Competition law
Basic concepts
History of competition law Monopoly Coercive monopoly Natural monopoly Barriers to entry Herfindahl–Hirschman Index Market concentration Market power SSNIP test Relevant market Merger control
Anti-competitive practices
Monopolization Collusion Formation of cartels Price fixing Bid rigging Product bundling and tying Refusal to deal Group boycott Essential facilities Exclusive dealing Dividing territories Conscious parallelism Predatory pricing Misuse of patents and copyrights
Enforcement authorities and organizations
International Competition Network List of competition regulators
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A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity. (This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry)^[1] Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.^[2] The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is business entity that has significant market power, that is, the power, to charge high prices.^[3] Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).^[4]

A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in a game theoretic manner – meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition in which companies are "price takers" and do not have market power.

When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition. (See also Bertrand, Cournot or Stackelberg equilibria, market power, market share, market concentration, Monopoly profit, industrial economics). Sometimes governments decide legally that a given company is a monopoly that doesn't serve the best interests of the market and/or consumers. Governments may force such companies to divide into smaller independent corporations as was the case of United States v. AT&T, or alter its behavior as was the case of United States v. Microsoft, to protect consumers.

Monopolies can be established by a government, form naturally, or form by mergers. A monopoly is said to be coercive when the monopoly actively prohibits competitors by using practices (such as underselling) which derive from its market or political influence (see Chainstore paradox). There is often debate of whether market restrictions are in the best long-term interest of present and future consumers.

In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly of a market is not illegal in itself, however certain categories of behavior can, when a business is dominant, be considered abusive and therefore incur legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies, but they rarely provide market power. The government may also reserve the venture for itself, thus forming a government monopoly.

Market structures[link]

In economics, the idea of monopoly is important for the study of market structures, which directly concerns normative aspects of economic competition, and provides the basis for topics such as industrial organization and economics of regulation. There are four basic types of market structures by traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a market structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed monopolistic competition, whereas by oligopoly the companies interact strategically.

In general, the main results from this theory compare price-fixing methods across market structures, analyze the effect of a certain structure on welfare, and vary technological/demand assumptions in order to assess the consequences for an abstract model of society. Most economic textbooks follow the practice of carefully explaining the perfect competition model, only because of its usefulness to understand "departures" from it (the so-called imperfect competition models).

The boundaries of what constitutes a market and what doesn't are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics (grapes sold during October 2009 in Moscow is a different good from grapes sold during October 2009 in New York). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of grapes in Russia, for example, which is not a market in the strict sense of general equilibrium theory monopoly.

Characteristics[link]

• Profit Maximiser: Maximizes profits.
• Price Maker: Decides the price of the good or product to be sold.
• High Barriers to Entry: Other sellers are unable to enter the market of the monopoly.
• Single seller: In a monopoly there is one seller of the good which produces all the output.^[5] Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.
• Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.

Sources of monopoly power[link]

Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry; economic, legal and deliberate.^[6]

• Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.^[7]

Economies of scale: Monopolies are characterised by decreasing costs for a relatively large range of production.^[8] Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. Monopolies are often in a position to reduce prices below a new entrant's operating costs and thereby prevent them from continuing to compete.^[8] Furthermore, the size of the industry relative to the minimum efficient scale may limit the number of companies that can effectively compete within the industry. If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, meaning that these companies cannot produce at an average cost that is competitive with the dominant company. Finally, if long-term average cost is constantly decreasing, the least cost method to provide a good or service is by a single company.^[9]

Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry.^[10] Large fixed costs also make it difficult for a small company to enter an industry and expand.^[11]

Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology.^[8] One large company can sometimes produce goods cheaper than several small companies.^[12]

No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.

Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good.

Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the greater the probability of any individual starting to use the product. This effect accounts for fads and fashion trends.^[13] It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers.

• Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.
• Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see anti-competitive practices).

In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. Great liquidation costs are a primary barrier for exiting.^[14] Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.

Monopoly versus competitive markets[link]

While monopoly and perfect competition mark the extremes of market structures^[15] there is some similarity. The cost functions are the same.^[16] Both monopolies and perfectly competitive companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows:

• Marginal revenue and price - In a perfectly competitive market price equals marginal revenue. In a monopolistic market marginal revenue is less than price.^[17]

• Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question.^[18] A customer either buys from the monopolizing entity on its terms or does without.

• Number of competitors: PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.^[18]

• Barriers to Entry - Barriers to entry are factors and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, exit or competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.

• Elasticity of Demand - The price elasticity of demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.

• Excess Profits- Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors which can enter the market freely and decrease prices, eventually reducing excess profits to zero.^[19] A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.^[20]

• Profit Maximization - A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs.^[21] The rules are not equivalent. The demand curve for a PC company is perfectly elastic - flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P.

• P-Max quantity, price and profit - If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, and realise positive economic profits.^[22]

• Supply Curve - in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied.^[23] In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both." ^[24] Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply "curve" would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply "point" would be established. The locus of these points would not be a supply curve in any conventional sense.^[25][26]

The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company.^[27] Practically all the variations above mentioned relate to this fact. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve. Assume that the inverse demand curve is of the form x = a - by. Then the total revenue curve is TR = ay - by2 and the marginal revenue curve is thus MR = a - 2by. From this several things are evident. First the marginal revenue curve has the same y intercept as the inverse demand curve. Second the slope of the marginal revenue curve is twice that of the inverse demand curve. Third the x intercept of the marginal revenue curve is half that of the inverse demand curve. What is not quite so evident is that the marginal revenue curve is below the inverse demand curve at all points.^[27] Since all companies maximise profits by equating MR and MC it must be the case that at the profit maximizing quantity MR and MC are less than price which further implies that a monopoly produces less quantity at a higher price than if the market were perfectly competitive.

The fact that a monopoly has a downward-sloping demand curve means that the relationship between total revenue and output for a monopoly is much different than that of competitive companies.^[28] Total revenue equals price times quantity. A competitive company has a perfectly elastic demand curve meaning that total revenue is proportional to output.^[29] Thus the total revenue curve for a competitive company is a ray with a slope equal to the market price.^[29] A competitive company can sell all the output it desires at the market price. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero.^[30] Total revenue has its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and price occur when MR = 0. For example assume that the monopoly’s demand function is P = 50 - 2Q. The total revenue function would be TR = 50Q - 2Q² and marginal revenue would be 50 - 4Q. Setting marginal revenue equal to zero we have

1. 50 - 4Q = 0
2. -4Q = -50
3. Q = 12.5

So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue maximizing price is 25.

A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition. If a company increases prices too much, then others may enter the market if they are able to provide the same good, or a substitute, at a lesser price.^[31] The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".^[32]

A monopolist can extract only one premium,^{[clarification needed]} and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs.

