On Monopolies, Quality of Service, and Possible Solutions

Probably the biggest reason for the degeneration of the quality of service provided by a company stems from it controlling a monopoly over a specific area or market. When a firm faces no competition, it becomes unprofitable to maintain an above average level of service. Why is this? Because while the marginal cost to the consumer of enduring a sub-par level of value remains smaller than the marginal cost of having to switch to another company, the customer will remain loyal. The monopoly could go the extra mile to be above average, but this would be simply beating a dead horse, as this would be a sufficient rather than a necessary condition to keeping that customer. Therefore, the firm provides the minimum level of effort necessary to keep from losing patrons.

We could discuss the violation of ethics and morality that is clearly evident in this practice, but in a capitalist society, anybody could contrive a justification for any of his actions, provided he thinks long and hard enough about it. No, combating monopolies will take more than appeals to the heart. The first method of combating monopolies is the same one that we have seen time and time again. The government must step in and impose some form of restriction or ban to clean up the inefficiencies in the free market. This solution is acceptable and effectual, as has been demonstrated by history, but it’s not perfect. With every step that the government takes against monopolies, there is an inevitable contraction of the liberty present in the market, and while this may not seem like a huge deal in the short run, it is possible to see how things could get out of hand in the case that the government ever began to lean heavily towards the side of business.

I propose a different solution, a solution that focuses more on using the dynamics of the free market to combat its own failures. How do the constituents of an oppressed nation combat their much more militarily powerful oppressors? The answer is guerrilla warfare, and I believe a similar tactic can be employed by the people who are hurt most by monopolies. Instead of boycotting the goods of the monopoly, which is often not an option due to the necessity of the good, the people must take it upon themselves to provide the competition that would begin to ameliorate the situation. Local mom and pop shops must spring up and take command of small shares of the resources, planting the seed that will eventually lead to the monopoly's downfall.

But how to gain access to these resources, which are locked away by the monopoly? The people must organize and pool all their available capabilities to try to rent away as much as possible from the monopoly, using the market itself. Where there is private property, there is an owner, and where there is an owner, there is an opportunity to purchase the property. If the price is right, the people should be able to purchase at least a tiny share of the monopoly's resources. From this tiny sliver of resources can potentially bloom a self-perpetuating cycle, in which local businesses can now appear that sell those resources, which in turns leads to more purchased resources and more local businesses. Furthermore, the monopoly could potentially be broken up from the inside by offering higher salaries to its key employees. 

How do I know that these regional businesses will be successful? Despite the prices that these shops charge relative to the monopoly, I predict that a particularly hostile atmosphere created by said monopoly's unscrupulous practices will be enough to make people buy locally out of principle alone.  Slowly but surely, these small firms and organized individuals should begin to whittle away at the authority of the monopoly. Eventually, there should be a return to normalcy, equilibrium, and efficiency within the market, after which people will no longer feel obligated to purchase from only certain purveyors.

So, if this approach is so great, why has it not been employed widely? I believe the problem lies in the rarity of talent and leadership readily available to guide the masses. To organize an operation of such magnitude would take a truly unique individual, not to mention the necessity of that individual being in the right place at the right time. To have such a figure at the helm is largely a matter of sheer luck, and the rarest luck at that. Another downside to this approach is the necessity of the collective group to have some baseline level of resources available to even begin the operation. I fear that the only recourse for a people who cannot together reach even this baseline would be violence. Given the very special conditions that my solution requires, and the potential for violence if such a solution was to fail, it's not surprising that the governmental approach has prevailed throughout history.

Complementary Goods

In this article, I would like to discuss complementary goods and provide some real world examples of how companies use them to make a profit. I'd like to start off by briefly describing what complementary goods are. Complementary goods are basically goods that are intended to be bought together (though not necessarily at the same time). For example, pencils and erasers, or hotdogs and buns, can be considered complementary goods. As expected then, a decrease in price of one of the goods would increase the demand for the other (since the demand for the first good would increase as well and since, as mentioned before, the two goods are purchased together). The vice versa is also true.

This is all well and good, but how can firms use this to make a profit? The more helpful question would probably be: How have firms already done this? The key rests in the necessity of the firm to produce BOTH complementary goods. From there, a simple marketing scheme can easily raise profit.

Let's take Apple as an example. Since Apple produces both the OS X operating system, as well as the Macintosh computers which are, as far as the layman is concerned, the only ones that can run this operating system, these two products are quite natural complementary goods. So how can Apple exploit this fact to make some money? Suppose that Apple announces that the OS X operating system is, for a limited time, going to be $10 cheaper. Certainly some people will go out and buy the operating system without buying a new Mac as well, but they are assumed to be the minority of shoppers. This marketing plan bases itself on the feasible idea that enough additional people will buy the now cheaper operating system, and the new computers to go with that operating system, to not only nullify the loss of profit from the $10 off sale, but to substantially overcompensate for it. Many variations of this basic strategy can be employed to attack specific markets at specific periods of time.

As mentioned before, the essential ingredient to maximizing the effectiveness of this policy is for the company to have sole, or almost sole, rights to produce both complementary goods. Microsoft, for example, would not have similar success lowering the price of their Windows operating system. Why? Because Microsoft does not produce computers, and even it did, there are too many other manufacturers producing PCs capable of running the Windows operating system. This weakens the tether between the complementary goods and hurts the profitability of the strategy.

Revisting the Relationship Between Investment and Interest Rates

It is helpful at certain points throughout one's study of economics to revisit the empirical data that seems to convince one of widely accepted macroeconomic theory. The focus in this article is on the theory between investment and interest rates. Because investment often depends on the borrowing of money, and the price of borrowed money depends on the interest rate, it is commonly believed that an increase in the interest rate should decrease investment. 

