Feb 18, 2008

The Paradox of the Free Market: Part I

Again I will be deviating from the standard Ubuntu rants to go onto another subject of my interest: economics.

This series of articles will outline my view of the free market today and what I perceive as a gross paradox within it. These articles are not original, I'm sure other people have written about it before, but whatever. This is a blog, not a scientific journal.

I will begin with talking about what my view of a free market is and should be. The free market is where the markets for goods/services/etc. is free from control, by any party. Traditionally the free market has been defined as free from control by the government, however this is not truly free as it is still controllable by individuals or groups of individuals (called monopolies or oligopolies respectively).

In order for the market to be free, there must be competition. Without competition, one party will control the market, either a firm or a group of firms (called a cartel). The purest form of competition is called perfect competition, where all firms are equally small and equally incapable of affecting market prices or wages. If they raise their price, nobody will buy from them, if they lower their price, they will not make enough money to finance their business. Obviously this market structure is not present in reality, as even small businesses such as d├ępanneurs (convenience stores) hold a positional advantage over other businesses which leads to a market structure called monopolistic competition.

There are many factors which break down the structure of perfect competition: patents, innovations, natural monopolies, to name a few. This is especially true in the computer industry, where high fixed-costs and copyrights can provide severe barriers for entry to starting firms. On the other hand, it is far easier to innovate in this industry, which explains how companies like Google got to where they are.

In the next article, I will talk about the impact of imperfect competition in the long run.

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