A pure monopoly has the same economic rationality of perfectly competitive companies, i.e. to optimise a profit function given some constraints. By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of production. Nonetheless, a pure monopoly can -unlike a competitive company- alter the market price for its own convenience: a decrease of production results in a higher price. In the economics' jargon, it is said that pure monopolies have "a downward-sloping demand". An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lesser quantity of output than a price-taking company; again, less is available at a higher price.^[33]

The inverse elasticity rule[link]

A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule can be expressed as (P - MC)/P = 1/PED.^[34] The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand.^[35] The implication of the rule is that the more elastic the demand for the product the less pricing power the monopoly has. This is also known as 1/Lerner Index

Market power[link]

Market power is the ability to increase the product's price above marginal cost without losing all customers.^[36] Perfectly competitive (PC) companies have zero market power when it comes to setting prices. All companies of a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual companies simply take the price determined by the market and produce that quantity of output that maximizes the company's profits. If a PC company attempted to increase prices above the market level all its customers would abandon the company and purchase at the market price from other companies. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both.^[37] A monopoly is a price maker.^[38] The monopoly is the market^[39] and prices are set by the monopolist based on his circumstances and not the interaction of demand and supply. The two primary factors determining monopoly market power are the company's demand curve and its cost structure.^[40]

Market power is the ability to affect the terms and conditions of exchange so that the price of a product is set by a single company (price is not imposed by the market as in perfect competition).^[41][42] Although a monopoly's market power is great it is still limited by the demand side of the market. A monopoly has a negatively sloped demand curve, not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers.

Price discrimination[link]

Improved price discrimination allows a monopolist to gain more profit by charging more to those who want or need the product more or who have a greater ability to pay. For example, most economic textbooks cost more in the United States than in "Third world countries" like Ethiopia. In this case, the publisher is using their government granted copyright monopoly to price discriminate between (presumed) wealthier economics students and (presumed) poor economics students. Similarly, most patented medications cost more in the U.S. than in other countries with a (presumed) poorer customer base. Perfect price discrimination would allow the monopolist to a unique price to each customer based on his or her individual demand. This would allow the monopolist to extract all the consumer surplus of the market. Note that while such perfect price discrimination is still a theoretical construct, it is becoming increasingly real with advances of information technology and micromarketing. Typically, a high general price is listed, and various market segments get varying discounts. This is an example of framing to make the process of charging some people higher prices more socially acceptable. (see also behavioral economics, decision biases).

It is important to realize that partial price discrimination can cause some customers who are inappropriately pooled with high price customers to be excluded from the market. For example, a poor student in the U.S. might be excluded from purchasing an economics textbook at the U.S. price, which the student might have been able to purchase at the China price. Similarly, a wealthy student in China might have been willing to pay more (although naturally it is against their interests to signal this to the monopolist). These are deadweight losses and decrease a monopolist's profits. As such, monopolists have substantial economic interest in improving their market information, and market segmenting.

There is important information for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lesser, than a competitive company follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in price discrimination (this is termed first degree price discrimination, such that all customers are charged the same amount). If the monopoly were permitted to charge individualised prices (this is termed third degree price discrimination), the quantity produced, and the price charged to the marginal customer, would be identical to that of a competitive company, thus eliminating the deadweight loss; however, all gains from trade (social welfare) would accrue to the monopolist and none to the consumer. In essence, every consumer would be indifferent between (1) going completely without the product or service and (2) being able to purchase it from the monopolist.

As long as the price elasticity of demand for most customers is less than one in absolute value, it is advantageous for a company to increase its prices: it then receives more money for fewer goods. With a price increase, price elasticity tends to increase, and in the optimum case above it will be greater than one for most customers.

Price discrimination is charging different consumers different prices for the same product when the cost of servicing the customer is identical.^[43][44] A company maximizes profit by selling where marginal revenue equals marginal cost. A company that does not engage in price discrimination will charge the profit maximizing price, P*, to all its customers. In such circumstances there are customers who would be willing to pay a higher price than P* and those who will not pay P* but would buy at a lower price. A price discrimination strategy is to charge less price sensitive buyers a higher price and the more price sensitive buyers a lower price.^[45] Thus additional revenue is generated from two sources. The basic problem is to identify customers by their willingness to pay.

The purpose of price discrimination is to transfer consumer surplus to the producer.^[46] Consumer surplus is the difference between the value of a good to a consumer and the price the consumer must pay in the market to purchase it. ^[47] Price discrimination is not limited to monopolies.

Market power is a company’s ability to increase prices without losing all its customers. Any company that has market power can engage in price discrimination. Perfect competition is the only market form in which price discrimination would be impossible (a perfectly competitive company has a perfectly elastic demand curve and has zero market power). ^{[48][49][46][50][51]}

There are three forms of price discrimination. First degree price discrimination charges each consumer the maximum price the consumer is willing to pay. Second degree price discrimination involves quantity discounts. Third degree price discrimination involves grouping consumers according to willingness to pay as measured by their price elasticities of demand and charging each group a different price. Third degree price discrimination is the most prevalent type.

There are three conditions that must be present for a company to engage in successful price discrimination. First, the company must have market power.^[52] Second, the company must be able to sort customers according to their willingness to pay for the good.^[53] Third, the firm must be able to prevent resell.

A company must have some degree of market power to practice price discrimination. Without market power a company cannot charge more than the market price.^[54] Any market structure characterized by a downward sloping demand curve has market power - monopoly, monopolistic competition and oligopoly.^[55] The only market structure that has no market power is perfect competition.^[56]

A company wishing to practice price discrimination must be able to prevent middlemen or brokers from acquiring the consumer surplus for themselves. The company accomplishes this by preventing or limiting resale. Many methods are used to prevent resale. For example persons are required to show photographic identification and a boarding pass before boarding an airplane. Most travelers assume that this practice is strictly a matter of security. However, a primary purpose in requesting photographic identification is to confirm that the ticket purchaser is the person about to board the airplane and not someone who has repurchased the ticket from a discount buyer.

The inability to prevent resale is the largest obstacle to successful price discrimination.^[57] Companies have however developed numerous methods to prevent resale. For example, universities require that students show identification before entering sporting events. Governments may make it illegal to resale tickets or products. In Boston Red Sox tickets can only be resold legally to the team.

The three basic forms of price discrimination are first, second and third degree price discrimination. In first degree price discrimination the company charges the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Thus for each unit the seller tries to set the price equal to the consumer’s reservation price.^[58] Direct information about a consumer’s willingness to pay is rarely available. Sellers tend to rely on secondary information such as where a person lives (postal codes); for example, catalog retailers can use mail high-priced catalogs to high-income postal codes. ^[59][60] First degree price discrimination most frequently occurs in regard to professional services or in transactions involving direct buyer/seller negotiations. For example, an accountant who has prepared a consumer's tax return has information that can be used to charge customers based on an estimate of their ability to pay.^[61]

In second degree price discrimination or quantity discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought.^[62] The theory of second degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a given price. Companies know that consumer’s willingness to buy decreases as more units are purchased. The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer. For example, sell in unit blocks rather than individual units.

In third degree price discrimination or multi-market price discrimination ^[63] the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand. Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve.^[64] The firm then attempts to maximize profits in each segment by equating MR and MC,^[52][65][66] Generally the company charges a higher price to the group with a more price inelastic demand and a relatively lesser price to the group with a more elastic demand.^[67] Examples of third degree price discrimination abound. Airlines charge higher prices to business travelers than to vacation travelers. The reasoning is that the demand curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is relatively inelastic. Any determinant of price elasticity of demand can be used to segment markets. For example, seniors have a more elastic demand for movies than do young adults because they generally have more free time. Thus theaters will offer discount tickets to seniors.^[68]

Example[link]

Assume that by a uniform pricing system the monopolist would sell five units at a price of $10 per unit. Assume that his marginal cost is $5 per unit. Total revenue would be $50, total costs would be $25 and profits would be $25. If the monopolist practiced price discrimination he would sell the first unit for $50 the second unit for $40 and so on. Total revenue would be $150, his total cost would be $25 and his profit would be $125.00.^[69] Several things are worth noting. The monopolist acquires all the consumer surplus and eliminates practically all the deadweight loss because he is willing to sell to anyone who is willing to pay at least the marginal cost.^[70] Thus the price discrimination promotes efficiency. Secondly, by the pricing scheme price = average revenue and equals marginal revenue. That is the monopolist is behaving like a perfectly competitive company.^[71] Thirdly, the discriminating monopolist produces a larger quantity than the monopolist operating by a uniform pricing scheme.^[72]

Classifying customers[link]

Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking consumers directly is fruitless: consumers don't know, and to the extent they do they are reluctant to share that information with marketers. The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions. As noted information about where a person lives (postal codes), how the person dresses, what kind of car he or she drives, occupation, income and spending patterns can be helpful in classifying

Monopoly and efficiency[link]

This unreferenced section requires citations to ensure verifiability.

