Market Structure VS Firm Behavior

The question, “Does market structure determine firm behavior, or does firm behavior determine market structure” can be answered in many ways for the real answer is not necessarily black and white. In situations where multiple firms compose the market, such as in perfect competition, the actions of one firm can seldom be so profound as to effect the structure of the market. In a perfectly competitive market for tomatoes, with 400 different sellers, each of whom holds an equal percentage of total output, it can be easily seen that one firm raising or lowering prices would have minimal effect on the actions of any other firms in the market. The firm, composing only .25% of the total output of the market, would be hard pressed to make a decision that did not negatively effect its financial status. Raising prices would raise their price above equilibrium meaning fewer people would buy, given 399 cheaper options, still selling at equilibrium price. Lowering output, would also have a negative effect on the firm, as would lowering prices. Long story short, given a multitude of firms acting independently of each other, the decisions of a firm would likely have minimal effect on market structure.

With that being said, the situation is rather different when it comes to markets in which only a few firms comprise the whole of the market, as with oligopolies, or when only a single firm is present, as is the case with monopolies. Using tomatoes as an example again, suppose that only three firms existed in the market for tomatoes, and each held a third of the output of the market. In this situation, it would be very simple for the firms to examine the behavior of the other two firms and thus make monumental shifts in the market when the pieces aligned correctly. It would also be easier to collude with only three firms, which would be very difficult in the presence of 400 different firms. While illegal, within the United States at least, collusion among three firms would be simple and easy to hide. The end result would be the presence of a single, self serving entity that could manipulate, through price gouging and other techniques, the market for tomatoes. Hiking up prices simultaneously would be simple and if each firm followed the agreement, the concept of competition driving down prices would be nullified and the end result would be an overly expensive tomato. The same is true for monopolies, which, although not illegal, can set prices at whatever they see fit, and thus control the market without fear of interference, or competition.

After all is considered, it is very easy to see there are situations in which markets determine the behavior of firms and where firms determine the structure of markets. Neither argument is wrong, given correct pretext.

Federic Bastiat and Liberty

Bastiat Propaganda

Federic Bastiat once wrote that “At whatever point on the scientific horizon I begin my researches, I invariably reach this one conclusion: The solution to the problems of human relationships is to be found in liberty.” While in theory this is what people all over the world want, it is not necessarily true. In the most current dictionary the definition of liberty is as follows: the state of being free within society from oppressive restrictions imposed by authority on one’s way of life, behavior, or political views.  If everything were actually solved by absolute freedom we would be living in anarchy. I am not a socialist or a communist, my views are that free trade and especially Americans rights to freedom are the way to go. However, I cannot say that the answer to all the problems in the US can be solved with liberty.

Now let me take this time to begin by saying that when people are actually being oppressed then the answer to the problem is actually liberty. But, the issue with this is that some people believe they are being oppressed when they are actually just breaking laws. Hypothetically speaking, if a murderer was to say, “I am being treated unfairly by the justice system, Federic Bastiat said that liberty is the answer to justice, I deserve to be free.” In this situation the murderer truly believes he or she is being oppressed, and that the only option is for liberty. So in this situation for Mr. Bastiat to say that liberty is the answer would not truly be correct.

I agree with the idea that liberty is the answer to a lot of problems that our society currently faces, but when Federic asserts that it is “always” the answer, he immediately loses me.  A non-hypothetical situation that liberty would not have solved was the financial crisis that peaked in 2007-2008, or in simpler terms the housing bubble. For those of you reading this that are not sure what lead to the housing bubble, I will give a quick summary. With the deregulation of the Savings and Loans market, the investment banking industry was able to give horrible loans out to millions of people, and after loaning to a point where there were almost no loans to be made on the market, the bubble burst devaluing property and causing a nation wide default of loans. The nationwide default caused nearly all investment banks that had these loans to go bankrupt.  In this situation that is still fresh in the mind of many Americans it was too much liberty that caused people to become victims to bad loans. While I am a proponent of free trade, I believe this crisis could have been stopped with companies being told they have to be reviewed periodically to make sure they are in good standing. Sadly, with their unfound freedom these banks took advantage of their liberty.

Mr. Bastiat is radical in saying that everything can be solved with liberty, but at the same time, it is liberty itself that keeps our country what it is. Without free trade and free speech we would be an oppressed nation crumbling under an oppressive government. For our country to thrive we must pride ourselves on liberty, but remember that to much liberty and no law leads to a place that is not fit for living.