Recently there was a consumerist war. The Blu-Ray dvd player, manufactured by Sony, fought the HD DVD player, manufactured by Toshiba. Consumers stood in a circle around the fight and watched. They had learned their lesson from previous fights (Betamax vs VHS) and weren’t going to part with any money until they knew who was going to win.
This is capitalism as it is supposed to be: firms fighting it out to give us more choice at a reasonable price. Except in this instance there should have been more fighters in the ring. Two fighters is looking a tad suspicious for a capitalist contest.
Anyway, Sony came out victorious. People knew where to put their money and the units started flying out the door. The best product must have won, right?
It was well known at the time that Sony was making a huge loss with every PlayStation 3 it sold (the machine had a Blu-Ray player built in). Sony’s strategy was clear: undercut the competition until they run out of money, then the market will be wide open for the monopolistic dominance of one company. It’s a well known gambit. Regional newspapers used to do it all the time to upstart magazines appearing in their territory which were given away for free. These magazines would eat into the newspaper’s advertising revenue by offering a cheaper alternative. The newspaper’s response would be to slash its own rates until the upstart starves of income. Once dead, the newspaper would safely put its own rates back up to immodest levels.
What we have instead of competition then, is simply, the survival of the richest. In a market of few players, the player with the deepest pockets wins. And we can see this happening today. Look at practically any market in the Western world and a few giant players dominate. How many supermarkets can you name? Presumably then, the logical endpoint of capitalism is a monopoly. Game over.
Should firms be allowed to sell their products at below cost? Surely, some would argue, that option is part of the freedom of capitalism? But corporations are required by law to maximise their profits for their shareholders so is this strategy unlawful?
This is why an independent referee with meaningful powers is required in any market.