Surpluses and deadweight loss created by monopoly price setting

According to the standard model,^{[citation needed]} in which a monopolist sets a single price for all consumers, the monopolist will sell a lesser quantity of goods at a higher price than would companies by perfect competition. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its cost, monopoly pricing creates a deadweight loss referring to potential gains that went neither to the monopolist nor to consumers. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition. Where efficiency is defined by the total gains from trade, the monopoly setting is less efficient than perfect competition.

It is often argued that monopolies tend to become less efficient and less innovative over time, becoming "complacent", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal during the late 18th century United Kingdom, was worth much less during the late 19th century because of the introduction of railways as a substitute.

Natural monopoly[link]

A natural monopoly is a company which experiences increasing returns to scale over the relevant range of output and relatively high fixed costs.^[74] A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve.^[75] When this situation occurs it is always cheaper for one large company to supply the market than multiple smaller companies, in fact, absent government intervention in such markets will naturally evolve into a monopoly. An early market entrant which takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.^{[citation needed]} Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.^[76] To reduce prices and increase output regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.^[77] This pricing scheme eliminates any positive economic profits since price equals average cost. Average cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies.^[77] Average cost pricing is does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price exceeds the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).

Government-granted monopoly[link]

A government-granted monopoly (also called a "de jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.^{[citation needed]}

Monopolist shutdown rule[link]

A monopolist should shut down when price is less than average variable cost for every output level.^[78]-- in other words where the demand curve is entirely below the average variable cost curve.^[78] Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term.^[78]

Breaking up monopolies[link]

When monopolies are not ended by the open market, sometimes a government will either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it (see Antitrust law and trust busting). Public utilities, often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. American Telephone & Telegraph (AT&T) and Standard Oil are debatable examples of the breakup of a private monopoly by government: When AT&T, a monopoly previously protected by force of law, was broken up into various components in 1984, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market.

Law[link]

The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share company's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices.

First it is necessary to determine whether a company is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer".^[79] As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold. The Herfindahl-Hirschman Index (HHI) is sometimes used to assess how competitive an industry is.^[80] In the US, the merger guidelines state that a post-merger HHI below 1000 is viewed as unconcentrated while HHI's above that provoke further review.^[81]

By European Union law, very large market shares raise a presumption that a company is dominant,^[82] which may be rebuttable.^[83] If a company has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market".^[84] The lowest yet market share of a company considered "dominant" in the EU was 39.7%.^[85]

Certain categories of abusive conduct are usually prohibited by a country's legislation.^[86] The main recognised categories are:

• Limiting supply
• Predatory pricing
• Price discrimination
• Refusal to deal and exclusive dealing
• Tying (commerce) and product bundling

Despite wide agreement that the above constitute abusive practices, there is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct. Furthermore, there has been some consideration of what happens when a company merely attempts to abuse its dominant position.

Historical monopolies[link]

This section requires expansion.

The term "monopoly" first appears in Aristotle's Politics, wherein Aristotle describes Thales of Miletus' cornering of the market in olive presses as a monopoly (μονοπωλίαν).^[87][88]

Vending of common salt (sodium chloride) was historically a natural monopoly. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for producing salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "famines" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (e.g. the Sahara desert) requiring well-organised security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, had a role in the beginning of the French Revolution, when strict legal controls specified who was allowed to sell and distribute salt.

Robin Gollan argues in The Coalminers of New South Wales that anti-competitive practices developed in the coal industry of Australia's Newcastle as a result of the business cycle. The monopoly was generated by formal meetings of the local management of coal companies agreeing to fix a minimum price for sale at dock. This collusion was known as "The Vend". The Vend ended and was reformed repeatedly during the late 19th century, ending by recession in the business cycle. "The Vend" was able to maintain its monopoly due to trade union assistance, and material advantages (primarily coal geography). During the early 20th century, as a result of comparable monopolistic practices in the Australian coastal shipping business, the Vend developed as an informal and illegal collusion between the steamship owners and the coal industry, eventually resulting in the High Court case Adelaide Steamship Co. Ltd v. R. & AG.^[89]

Examples of monopolies[link]

• The salt commission, a legal monopoly in China formed in 758.
• The British Honourable East India Company; created as a legal trading monopoly in 1600.
• Netherlands East India Company; created as a legal trading monopoly in 1602.
• Western Union was criticized as a "price gouging" monopoly in the late 19th century.^[90]
• Standard Oil; broken up in 1911, two of its surviving "child" companies are ExxonMobil and the Chevron Corporation.
• U.S. Steel; anti-trust prosecution failed in 1911.
• Major League Baseball; survived U.S. anti-trust litigation in 1922, though its special status is still in dispute as of 2009.
• United Aircraft and Transport Corporation; aircraft manufacturer holding company forced to divest itself of airlines in 1934.
• National Football League; survived anti-trust lawsuit in the 1960s, convicted of being an illegal monopoly in the 1980s.
• American Telephone & Telegraph; telecommunications giant broken up in 1984.
• De Beers; settled charges of price fixing in the diamond trade in the 2000s.
• Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in 2004 for 497 million euros.^[91] which was upheld for the most part by the Court of First Instance of the European Communities in 2007. The fine was 1.35 Billion USD in 2008 for noncompliance with the 2004 rule.^[92][93]
• Iarnród Éireann; The Irish Railway authority is a monopoly as Ireland does not have the size for more companies.
• Joint Commission; has a monopoly over whether or not US hospitals are able to participate with the Medicare and Medicaid programs.
• Telecom New Zealand; local loop unbundling enforced by central government.
• Telkom; a semi-privatised, part state-owned South African telecommunications company.
• Deutsche Telekom; former state monopoly, still partially state owned, currently monopolizes high-speed VDSL broadband network.^[94]
• Monsanto has been sued by competitors for anti-trust and monopolistic practices. They have between 70% and 100% of the commercial seed market.
• AAFES has a monopoly on retail sales at overseas military installations.
• State stores in certain United States states, e.g. for liquor.
• Long Island Power Authority (LIPA).
• Long Island Rail Road (LIRR).

Countering monopolies[link]

This section requires expansion.

According to professor Milton Friedman, laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing tariffs and other regulation that upholds monopolies.

A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device. It is close to impossible to do so on a world scale. The De Beers diamond monopoly is the only one we know of that appears to have succeeded (and even De Beers are protected by various laws against so called "illicit" diamond trade). – In a world of free trade, international cartels would disappear even more quickly.^[95]

However, professor Steve H. Hanke believes that although private monopolies are more efficient than public ones, often by a factor of two, sometimes private natural monopolies, such as local water distribution, should be regulated (not prohibited) by, e.g., price auctions.^[96]

Thomas DiLorenzo asserts, however, that during the early days of utility companies where there was little regulation, there were no natural monopolies and there was competition ^[97]. Only when companies realized that they could gain power through government did monopolies begin to form.

