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John is a shoe producer in a
far country of Los Zapatos.
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He achieved his significant market position in
an honest manner, i.e. through offering desirable
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products to customers, introducing innovations and
making sure to be up to date with current trends.
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For many years he managed to correctly
anticipate his client tastes, and this
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has lead to huge success and handsome profits.
Unfortunately, success made John a little lazy.
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He started to invest a little less in his
business, he was basing on “good old bestsellers”,
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rather than seek for new trends as well. He
certainly didn’t expand his business as before,
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rather focusing at maintaining status quo. The
competition, however, had a different approach.
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When John slowed down, competitors rapidly
expanded. Both domestic and foreign competitors
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increased their market shares, and lured John
clients with lower prices and better quality.
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John observed his tumbling
sales records with great worry.
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He still had a powerful market position, but he
knew something has to be done to maintain it.
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He had two choices. Either he could increase
his productivity, once more focus on innovation,
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cut costs, invest in better capital goods OR… he
could simply start lobbying for some regulations,
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which would constrain his competition. John
chose option number two. Why? Well, for one:
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because he could, and second: because it
was much easier than the option number one.
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After he made his decision, he had
to think about what should be done,
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for his plan to be successful. Oh, but
he had so many potential tools to use!
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He could, for example, lobby that the government
should grant him an exclusive license to sell
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shoes in his country, or mandate people to buy
at least one pair of shoes a year from him.
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He quickly realised, that this would be
excessive and no one would go for that.
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Not with shoes anyway. He knew that he
must be much more subtle with his demands.
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Best way would to present his demands in a
way, that people would think, that he cares
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not for his profits, but rather about the
common good, about employees or about customers.
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He also knew that he wouldn’t be able to be a sole
monopolist, so he decided to join forces with the
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other existing domestic producers in order to
constrain (maybe even eliminate) all foreign
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competition, and also to make it almost impossible
for a new domestic competition to emerge.
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He presented his ideas to his main domestic
competitors, and when they were on board,
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together they started a Shoe Producers Association
of the Great Nation of Los Zapatos. John was
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elected a new president of the association, which
quickly started working on a bills proposals.
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The point of the first bill proposal was to
impose a very high tariff on shoe imports.
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The explanation was, that the foreign
competition was “unfair” as they use
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price dumping. The argument was made, that the new
tariff would also save domestic jobs, which were
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endangered by foreign competition. John and other
associates gave many tv and radio interviews,
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in which they were presenting arguments in
favour of the bill proposal, the wrote articles,
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statements and declarations, and tried to convince
local politicians to their cause. The clients were
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very much against this proposals, as it would
limit their possible choice, but their voice
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wasn’t heard enough. After all, it wasn’t as if
they were in some kind of “consumer association”.
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The shoe producers thus won,
and the new bill was passed.
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From now on, if a consumer wanted to buy shoes,
he had to go to domestic producer, because foreign
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competition product was too expensive, due to
tariffs. So, that’s one of Johns problems solved!
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There was one more problem however. John knew,
that lack of foreign competition would lead to
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higher profits for domestic producers, and higher
profits would eventually lead to new domestic
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competition. Blocking new domestic competition
was harder, than blocking foreign competition.
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In case of foreign competition, Association
could invoke job saving or unfair competitive
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advantage as an argument, but it wouldn’t make
sense in case of new domestic competition.
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John proposed a different approach, and said that
bad shoes are a cause of various afflictions,
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which is not the case for quality shoes.
And because everyone should want to have
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good quality shoes, shoemaking should
be licensed, and shoes certified,
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to make sure, that clients feet would
be protected from the bad producers,
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who produce low quality shoes. License would not
be free of course. Quite the opposite, it would
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be very expensive - and – if anyone wanted to get
it, would have to fulfil some harsh requirements.
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The requirements was to be set by Shoe Producer
Association of the Great Nation of Los Zapatos,
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as they were clearly the experts on this matter.
The certificate would be granted by the special
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commission, in which members of Association
would participate as well. From now on,
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new shoe producer would have to follow detailed
instructions during the production process,
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to have a chance to get a certificate, and sales
without the certificate would be forbidden,
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for the good of the customer – of course.
Association once more created a bill proposal,
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which quickly passed, because who wouldn’t want to
protect the customers from the low quality shoes!
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John and the other “old” producers could afford
to buy an expensive license, but unfortunately
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the cost was too big for the “new players”. This
effectively discouraged potential competition.
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“Luckily” John and the “old players” met every
production requirement, that they themselves
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created, so their shoes could be certified.
This was a smart move from John, because he
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started small, and although he always cared very
much about the quality of his product, it took
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him years to meet all the high requirements,
that the Association now imposed on everyone,
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thus he knew very well that this would discourage
potential competition even more. Of course John
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would never admit publicly, that his ideas has
anything to do with discouraging the competition.
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He would always talk about the good
of the customer and his healthy feet.
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And that’s how the John and the others
created a monopoly, or should we say,
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oligopoly in Los Zapatos. From now on, someone
who wanted to enter the shoe manufacturing market,
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would have to have a huge determination, and much
higher financial means. Entry barriers went up
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significantly. Who gained and who lost?
The obvious benefactors of this monopoly
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privileges are John and other “old” domestic
producers. They can rest easy, that a new
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domestic or foreign competition is very unlikely
to emerge. They will be able to achieve monopoly
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price if theirs, as Rothbard writes, “demand
curve is inelastic, or sufficiently less elastic,
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above the free-market price.” 1 It is possible
that Johns’ employees would also benefit,
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as they would keep their job, otherwise lost
if John would have lost his market position.
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Who looses? The foreign competition,
who are blocked by the high tariff.
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Potential domestic competition, as the entry
barrier is much, much higher, and the customers,
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who now have less choice and pay higher prices
due to lower shoe supply and/or monopoly prices.
