Virtual Competition Solves Geographic Monopoly

This article defines virtual competition and argues that it is a mechanism to solve geographic monopoly.

Virtual competition is competition conducted through exchanges of information. Financial competition, reputation, marketing, and so on are all subsets of virtual competition. Such mechanisms can lead to the displacement of an unproductive producer of physical goods, even if that producer is in a position of geographic monopoly. It may also displace other forms of market control, but I want to focus on geographic monopoly here.

Why? Because I was on the train earlier and it was bothering me. There is a common and straightforward argument for intervention: certain goods and services can only be provided by means of a geographic monopoly. In particular, transportation, power lines, and phone lines. Such providers may abuse market power and therefore government must step in and defend the consumer.

There are maybe 4 pro-market responses I can think of:

  1. The public choice response is that government isn’t really benevolent. In some cases they are systematically worse abusers of the average individual compared to a market monopolist.
  2. Innovation can overcome the need for government intervention. For example, mobile phones and satellite technology reduce the need for phone lines. For cars the equivalent would be maybe a flying car.
  3. Another argument is that there is no clear reason to defend consumers rather than producers. After all, both are ultimately just people. Most people are employed, meaning they are producers, but they are also consumers. The unemployed are a special group to consider, but they are already singled out for special care by various public and private programs.
  4. The argument from virtual competition.

Virtual competition can allow displacement of a low-quality provider through a buyout in the following way:

  1. Reputation and information sharing allow individuals in a geographic area to notice that a producer of a similar service in another geographic area is a better fit.
  2. Those individuals can negotiate with the current producer and the foreign producer to negotiate a buyout of the current producer.
  3. Optionally, the new contract might contain good behavior clauses tied to financial incentives.

Instead of coordinating a buyout, the individuals might coordinate to produce a new technology, organize and broadcast demand for a substitute service, organize a boycott to pressure the current producer directly, or coordinate by other means.

Note the fluid reference to individuals as consumers and as investors. This is key and I think economics in general can benefit from focus on individuals and objects rather than producers, consumers, goods, and bads. Because a particular individual in one context is a consumer and in another context is a producer, and a particular object in one context can be a good and in another context it can be a bad. For example, people in the real world have bliss points and eating a sandwich is good while eating 10 sandwiches just might make you throw up.

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