See also[link]

• Bilateral monopoly
• Complementary monopoly
• Demonopolisation
• Duopoly
• Flag carrier
• History of monopoly
• Monopolistic competition
• Monopsony
• Oligopoly
• Ramsey problem, a policy rule concerning what price a monopolist should set.
• Simulations and games in economics education that model monopolistic markets.

Notes and references[link]

Further reading[link]

'

External links[link]

Look up monopoly in Wiktionary, the free dictionary.

• Monopoly: A Brief Introduction by The Linux Information Project
• Monopoly by Elmer G. Wiens: Online Interactive Models of Monopoly (Public or Private) and Oligopoly
• Monopoly Profit and Loss by Fiona Maclachlan and Monopoly and Natural Monopoly by Seth J. Chandler, Wolfram Demonstrations Project.
• Beach, Chandler B., ed. (1914). The New Student's Reference Work. Chicago: F. E. Compton and Co.. Wikisource 
• A monopolist who does not know the demand curve - A paper and a simulation software by Valentino Piana (2002).

Criticism[link]

• Government and Microsoft: a Libertarian View on Monopolies (by François-René Rideau on his personal website)
• The Myth of Natural Monopoly (by Thomas J. DiLorenzo on www.Mises.org) - 1996
• Natural Monopoly and Its Regulation
• From rulers' monopolies to users' choices A critical survey of monopolistic practices
• Body of Knowledge on Infrastructure Regulation Monopoly and Market Power

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (August 2010)

Ace Ventura is a fictional character, created by screenwriters Jack Bernstein, Tom Shadyac and Steve Oedekerk. Ace was played by Jim Carrey in the films (Ace Ventura: Pet Detective, released in 1994, and Ace Ventura: When Nature Calls, released in 1995.) He was voiced by Michael Daingerfield (credited as Michael Hall) in the animated television series.

Biography[link]

Ace is a Miami-based private detective specializing in the retrieval of missing animals, said to be the son of Ron Ventura and descendant of such as "Ernest Ventura Shackleton" and "Jacques Ventura Costeau". It is not known whether the animated television series was contiguous with the feature-films; but if it was it may take place before them because the only one of his pets to appear in the series is his capuchin monkey, Spike. During the second film, Ace attempts monasticism after a failed rescue attempt of a raccoon; only to be called out of retirement to investigate a missing sacred animal. By the events portrayed in Ace Ventura, Jr. it is established that Ace has disappeared somewhere in the Bermuda Triangle, and never appears in the film itself.^[1]

Development[link]

This section requires expansion.

Bernstein had wanted to do a comedic version of Sherlock Holmes, and when watching the Stupid Pet Tricks segment on Late Night With David Letterman, got the idea for a pet detective.^{[citation needed]}

Personality[link]

Ace Ventura is an eccentric self-styled 'pet detective' who forsook regular police work to concentrate on this latter pursuit. Like other fictional detectives, he is notable for extraordinary powers of observation and deduction; and on at least one occasion, he has managed to escape being shot by catching a bullet in his teeth.

Ventura's eccentricities include his persistent vulgarity and exceedingly flamboyant behaviour; but he is nevertheless a dedicated detective, driven by an insatiable adoration of animals and a desire to protect them from human mistreatment. In Ace Ventura Jr: Pet Detective, it is implied that his abilities, personality, and appearance are hereditary. Although Ace is an animal lover, the second film reveals a deep-seated chiroptophobia.

In most appearances, Ace usually wears an unbuttoned Aloha shirt over a plain white A-shirt, with red and black striped trousers and black combat boots. He lives in an apartment alongside many different animals, all of whom hide from his landlord, Mr. Schickadance, in his absence.

[edit] Appearance in The Mask: The Animated Series

In the episodes "The Aceman Cometh/Have Mask, Will Travel" of The Mask: The animated series, when Milo, the pet dog of Stanley Ipkiss, was stolen by Dr. Pretorius, Ipkiss calls Ace for help. Both Ipkiss/the Mask and Ace Ventura were the animated versions of characters portrayed by Jim Carrey himself. Ace later accidentally wears the mask on his rump, which assumes a face similar to his own and gains the ability to speak, suggesting a joke featured in the original film of speaking while presenting his rump to the listener and moving it in semblance of a speaking mouth.

Reception[link]

Ace was ranked the 60th Greatest Movie Character in a November, 2008 list by Empire Magazine.^[2] Cyborg Franky from Japanese anime and manga One Piece is based on the character.^{[citation needed]}

See also[link]

• Ace Ventura: Pet Detective
• Ace Ventura: When Nature Calls

External links[link]

• Ace Ventura: Pet Detective at the Internet Movie Database
• Ace Ventura: When Nature Calls at the Internet Movie Database
• Ace Ventura Jr: Pet Detective at the Internet Movie Database

References[link]

Milton Friedman

Chicago School of Economics
Born	(1912-07-31)July 31, 1912 Brooklyn, New York
Died	November 16, 2006(2006-11-16) (aged 94) San Francisco, California
Nationality	American
Institution	Hoover Institution (1977–2006) University of Chicago (1946–77) Columbia University (1937–41, 1943–45, 1964–65) NBER (1937–40)
Field	Economics
Alma mater	Columbia University (Ph.D.), 1946, University of Chicago (M.A.), 1933 Rutgers University (B.A.), (1932)
Opposed	John Maynard Keynes, John Kenneth Galbraith, Murray Rothbard
Influences	Adam Smith, Irving Fisher, Frank Knight, Murray Rothbard, Jacob Viner, Harold Hotelling, Arthur Burns, Friedrich Hayek, Homer Jones, Ludwig von Mises, Henry Simons, George Stigler
Influenced	Margaret Thatcher, Alan Greenspan, David D. Friedman, Anna J. Schwartz, Ben Bernanke, Gary Becker, Thomas Sowell, Harry Markowitz, Chicago Boys, William F. Buckley, Jr., Cato Institute
Contributions	Price theory, Monetarism, applied macroeconomics, floating exchange rates, volunteer military, Permanent income hypothesis, Friedman test
Awards	John Bates Clark Medal (1951) Nobel Memorial Prize in Economics (1976) Presidential Medal of Freedom (1988) National Medal of Science (1988)
Signature

Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist, statistician, and author who taught at the University of Chicago for more than three decades. He was a recipient of the Nobel Memorial Prize in Economic Sciences, and is known for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy.^[1] As a leader of the Chicago school of economics, he influenced the research agenda of the economics profession. A survey of economists ranked Friedman as the second most popular economist of the twentieth century behind John Maynard Keynes,^[2] and The Economist described him as "the most influential economist of the second half of the 20th century…possibly of all of it."^[3]

Friedman's challenges to what he later called "naive Keynesian" (as opposed to New Keynesian) theory^[4] began with his 1950s reinterpretation of the consumption function, and he became the main advocate opposing activist Keynesian government policies.^[5] In the late 1960s he described his own approach (along with all of mainstream economics) as using "Keynesian language and apparatus" yet rejecting its "initial" conclusions.^[6] During the 1960s he promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural" rate of unemployment, and argued that governments could increase employment above this rate (e.g., by increasing aggregate demand) only at the risk of causing inflation to accelerate.^[7] He argued that the Phillips curve was not stable and predicted what would come to be known as stagflation.^[8] Friedman argued that, given the existence of the Federal Reserve, a constant small expansion of the money supply was the only wise policy.^[9]

