The argument . . . → Read More: Oligopoly or a Free Market – A Realistic Choice?]]> The study of economics should be clearly divided into its factual, quantifiable aspects (more commonly referred to as “econometrics”) distinct from the more philosophical and abstract study (generally known as ‘normative economics’). This is becoming increasingly important as the world has become ever more interdependent. The global financial crisis attests to this.

The argument in the United States increasingly rages between “free market” advocates, such as Friedrich von Hayek and Milton Friedman, and advocates of governmental social planning from Horace Mann to Barack Obama.

Vocal anarcho-capitalists would ideally do away with all forms of governmental influence or control, preferring a reliance on the sovereignty and sanctity of an individual’s decision-making ability. Ardent social planners would prefer to regulate everything from “Joe Six-Pack’s” beer consumption to private sex.

Few “free market” adherents attach economic importance to the desired social, racial or sexist equality that a majority of Americans espoused over the past fifty decades. These issues are perceived more in the realm of sociology or political science rather than economics. When the issues are addressed, it is often felt that the “free market” theory would solve them, just as Adam Smith and his “invisible hand” led the way to theoretical capitalistic freedom.

Unfortunately, the “free market” theory in the United States certainly did not, by itself, do away with the social injustices of segregation or discrimination, poverty or the exploitation of labor that plagued the country. It ultimately took government planners to lead society in what a majority of the country’s citizens considered proper.

Was a conscious exception made for state intervention on these issues to promote increased control for economic purposes?

Even more perplexing is the apparent lack of discussion of oligopolies in “free market” discourses.

Significantly more measurable than the normative verbiage about the“free market,” economists have achieved a number of factual measures to determine when an oligopoly exists. The “four firm concentration ratio,” the Herfindahl Index or other closely allied measures can show with little dispute than an oligopoly structure exists. Most economists agree that four or five companies controlling more than forty percent of an industry’s market share indicates an oligopoly market.

While collusion, pricing fixing or cartels have been illegal in the United States for a century or more, economists agree that “price leadership” in an oligopolistic structure is inevitable, as are upwardly rising prices an downwardly “sticky prices” despite a free market.

Oligopolistic firms are not generally controlled in the United States, unless there is clear evidence regarding collusion or other gross legal violations, such as safety laws.

Through most of last century, oligopolies maintained roughly forty percent of GNP. Through government deregulation during the early part of the nineteen eighties, however, oligopolies dropped to a mere eighteen percent.

However, there are few consumer goods that are not directly controlled by oligopolies. From airlines to automobiles to soft drinks, movie studios to fossil fuel energy and distribution, government action for deregulation helped, rather than hindered, oligopoly in the country. Sheer financial size dictate the difficulty of market entry.

Individuals and private companies, not government, foster the never-ending race to maximize profit margins, to outsource and downsize employee labor in favor of more efficient technologies, or to move physical manufacturing to less expensive nations.

The most competitive industries, however, such as apparel, furniture and – yes, the mortgage business – are those that most failed in the market..

Norman Jewison’s 1975 science fiction film “Rollerball” (and the panned 2002 remake) envisioned a world not run by politicians, but corporations. Only a handful of companies control the industries responsible for communications, energy, food, medicine, sports and so forth. Despite its violence, the film tries to point to the power of the individual versus either a state or a corporation.

If we accept today’ realistic global trends, oligopoly is likely to win over both: the concept of state monopolies or a stateless “free market” of some nine billion people.  Already American, European and Asian firms dominate their industries and compete within the structure of oligopolies irrespective of national political borders or mores. Their outlook on people’s wants is similar to Roman emphasis on bread and circuses.

Ideally, a fundamental change in the nature of mankind would solve the many pressing physical problems facing the globe. That, however, seems totally unrealistic.

Much of economics recognizes the facts of proven theories, instead of clinging to outdated, normative ones. It changes as the times change, albeit very slowly.

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<p>Dr. Walter Block, an Austrian economist, . . . → Read More: Is It Fair to Charge Higher Prices to the Poor?]]> On the face of it, it seems very unfair: prices in the inner-city, where people have the least money to spend, are typically higher than in middle-class suburban areas in the same state. Is this an example of corporate exploitation of the poor, or is there another explanation?

