice of supporting smokers). However, as these premium lighters are expensive, and operating on the theory that "a lighter is a lighter", my wife bought me some of those "three for a dollar" or even "six for a dollar" packs of no-name lighters. And, honestly, the first few times, they worked fine. They may have lasted a little less time, the flints may have been used up long before the fluid, and every so often the flint and spring would simply shoot out of it, taking the striker wheel with them, but since they cost one third or less of a regular lighter, a few such mishaps were well worth the savings.

But, it appears that the makers of such lighters, having secured a market, decided to squeeze a few more cents profit out of each item and found an even lower grade supplier. Now, between the defective valves and the soft, almost useless flints, it is almost impossible to generate a flame using one of their lighters. Even when the flint manages to spark before wearing completely away, the misdirected valve means there is no butane for the spark to ignite. So, despite the added costs, I find myself going back to the premium lighters, as I have lost confidence in the makers of cheap lighters.

So, besides airing my gripes about cheap lighters from dollar stores, what is my point? Well, this prosaic little story provides, in microcosmic form, a perfect example of why a non-coercive monopoly cannot survive unless it provides either superior quality or cheaper prices, and why attempts to "undercut" or "dump" goods while cashing in later will simply not work.

You see, the discount lighter makers are a perfect stand in for the would be monopolist. They provided cheap goods which drew customers away from established firms. However, when they then tried to garner more profits by reducing quality (though it would have been the same had they raised prices), customers simply flee back to the established firms. Despite their efforts to secure a market for themselves, they have no ability to hold customers once quality falls or prices rise.

Now, some will argue it is not a perfect example, as they did not drive Bic et al out of business. However, from my story above, you should be able to spot the flaw in that argument. Let us assume tomorrow I go into a gas station and ask for a Bic. Let us also suppose that the attendant says "Didn't you hear? The cheap lighter companies drove them out of business; all we have are these three for a dollar Chinese imports." (I have a very erudite gas station attendant who speaks with included semicolons.)

Now, that would actually be a better analogy to the dumping argument. However, you can see the immeidate problem. My response? "How about some matches then?" And thus the coercive monopolist is bankrupted. Having started off selling at a loss, he now finds his customers running to substitutes when he raises prices (or reduces quality), and so he is driven from business.

Of course, in the long run, even that would not happen. Some businessman, hearing of the revived demand for Bics would likely buy up their old assets at pennies on the dollar, maybe even acquire their old trademark, and revive the competing brand, putting the cheap lighters out of business even more quickly. Or, if they could not buy out the old Bic assets, they would invest in building new plants, which, though it would take longer, would have the same result.

Which brings me to my question for those who often respond to my arguments that they are "nice in theory". What is there that makes my lighter argument different from any other good? What is there about any manufactured good which makes it impossible for competition or substitution to occur should a monopolist attempt to charge above market prices? Granted, there may be some time to establish new plant and train employees, but I think that is much less time than many think. In fact, if you recall how quickly war industries were established in 1941, and how quickly previous housewives were made into industrial workers. Not to mention that all the workers driven out of business will remain to be hired by new firms, creating a pool of skilled workers form which hiring can be done.

And so, I simply cannot see how anyone can reasonably argue that a would be monopolist, foreign or domestic could possibly manage to monopolize a market, except by providing cheaper or better made goods. And if they do provide goods more cheaply or of betetr quality, then who cares whether it is a monopoly or a thousand firms? If you get your goods at the lowest possible price or in the best possible quality, does it matter to you how much competition there is?

POSTSCRIPT

My final point actually relates to a recurring problem in economics, the failure to see the market form the point of view of the consumer, looking instead at "macroeconomics" solely from the point of view of labor or producers and ignoring the fact that every being living exists as both a consumer and producer (unless they are supported by a producer, of course, in which case they are only a consumer.)

Here is a partial list of my earlier posts on protectionism, monopoly, and viewing the market form a single perspective (either entirely from the perspective of consumer or producer/laborer):

Two Perspectives
How To Blame the Free Market
The Limits of Technocracy
Exploiting Workers?
Spend for the Fatherland, Citizen!
Protectionism
War Stimulates the Economy? Let's Nuke San Francisco!
Four Elections
The Theory That Wouldn't Die
Beware Populist Deception
Saving Us From Lower Prices
Term in Search of a Definition
Fear of Trade
To Correct Debra Saunders
The High Cost Of Protection
The Limits of Econometrics
The World's Oldest Myth
I Am A Conservative But...
Authoritarian Oil Talk
STOP BIG PORCELAIN NOW!
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
Those Darn Speculators
Fear of the "Big"
The Party Of Stagnation, Lies or Marx?
Coincidence is not Causation
Technology and "Natural Monopolies"
Misplaced Blame and A Power Play
Monetary Issues Made Simple Part I
Monetary Issues Made Simple Part II
Remember I Predicted It
Inescapable Logic
Prelude to a Full Argument
Microloans and the Community Reinvestment Act
History Repeating Itself
Smaller Government , Fair Weather Friends and Special Cases
An Analogy
Economic Illiteracy

I hope to put together a better list of all my economic articles shortly and may append it to this post when done.