Friedman was an economic adviser to conservative President Ronald Reagan. His political philosophy extolled the virtues of a free market economic system with minimal intervention. He once stated that his role in eliminating U.S. conscription was his proudest accomplishment, and his support for school choice led him to found The Friedman Foundation for Educational Choice. In his 1962 book Capitalism and Freedom, Friedman advocated policies such as a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, and education vouchers.^[10] His ideas concerning monetary policy, taxation, privatization and deregulation influenced government policies, especially during the 1980s. His monetary theory influenced the Federal Reserve's response to the global financial crisis.^[11]

Milton Friedman's works include many monographs, books, scholarly articles, papers, magazine columns, television programs, videos, and lectures, and cover a broad range of topics of microeconomics, macroeconomics, economic history, and public policy issues. His books and essays were widely read, and have had an international influence, including in Communist countries.^{[12][13][14][15]}

Early life[link]

Friedman was born in Brooklyn, New York, to recent Jewish immigrants Jenő Friedman and Sára Landau from Beregszász in Austria-Hungary (now Berehove in Ukraine), both of whom worked as dry goods merchants. Shortly after Milton's birth, the family relocated to Rahway, New Jersey. A talented student, Friedman graduated from Rahway High School in 1928, just before his 16th birthday.^[16][17]

Friedman graduated from Rutgers University in New Jersey, where he specialized in mathematics and initially intended to become an actuary. During his time at Rutgers, Friedman became influenced by two economics professors, Arthur F. Burns and Homer Jones, who convinced him that modern economics could help end the Great Depression. After graduating from Rutgers in 1932, Friedman was offered two scholarships to do graduate work; one being Mathematics at Brown University and the other being Economics at the University of Chicago.^[18]Friedman chose the latter, thus earning an M.A. in 1933. He was strongly influenced by Jacob Viner, Frank Knight, and Henry Simons. It was at Chicago that Friedman met his future wife, economist Rose Director. During 1933–34 he had a fellowship at Columbia University, where he studied statistics with renowned statistician and economist Harold Hotelling. He was back in Chicago for 1934–35, spending the year working as a research assistant for Henry Schultz, who was then working on Theory and Measurement of Demand. That year, Friedman formed what would prove to be lifelong friendships with George Stigler and W. Allen Wallis.^[19]

Public service[link]

Friedman was initially unable to find academic employment, so during 1935, he followed his friend W. Allen Wallis to Washington, where Franklin D. Roosevelt's New Deal was "a lifesaver" for many young economists.^[20] At this stage, Friedman said that he and his wife "regarded the job-creation programs such as the WPA, CCC, and PWA appropriate responses to the critical situation," but not "the price- and wage-fixing measures of the National Recovery Administration and the Agricultural Adjustment Administration."^[21] Foreshadowing his later ideas, he believed price controls interfered with an essential signaling mechanism to help resources be used where they were most valued. Indeed, Friedman later concluded that all government intervention associated with the New Deal was "the wrong cure for the wrong disease," arguing that the money supply should simply have been expanded, instead of contracted.^[22] In the publication Monetary History of the United States by Friedman and Anna Schwartz, they argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policymaking by the Federal reserve and the continuous crises of the banking system.^[23]

During 1935, he began work for the National Resources Committee, which was then working on a large consumer budget survey. Ideas from this project later became a part of his Theory of the Consumption Function. Friedman began employment with the National Bureau of Economic Research during autumn 1937 to assist Simon Kuznets in his work on professional income. This work resulted in their jointly authored publication Incomes from Independent Professional Practice, which introduced the concepts of permanent and transitory income, a major component of the Permanent Income Hypothesis that Friedman worked out in greater detail in the 1950s. The book hypothesizes that professional licensing artificially restricts the supply of services and raises prices.

During 1940, Friedman was appointed an assistant professor teaching Economics at the University of Wisconsin–Madison, but encountered antisemitism in the Economics department and decided to return to government service.^[24][25] Friedman spent 1941–43 working on wartime tax policy for the Federal Government, as an advisor to senior officials of the United States Department of the Treasury. As a Treasury spokesman during 1942 he advocated a Keynesian policy of taxation. He helped to invent the payroll withholding tax system, since the federal government badly needed money in order to fight the war.^[26] He later said, "I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now."^[27]

Academic career[link]

Early years[link]

In 1943, Friedman joined the Division of War Research at Columbia University (headed by W. Allen Wallis and Harold Hotelling), where he spent the rest of World War II working as a mathematical statistician, focusing on problems of weapons design.^[28]

During 1945, Friedman submitted Incomes from Independent Professional Practice (co-authored with Kuznets and completed during 1940) to Columbia as his doctoral dissertation. The university awarded him a Ph.D. during 1946. Friedman spent the 1945–46 academic year teaching at the University of Minnesota (where his friend George Stigler was employed). On February 12, 1945, his son, David D. Friedman was born.

University of Chicago[link]

University of Chicago

During 1946, Friedman accepted an offer to teach economic theory at the University of Chicago (a position opened by departure of his former professor Jacob Viner to Princeton University). Friedman would work for the University of Chicago for the next 30 years. There he helped build an intellectual community that produced a number of Nobel Prize winners, known collectively as the Chicago School of Economics.

At that time, Arthur Burns, who was then the head of the National Bureau of Economic Research, asked Friedman to rejoin the Bureau's staff. He accepted the invitation, and assumed responsibility for the Bureau's inquiry into the role of money in the business cycle. As a result, he initiated the "Workshop in Money and Banking" (the "Chicago Workshop"), which promoted a revival of monetary studies. During the latter half of the 1940s, Friedman began a collaboration with Anna Schwartz, an economic historian at the Bureau, that would ultimately result in the 1963 publication of a book co-authored by Friedman and Schwartz, A Monetary History of the United States, 1867–1960.

Friedman spent the 1954–55 academic year as a Fulbright Visiting Fellow at Gonville and Caius College, Cambridge. At the time, the Cambridge economics faculty was divided into a Keynesian majority (including Joan Robinson and Richard Kahn) and an anti-Keynesian minority (headed by Dennis Robertson). Friedman speculates that he was invited to the fellowship because his views were unacceptable to both of the Cambridge factions. Later his weekly columns for Newsweek magazine (1966–84) were well read and increasingly influential among political and business people.^[29] From 1968 to 1978, he and Paul Samuelson participated in the Economics Cassette Series, a biweekly subscription series where the economist would discuss the days' issues for about a half hour at a time.^[30]

Friedman was an economic adviser to Republican presidential candidate Barry Goldwater during 1964.

Nobel memorial prize and retirement[link]

In 1976 Friedman won the Nobel Memorial Prize in Economics "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy."^[1] During the banquet speech he made a reference to “the Prize in Economic Sciences in Memory of Alfred Nobel”. In that he was the first recipient to do so, and it wasn’t until 2006 that a recipient of the prize called it by its proper name.^[31] During 1977, at age 65, Friedman retired from the University of Chicago after teaching there for 30 years. He and his wife moved to San Francisco where he became a visiting scholar at the Federal Reserve Bank of San Francisco. From 1977 on, he was affiliated with the Hoover Institution at Stanford University. During the same year, Friedman was approached by the Free To Choose Network and asked to create a television program presenting his economic and social philosophy. The Friedmans worked on this project for the next three years, and during 1980, the ten-part series, titled Free to Choose, was broadcast by the Public Broadcasting Service (PBS). The companion book to the series (co-authored by Milton and his wife, Rose Friedman), also titled Free To Choose, was the bestselling nonfiction book of 1980 and has since been translated into 14 foreign languages.