To help illustrate this, I have juxtaposed a graph of the federal funds interest rate since 1955 with a graph showing the percent change in private fixed investment from the previous period (I have used the percent change rather than the absolute value to remove the effects of the continual upward trend of investment caused by GDP growth). The investment line has been shifted forward one year to account for lags in the effect of the interest rate. We can thus clearly see from the graph that, for the most part, investment and interest rate behave quite miraculously as expected.

The data for the interest rate is from the Federal Reserve website, and the private investment data is from the Bureau of Economic Analysis. 

The Effect Of Recession On Net Private Sector Saving

It is not unnaturally believed by some that recessions should cause an increase in net private sector savings. This would be due to the notion that, when times are tough and unemployment is heightened, saving one's money is less risky than using it for consumption. However, despite the seemingly sound logic of this, the data suggests a more complicated relationship. Examine the following graphs of net private savings as observed between 1929 and 2011 (quarterly data is not available between 1929 and 1946, so annual data is provided instead):

Now observe the dates of all the recessions the U.S. has undergone since the Great Depression (taken from Wikipedia), as well as the observed change in net private savings during those dates, as measured by the graphs above:

Aug 1929–Mar 1933: Annual Net Decrease
May 1937–June 1938: Annual Net Decrease
Feb–Oct 1945: Annual Net Decrease
Nov 1948–Oct 1949: Quarterly Net Decrease
July 1953–May 1954: Quarterly Net Decrease
Aug 1957–April 1958: Quarterly Net Decrease
Apr 1960–Feb 1961: Quarterly Net Increase
Dec 1969–Nov 1970: Quarterly Net Increase
Nov 1973–Mar 1975: Quarterly Net Decrease
Jan–July 1980: Quarterly Net Increase
July 1981–Nov 1982: Quarterly Net Decrease
July 1990–Mar 1991: Quarterly Net Increase
March 2001–Nov 2001: Quarterly Net Decrease
Dec 2007–June 2009 : Quarterly Net Increase

It is obvious from this data that before 1960, every single recession the U.S. experienced resulted (supposedly) in a decrease of net private savings. This runs against the reasoning we presented at the beginning of the article, and it would be helpful to try to explain why that could be the case. I believe the explanation can be found in the difference between "saving money" and the definition of savings as employed by the above data. When times are rough, everyone does a little more to spend less. However, attempting to spend less does not correspond necessarily to increasing one's savings. It could be that a family that is trying to be more frugal isn't placing the money it has conserved into the bank out of fear of losing it (as happened to many during the Great Depression). Another arguably more likely scenario is that, since recessions are coupled with increasing unemployment, a decrease in average income could theoretically cause a corresponding decrease in average savings.


But assuming that the above theory is true, how then, can we explain the increase in savings that we see in many of the later recessions. One obvious conjecture for 4/5 of these cases is the following: the recessions of 1960, 1969, 1980, and 1990 all correspond to periods in which the Federal Reserve raised the interest rate in order to combat inflation. In other words, the recessions were purposefully orchestrated. Higher interest rates provided the incentive needed to encourage corporations and citizens to save more and spend less.


The elephant in the room remains the most recent recession. A net increase of net private savings was observed despite the fact that the interest rate was not raised (and was in fact lowered to basically zero). In order to get to the bottom of this, it would be helpful to take a closer look at this particular period in graph form:

In the graph above, net private saving = domestic business saving + household and institutional saving. As we can clearly see then, the very beginning of the recession is characterized by a large surge in net private saving, brought on by households and institutions. This is possibly due to the housing market crash that precipitated the recession. Many people who saw the price of their homes start to collapse may have thought it wise to start saving; the counter-active effect of lower savings due to lower income that we discussed earlier had not started to kick in yet, since unemployment did not begin to seriously rise until around the second quarter of 2008, as illustrated by the graph below (courtesy of the Bureau of Labor Statistics):
Curiously enough, this rise in unemployment is right around the time we start to see household and institutional saving start to dip. This causes net private saving to decrease as well. Something even more interesting happens a bit later though: household/institutional saving starts to increase once again. This could be due to the fact that unemployment had a short 2 month period of stagnation in quarter 3, which perhaps gave the false impression that the economy had stabilized. However, it is during this same time that the brunt of the recession seems to have hit the domestic business sector, where we see a large drop. This is enough to overcome the rise in household and institutional savings, causing the net private saving to drop further still. It appears as if that downward trend should've have continued on, but instead we see a sharp increase in domestic business saving beginning in the fourth quarter of the 2008 year. 

What could account for this? Though it is hardly indicative of causality, the Troubled Asset Relief Program initiated under George W. Bush to alleviate the crisis was passed during this very time. This substantial increase in domestic business saving was enough to pull up net private saving. In the first quarter of 2009, we see a continuing increase in domestic business saving, as well as a slight bump in household/institutional saving. Potential reasons for this? The government passed the American Recovery and Reinvestment Act of 2009 during this period, better known as the Stimulus. Despite rapidly rising unemployment, this could have led to the temporary increase we see in household/institutional saving (if we extend the graph a bit more to the right, we will see that household/institutional saving plummets severely in the following quarters, most likely due to the unemployment rate reaching its trough and overwhelming any of the aforementioned transient effects of the Stimulus on public perception.)

I feel the need to emphasize that none of the above is meant to imply any causality. I have only presented theories and rationalizations based on the data observed that I believe to be of sufficient probability as to warrant notice.