This page deals with economics and business issues,concerning Latin America, and the global economy.-
Friday, April 15, 2016
Politics and oligopoly: Costly Entry barriers
Free markets work as long as competiton also work,otherwsie special interest groups can colude themselves to transform markets functioning in their own advantage ,This outcome is known as Competition among a few (oligopoly) which imply that the benefits of competiton goes to those who contol the market, leaving aside consumer´s interest , and comunity welfare as a whole.
Imperfect competition, in particular Oligopoly just as it is with monopoly, affect negatively the welfare level of the community, because prices are higher, product is lower, so employment is also lower, but rents of those in charge of oligopoly are higher.It follows that an economy which become organized as an oligopoly , induce income inequality and welfare losses.-
Someone may wonder about regulators and regulations.Either one, the law or the regulator can only reduce the burden upon the welfare of the community, but no necessarily avoid the rent arising from lack of effective competition. Moreover , consumers who are key to enforce the law ,are disperse and ill organizaed , lacking coordination capabilities.-
What about oligopoly in politics?.It would be like a competition among a few, but in this case the market are voters ,and the losses of welfare do not affect only to those who buy the products under the oligopoly scheme, but to the community as a whole, as long as it becomes hostage of those who have the control of politic frameworks for their own advantage away from community needs.-
So, with Oligopoly in the economy and oligopoly in the politics field, what may be the final outcome?.It is not surprising to realize that in such scenario , both democracy and free market not longer exist at the same time. A new dictatorship arise, not the one plainly totalitarian like the XX century style .This one, is more sophisticated , it goes through the rules of democracy and competition hiding its real purpose, such that it is harder to detect and difficult to confront. Besides , as the decisions parameters do not fit with community interest, there is not control mechanism other than its own perspective of surviving time and events.-
Many latin american economies ,are organized on the basis of lack of competiton and political oligopoly.The outcome is corruption, poverty, inequality, and losses because of recources are wrongly allocated to those uses which do not represent the majority welfare expectations, neither theirs best interest, but only the ones of those who have become the controllers of markets and democracy.
Current crisis on key economies of South America, deal with this problem and its implications. Sooner or later , voters have something to say.Voters have better coordination capabilities than consumer ,because they identify themselves with someone in a stronger way they do with a product .-
Friedman was right when he stressed that free markets economy, goes along with politics freedom , which mean no entry barriers for those who have new ideasconcerning how to improve economics perfomance ,or how to improve politcs frameweork for the benefits of the majority which add up to become real free markets and effective democracy.-
The source of innovation and prosperity ,is precisely to keep freedom to shape the design of new politics approach to key issues , as much as to design new product for the benefit of consumer.
However, this argument works with a the proper instituional framework with a clear set of rules,and transparency mechanisms, to sustain competition above special interests threats to get control of it for their own purposes. Friedman did not foresee that politics may be capture by special interests.