Friedman served as an unofficial adviser to Ronald Reagan during his 1980 presidential campaign, and then served on the President's Economic Policy Advisory Board for the rest of the Reagan Administration. During 1988, he received the National Medal of Science and Reagan honored him with the Presidential Medal of Freedom. Milton Friedman is known now as one of the most influential economists of the 20th century.^[32][33] Throughout the 1980s and 1990s, Friedman continued to write editorials and appear on television. He made several visits to Eastern Europe and to China, where he also advised governments. He was also for many years a Trustee of the Philadelphia Society.^[34][35][36]

Scholarly contributions[link]

Economics[link]

Friedman was best known for reviving interest in the money supply as a determinant of the nominal value of output, that is, the quantity theory of money. Monetarism is the set of views associated with modern quantity theory. Its origins can be traced back to the 16th-century School of Salamanca or even further; however, Friedman's contribution is largely responsible for its modern popularization. He co-authored, with Anna Schwartz, A Monetary History of the United States (1963), which was an examination of the role of the money supply and economic activity in U.S. history. A striking conclusion of their research was one regarding the role of money supply fluctuations as contributing to economic fluctuations. Several regression studies with David Meiselman during the 1960s suggested the primacy of the money supply over investment and government spending in determining consumption and output. These challenged a prevailing but largely untested view on their relative importance. Friedman's empirical research and some theory supported the conclusion that the short-run effect of a change of the money supply was primarily on output but that the longer-run effect was primarily on the price level.

Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between price inflation and the money supply, mainly that price inflation should be regulated with monetary deflation and price deflation with monetary inflation. He famously quipped that price deflation can be fought by "dropping money out of a helicopter."^[37]

Friedman's arguments were designed to counter popular claims that price inflation at the time was the result of increases in the price of oil, or increases in wages: as he wrote,

Inflation is always and everywhere a monetary phenomenon.

—Milton Friedman, 1963.^[38]

Friedman rejected the use of fiscal policy as a tool of demand management; and he held that the government's role in the guidance of the economy should be restricted severely. Friedman wrote extensively on the Great Depression, which he termed the Great Contraction, arguing that it had been caused by an ordinary financial shock whose duration and seriousness were greatly increased by the subsequent contraction of the money supply caused by the misguided policies of the directors of the Federal Reserve.

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.

—Milton Friedman, Two Lucky People, 233

Friedman also argued for the cessation of government intervention in currency markets, thereby spawning an enormous literature on the subject, as well as promoting the practice of freely floating exchange rates. His close friend George Stigler explained, "As is customary in science, he did not win a full victory, in part because research was directed along different lines by the theory of rational expectations, a newer approach developed by Robert Lucas, also at the University of Chicago."^[39]

Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work.^[40] This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to increase later to balance public finances. Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). This critique associated his name, together with that of Edmund Phelps, with the insight that a government that brings about greater inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections of the labor market.

Friedman's essay "The Methodology of Positive Economics" (1953) provided the epistemological pattern for his own subsequent research and to a degree that of the Chicago School. There he argued that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism but by its simplicity and fruitfulness as an engine of prediction. That is, students should measure the accuracy of its predictions, rather than the "soundness of its assumptions. His argument was part of an ongoing debate among such statisticians as Jerzy Neyman, Leonard Savage, and Ronald Fisher.^[41]

Statistics[link]

One of his most famous contributions to statistics is sequential sampling. "Friedman did statistical work at the Division of War Research at Columbia. He and his colleagues came up with a sampling technique, known as sequential sampling, which became, in the words of The New Palgrave Dictionary of Economics, 'the standard analysis of quality control inspection.' The dictionary adds: 'Like many of Friedman’s contributions, in retrospect it seems remarkably simple and obvious to apply basic economic ideas to quality control; that however is a measure of his genius.'"^[42]

Public policy positions[link]

Federal reserve[link]

Friedman believed that if the money supply was to be centrally controlled (as by the Federal Reserve) that the preferable way to do it would be with a mechanical system that would keep the quantity of money increasing at a steady rate. However, instead of government involvement at all, he was open to a "real," non-government, gold standard where money is produced by the private market: "A real gold standard is thoroughly consistent with [classical] liberal principles and I, for one, am entirely in favor of measures promoting its development." He did however add this caveat, "Let me emphasize that this note is not a plea for a return to a gold standard.... I regard a return to a gold standard as neither desirable nor feasible—with the one exception that it might become feasible if the doomsday predictions of hyperinflation under our present system should prove correct."^[43] He said the reason that it was not feasible was because "there is essentially no government in the world that is willing to surrender control over its domestic monetary policy." However, it could be done if "you could re-establish a world in which government's budget accounted for 10 percent of the national income, in which laissez-faire reigned, in which governments did not interfere with economic activities and in which full employment policies had been relegated to the dustbin..."^[43]

He was critical of the Federal Reserve's influence on the economics profession. In a 1993 letter to University of Texas economics professor and former House Banking Committee investigator Robert Auerbach, Friedman wrote:

I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results.^[44]

School choice[link]

In his 1955 article "The Role of Government in Education" Friedman proposed supplementing publicly operated schools with privately run but publicly funded schools through a system of school vouchers.^[45] Reforms similar to those proposed in the article were implemented in, for example, Chile in 1981 and Sweden in 1992.^[46] In 1996 Friedman, together with his wife, founded the The Foundation for Educational Choice to advocate school choice and vouchers.

Conscription[link]

Milton Friedman was a major proponent of a volunteer military, stating that the draft was "inconsistent with a free society."^[47][48] In Capitalism and Freedom, he argued that conscription is inequitable and arbitrary, preventing young men from shaping their lives as they see fit.^[49] During the Nixon administration he headed the committee to research a conversion to paid/volunteer armed force. He would later state that his role in eliminating the conscription in the United States was his proudest accomplishment.^[9] Friedman did, however, believe a nation could compel military training as a reserve in case of war time.^[49]

Libertarianism and the Republican party[link]

He served as a member of President Reagan's Economic Policy Advisory Board during 1981. During 1988, he received the Presidential Medal of Freedom and the National Medal of Science. He said that he was a libertarian philosophically, but a member of the U.S. Republican Party for the sake of "expediency" ("I am a libertarian with a small 'l' and a Republican with a capital 'R.' And I am a Republican with a capital 'R' on grounds of expediency, not on principle.") But, he said, "I think the term classical liberal is also equally applicable. I don't really care very much what I'm called. I'm much more interested in having people thinking about the ideas, rather than the person."^[50]

Public goods and monopoly[link]

Friedman was supportive of the state provision of some public goods that private businesses are not considered as being able to provide. However, he argued that many of the services performed by government could be performed better by the private sector. Above all, if some public goods are provided by the state, he believed that they should not be a legal monopoly where private competition is prohibited; for example, he wrote:

There is no way to justify our present public monopoly of the post office. It may be argued that the carrying of mail is a technical monopoly and that a government monopoly is the least of evils. Along these lines, one could perhaps justify a government post office, but not the present law, which makes it illegal for anybody else to carry the mail. If the delivery of mail is a technical monopoly, no one else will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter.

