Before considering government regulation of monopolies, Prof. Lynne Kiesling encourages us to think about the regulation that markets naturally provide. In any market, in the absence of government interference, each business is constrained by the following:
The availability of substitutes
The entry, or threat of entry, of new firms
Historically, despite these competitive pressures, people have identified what they feel are monopolies in markets. In order to fix the problem, they often advocate government regulation in the form of breaking up large firms or regulating profits. Although these regulations may have merits, they reduce the profit motive that lures the innovators to come in and compete against the monopoly. Additionally, government regulations often create legal barriers to entry, which crushes smaller competitors.
The good news is that markets, on top of naturally regulating monopolies, generate wealth and technologies that systemically reduce the cost of starting new ventures over time. This, in turn, increases the competitive pressures on larger firms and reduces the likelihood of monopoly.
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