Do Not Fear Monopolies: Competition is a Process

CNBC reports that a large deposit of rare earth metals, enough to supply current world demand for nearly 1,000 years, was discovered off the coast of Japan.

Presently, almost all of the world’s rare earth metal consumption is supplied by China. This effective monopoly on rare-earths have caused some to wring their hands in fear of Chinese dominance and calls for protectionists tariffs soon followed. While this seems like a classic national-defense argument for tariffs, and a textbook case for monopoly regulation, the result of Japan indicates why fears of monopolies are overblown.

From the article:

Japan started seeking its own rare-earth metals after China held back shipments in 2010 during a dispute over islands both countries claim, Reuters reported in 2014. As a major electronics manufacturer, Japan needs rare earths for components.

Separately, China held back exports of certain types of rare earths starting 2010, which caused prices to jump by as much as 10 times — further pushing Japan to seek other sources, according to the Journal.

The Chinese government attempted to flex their “market power” on Japanese consumers in order to get some policy change (again, a classic example of protectionist fears). However, simple price theory predicted why the strategy would fail: Demand curves slope downward and (subsequently) supply curves slope upward. When China raised the relative price of rare earth metals for Japan, Japan looked for other sources and indeed discovered this massive deposit.

Currently, the deposit is too expensive to mine profitably given current prices. But, if China were to try and flex their “market power” again, they would quickly find another competitor in Japan (indeed, when China attempted to raise prices on rare earth metals through their role of a monopoly in 2008, it failed miserably as mothballed mines in other countries came back online).

Monopolies are not perpetual things. Relatively high prices induce people to enter the market (note this is true even when there are high barriers to entry). Relatively high prices induce technological innovation (like fracking in oil). If a monopolist seeks to exploit “market power,” then we will find people who respond. The Law of Demand remains in effect.

In short, I do not fear monopolies, even one that dominates like China and rare earths, because competition is a process, not a static state of affairs.

Jon MurphyPrice Theory