—Milton Friedman, Friedman, Milton & Rose D. Capitalism and Freedom, University of Chicago Press, 1982, 29

Welfare[link]

Friedman made newspaper headlines by proposing a negative income tax to replace the existing welfare system, and then opposing a bill to implement it because the bill proposed to supplement the existing system rather than replace it.

Drugs[link]

Friedman also supported libertarian policies such as legalization of drugs and prostitution. During 2005, Friedman and more than 500 other economists advocated discussions regarding the economic benefits of the legalization of marijuana.^[51]

Economic freedom[link]

Michael Walker of the Fraser Institute and Friedman hosted a series of conferences from 1986 to 1994. The goal was to create a clear definition of economic freedom and a method for measuring it. Eventually this resulted in the first report on worldwide economic freedom, Economic Freedom in the World. This annual report has since provided data for numerous peer-reviewed studies and has influenced policy in several nations.

Along with sixteen other distinguished economists he opposed the Copyright Term Extension Act and filed an amicus brief in Eldred v. Ashcroft.^[52] He supported the inclusion of the word "no-brainer" in the brief.^[53]

Friedman argued for stronger basic legal (constitutional) protection of economic rights and freedoms in order to further promote industrial-commercial growth and prosperity and buttress democracy and freedom and the rule of law generally in society.^[54]

Honors, recognition, and influence[link]

Friedman allowed the Cato Institute to use his name for its biannual Milton Friedman Prize for Advancing Liberty beginning in 2001. A Friedman Prize was given to the late British economist Peter Bauer during 2002, Peruvian economist Hernando de Soto during 2004, Mart Laar, former Estonian Prime Minister during 2006 and a young Venezuelan student Yon Goicoechea during 2008. His wife Rose, sister of Aaron Director, with whom he initiated the Friedman Foundation for Educational Choice, served on the international selection committee. Friedman was also a recipient of the Nobel Prize in Economics.

Hong Kong[link]

Friedman once said, "If you want to see capitalism in action, go to Hong Kong."^[55] He wrote in 1990 that the Hong Kong economy was perhaps the best example of a free market economy.^[56]

One month before his death, he wrote the article "Hong Kong Wrong – What would Cowperthwaite say?" in the Wall Street Journal, criticizing Donald Tsang, the Chief Executive of Hong Kong, for abandoning "positive noninterventionism."^[57] Tsang later said he was merely changing the slogan to "big market, small government," where small government is defined as less than 20% of GDP. In a debate between Tsang and his rival, Alan Leong, before the 2007 Chief Executive election, Leong introduced the topic and jokingly accused Tsang of angering Friedman to death.

Chile[link]

During 1975, two years after the military coup that ended the government of Salvador Allende, the economy of Chile experienced a severe crisis. Friedman accepted the invitation of a private foundation to visit Chile and speak on principles of economic freedom. He spent seven days in Chile giving a series of lectures. One of the lectures was entitled "The Fragility of Freedom," and according to Friedman, "dealt with precisely the threat to freedom from a centralized military government."^[58] Friedman encapsulated his philosophy in a lecture at Universidad Católica de Chile, saying: "free markets would undermine political centralization and political control."^[59]

Friedman also met with military dictator President Augusto Pinochet during his visit. He never served as an adviser to the Chilean government, but did write a letter to Pinochet outlining what Friedman considered the two key economic problems of Chile. The letter listed a series of monetary and fiscal measures deemed a "shock program" to end hyperinflation and promote a market economy.^[60] His letter suggested (among other, more specific prescriptions) that a brief period of cutting government spending would reduce its fiscal deficit and thus reduce the rate of increase of the quantity of money in the country that was driving inflation. The economist did however admit his knowledge of Chile was "too limited to enable [him] to be precise or comprehensive" and that the measures he outlined were "to be taken as illustrative."^[60] Friedman felt that there might be a brief period ("measured in months") of higher unemployment, followed by recovery once inflation was tamed. His letter also suggested that cutting spending to reduce the fiscal deficit would result in less transitional unemployment than raising taxes to do so. Later, Friedman said he believed that market reforms would undermine Pinochet.^[61] Chilean graduates of the Chicago School of Economics and its new local chapters had been appointed to important positions in the new government soon after the coup, which allowed them to advise Pinochet on economic policies in accord with the School's economic doctrine.

According to his critics, Friedman did not criticize Pinochet's dictatorship at the time, nor the assassinations, illegal imprisonments, torture, or other atrocities that were well known by then.^[62] In his 1980 documentary Free to Choose, he said the following: "Chile is not a politically free system, and I do not condone the system. But the people there are freer than the people in Communist societies because government plays a smaller role. ... The conditions of the people in the past few years has been getting better and not worse. They would be still better to get rid of the junta and to be able to have a free democratic system."^[63][64] In 1984 Friedman stated that he has "never refrained from criticizing the political system in Chile."^[58]

Friedman defended his activity in Chile on the grounds that, in his opinion, the adoption of free market policies not only improved the economic situation of Chile but also contributed to the amelioration of Pinochet's rule and to the eventual transition to a democratic government during 1990. That idea is included in Capitalism and Freedom, in which he declared that economic freedom is not only desirable in itself but is also a necessary condition for political freedom. He stressed that the lectures he gave in Chile were the same lectures he later gave in China and other socialist states.^[65] During the 2000 PBS documentary The Commanding Heights (based on the book), Friedman continued to argue that criticism over his role in Chile missed his main contention that freer markets resulted in freer people, and that Chile's unfree economy had caused the military government. Friedman suggested that the economic liberalization he advocated caused the end of military rule and a free Chile.^[66]

Iceland[link]

Friedman visited Iceland during the autumn of 1984, met with important Icelanders and gave a lecture at the University of Iceland on the "tyranny of the status quo." He participated in a lively television debate on August 31, 1984 with socialist intellectuals, including Ólafur Ragnar Grímsson, who later became the president of Iceland.^[67] When they complained that a fee was charged for attending his lecture at the University and that hitherto, lectures by visiting scholars had been free-of-charge, Friedman replied that previous lectures had not been free-of-charge in a meaningful sense: Lectures always have related costs. What mattered was whether attendees or non-attendees covered those costs. Friedman thought that it was fairer that only those who attended paid. In this discussion Friedman also stated that he did not receive any money for delivering that lecture.

Estonia[link]

Although Friedman never visited Estonia, his book Free to Choose exercised a great influence on that nation's then 32-year-old prime minister, Mart Laar, who has claimed that it was the only book on economics he had read before taking office. Laar's reforms are often credited with responsibility for transforming Estonia from an impoverished Soviet Republic to the "Baltic Tiger." A prime element of Laar's program was introduction of the flat tax. Laar won the 2006 Milton Friedman Prize for Advancing Liberty, awarded by the Cato Institute.^[68]

United Kingdom[link]

Milton Friedman influenced the thinking of Alan Walters and Patrick Minford, two of Margaret Thatcher's main macroeconomic advisers. See the book Margaret Thatcher's Revolution: How it Happened and What it Meant, edited by Subroto Roy & John Clarke, Continuum 2005

Criticism[link]

Keynesian criticism[link]

During the financial crisis of 2007–2010, several Keynesian economists such as James Galbraith and Joseph Stiglitz blamed the free market philosophy of Friedman and the Chicago school for the economic turmoil.^[69]

After Friedman's death in 2006, Keynesian Nobel laureate Paul Krugman, praised Friedman as a "great economist and a great man," but criticized him by writing that "he slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose."^[70]

Austrian school criticism[link]