<p>Dr. Walter Block, an Austrian economist, wrote about this subject in his 1976 book <i>Defending the Undefendable</i>, and the phenomenon is still with us today. In 2002, the <i>Akron Beacon Journal</i> compared the prices of fifteen nonprescription items at area inner-city and suburban Walgreens and Rite-Aid stores and found that more than one-third of the items at inner-city stores were priced higher than those in the suburbs.

<p>The newspaper was outraged, saying that the data “flew in the face” of the drug-store chains’ promises to “bring fair prices” to the inner-city – promises they made when they begged city planners to “let” them open stores in the heavily regulated ghettos of Akron, Ohio.

<p>”You think because Walgreens is a chain their prices would be the same across the board. That is supposed to be the good thing about chains,” said a local politician.

<p><b>Prices in a Free Market</b>

<p>All businesses charge what the market will bear—the price point at which their profits are maximized. This isn’t the “highest possible price,” for if they tried to charge $100 for a bottle of aspirin, no one would buy. Rather, businesses in the ghetto and in Beverly Hills both charge the price that will lead to the greatest profits for the business. This is how capitalism works.

<p>The real question, therefore, is: what is it about the suburbs that prevents the drug chains from charging higher prices, and what is it about the inner-city that allows them to get away with it?

<p>Well, just as in the ghetto, Walgreens and Rite-Aid charge what the market will bear in the suburbs. The suburbs, evidently, will bear less than the inner city, even though their denizens have more money. Why? If Walgreens and Rite-Aid tried to charge higher prices, their customers would shop at competitors and the businesses would be unsuccessful.

<p>So why don’t competitors charge lower prices in the inner city? After all, Walgreens and Rite-Aid promised to bring “fair prices” to Akron, which obviously means the prices charged by the existing merchants were considered “unfair.” Why doesn’t a new drug store come in and charge “fair” prices and get all of the inner-city’s business?

<p>The answer is that it’s more expensive to do business in the ghetto than in the suburbs. Insurance premiums are higher because there is a greater risk of theft, vandalism and worse. There are greater expenses related to shoplifting and property damage that’s uninsurable. And in order to attract equally qualified employees, the business must pay higher wages. After all, who would want to work in a dangerous environment for the same pay? In reality, of course, the wages paid are usually similar, and a lower-quality of service can be expected.

<p><b>Opportunity Costs and Choices</b>

<p>It could be that Walgreens and Rite-Aid generate larger profit margins from their ghetto stores than from their suburban ones. Thus, an altruist would say that they should lower their prices voluntarily, even though they can get away with charging more. But shouldn’t businesses be compensated more for doing comparatively unpleasant work? If you had the choice of making $10 an hour working in a safe environment or making $11 working in a war-zone, you’d probably take the $1 pay-cut. Maybe you’d work in the dangerous area for $15 or $20, but you would certainly expect to make more for performing unpleasant work, and only you could decide “how much more.” This is what Walgreens and Rite-Aid are doing.

<p>What would be the result of government regulation forcing Walgreens and Rite-Aid to charge equal prices in the suburbs and inner city? Well, they’d either have to raise prices in the suburbs or lower them in the ghetto. If they did the former, they’d lose business to firms that only operated in the suburbs and thus weren’t subject to the regulation. If they did the latter, it would no longer be worth it to remain open in the inner city. Either way, the end result would be the same: Walgreens and Rite-Aid would shut down their inner-city operations. This is exactly what CVS did before them.

<p>CVS was not faced with regulations but merely social pressure, the same kind of social pressure the Akron politicians put on Walgreens and Rite-Aid in 2002. The result of that social pressure is the exact opposite of its intended effect. After all, if people resent Walgreens and Rite-Aid employees for working for corporations they find to be “exploitive,” then that would likely result in employee mistreatment or harassment on the part of customers. In order to keep the employees from quitting, the drug chains would have to pay them higher wages, thus further causing prices to rise. Ultimately, the end result of this kind of social pressure will be for the chains to exit the inner city and leave it to the previous merchants that charged “unfair” prices to begin with.

<p>Economics is a science of definite laws. These laws can no more be subverted by man-made government laws than can the law of gravity. When politicians pass laws that seek to thwart economic laws, the opposite of the intended consequence can be expected.