In 1971, libertarian economist Murray Rothbard criticized Friedman's efforts to make the government more efficient as detrimental to individual liberty, concluding "...as we examine Milton Friedman’s credentials to be the leader of free-market economics, we arrive at the chilling conclusion that it is difficult to consider him a free-market economist at all."^[71] Friedman's position on governmental control of money changed since 1971 when this criticism was made.^[72] In a 1995 interview in Reason magazine he said the "difference between me and people like Murray Rothbard is that, though I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction." He said he actually would "like to abolish the Fed," and points out that when he has written about the Fed it is simply his recommendations of how it should be run given that it exists.^[9]

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Other criticism[link]

In her book The Shock Doctrine: The Rise of Disaster Capitalism, journalist and author Naomi Klein criticized Friedman's ideology and the principles that guided the economic restructuring that followed the military coups in countries such as Chile and Indonesia, drawing analogies between the way that Friedman proposed using the social "shock" of the coups to create an economic "blank slate" with Ewen Cameron's controversial medical experiments that used electroshock therapy to create a mental "blank slate" in patients with mental disorders.^[73] Based on the extent to which the application of neoliberal policies has contributed to income disparities and inequality,^[74] both Klein and Noam Chomsky have suggested that the primary role of neoliberalism was as an ideological cover for capital accumulation by multinational corporations.^[75] Chilean economist Orlando Letelier asserted that Pinochet's dictatorship resorted to oppression because of popular opposition to Chicago School policies in Chile.^[76] Klein's book has been criticized. In the October 2008 issue of Reason magazine, Swedish historian Johan Norberg called her book a "disastrous ... polemic" and criticized the book as exaggerating some facts and ignoring others, subjecting Friedman to "the most malevolent distortions of a thinker's ideas in recent history." Norberg states that "Friedman's view was the opposite of what Klein claims" and "twists [the] relationship [between Friedman and Pinochet's regime] beyond recognition," concluding that "Klein is dead wrong about Friedman."^[77] Tom Redburn wrote that Klein "accuses Friedman of being the godfather of a Mafia-like gang", stated that "her argument constantly overreaches because her goal is not really to tame capitalism so much as to taunt it", and that Klein is "blind to the necessary role of entrepreneurial capitalism in overcoming the inherent tendency of any established social system to lapse into stagnation."^[78]

Personal life[link]

According to a 2007 article in Commentary magazine, his "parents were moderately observant [Jews], but Friedman, after an intense burst of childhood piety, rejected religion altogether."^[79] He described himself as an agnostic.^[80]

Friedman wrote extensively of his life and experiences, especially in 1998 in his memoirs with his wife Rose, titled Two Lucky People. He died of heart failure at the age of 94 years in San Francisco on November 16, 2006.^[81][82] He was survived by his wife (who died on August 18, 2009) and their two children, David, who is a philosopher and anarcho-capitalist economist, and Janet. David's son, Patri Friedman, is the executive director of the Seasteading Institute.^[83]

See also[link]

liberalism portal

• Works of Milton Friedman
• Friedman–Savage utility function
• Friedman rule
• Friedman's k-percent rule
• Friedman test
• List of economists
• List of Jewish Nobel laureates
• List of notable Presidential Medal of Freedom recipients
• History of economic thought

Notes[link]

Bibliography[link]

References[link]

• Bernanke, Ben (2004), Essays on the Great Depression, Princeton University Press, ISBN 0-691-11820-5 
• Butler, Eamonn. Milton Friedman (Harriman Economic Essentials) (2011)
• Ebenstein, Alan O. Milton Friedman: a biography (2007)
• Friedman, Milton (1999), Two Lucky People: Memoirs, University of Chicago Press, ISBN 0-226-26415-7 
• Wood, John Cunningham, and Ronald N. Wood, ed. (1990) Milton Friedman: Critical Assessments, v. 3. Scroll to chapter-preview links. Routledge.

Further reading[link]

• Friedman, Milton (1948). "A Monetary and Fiscal Framework for Economic Stability," American Economic Review, 38(3), pp. 245-264. Also in Friedman (1953), pp. 133–56.
• Friedman, Milton (1953). Essays in Positive Economics, University of Chicago Press. Chapter- preview links.
• Friedman, Milton (1959). A Program for Monetary Stability. Fordham University Press. New York. TOC chapter-preview links.
• Friedman, Milton (1963). A Monetary History of the United States, 1867-1960. Princeton University Press. ISBN 0-691-00354-8. 
• "The Role of Monetary Policy." American Economic Review, Vol. 58, No. 1 (Mar., 1968), pp. 1–17 JSTOR presidential address to American Economics Association
• Ebenstein, Lanny (January 23, 2007). Milton Friedman: A Biography. Palgrave Macmillan. ISBN 1-4039-7627-9. 
• Enlow, Robert (September 25, 2006). Liberty & Learning: Milton Friedman's Voucher Idea at Fifty. Cato Institute. ISBN 1-930865-86-4. 
• Friedman, Milton (November 15, 2002). Capitalism and Freedom. University of Chicago Press. ISBN 0-226-26421-1. 
• Friedman, Milton (November 26, 1990). Free to Choose: A Personal Statement. Harvest Books. ISBN 0-15-633460-7. 
• Friedman, Milton (February 1, 2008). Milton Friedman on Economics: Selected Papers. University of Chicago Press Journals. ISBN 0-226-26349-5. 

External links[link]

Find more about Milton Friedman on Wikipedia's sister projects:
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	News stories from Wikinews
	Quotations from Wikiquote

• Works by or about Milton Friedman in libraries (WorldCat catalog)
• Milton Friedman at the Internet Movie Database
• Appearances on C-SPAN
  • Booknotes interview with Friedman on the 50th Anniversary Edition of F.A. Hayek's Road to Serfdom, November 20, 1994.
  • In Depth interview with Friedman, September 3, 2000
• A film clip "The Open Mind - Living Within Our Means (1975)" is available for free download at the Internet Archive [more]
• A film clip "The Open Mind - A Nobel Laureate on the American Economy (1977)" is available for free download at the Internet Archive [more]
• Milton Friedman on Charlie Rose
• Milton Friedman collected news and commentary at The New York Times
• The Milton Friedman papers at the Hoover Institution Archives
• Selected Bibliography for Milton Friedman at the University of Chicago Library
• Inflation and Unemployment 1976 lecture at NobelPrize.org
• Profile and Papers at Research Papers in Economics/RePEc
• Milton Friedman at Econlib
• Milton Friedman, Commanding Heights, PBS, October 1, 2000, interview, profile and video
• Becker Friedman Institute at the University of Chicago
• "Free To Choose" (1980) a PBS TV Series by Milton Friedman
• Milton Friedman at the Cato Institute
• Free to Choose Network
• The Foundation for Educational Choice
• Milton Fridman at Scarlett
• Milton Friedman:Why Not a Volunteer Army?, New Individualist Review, Spring 1967
• The Social Responsibility of Business is to Increase its Profits, Milton Friedman, The New York Times Magazine, September 13, 1970
• Interview with Milton Friedman, Dominic Streatfeild, May 25, 2000, source material for Cocaine: An Unauthorised Biography
• Milton Friedman vs. The Fed Bailout by Michael Hirsh, Newsweek, July 17, 2009
• Four Deformations of the Apocalypse, David Stockman, The New York Times, July 31, 2010
• The Case for Free Trade by Milton and Rose Friedman
• How to Cure Inflation : Milton Friedman