Monday, May 18, 2020

Schmitz on monopoly

Jim Schmitz has released the first salvo in what promises to be a monumental work on monopoly, titled Monopolies Inflict Great Harm on Low- and Middle-Income Americans. (I love titles with answers and no colons.)
Today, monopolies inflict great harm on low- and middle-income Americans. One particularly pernicious way they harm them is by sabotaging low-cost products that are substitutes for the monopoly products. I'll argue that the U.S. housing crisis, legal crisis, and oral health crisis facing the low- and middle-income Americans are, in large part, the result of monopolies destroying low-cost alternatives in these industries that the poor would purchase.
He promises more to come
Legal Services, Residential Construction, Hearing Aids, Eyecare and ...Repair, Pharmaceutals, Credit Cards, Public Education...
There is a huge one right there.

To Jim the main characteristics of monopoly are
A. Monopolies sabotage and destroy markets. They typically destroy substitutes for their products, those that would be purchased by low-income Americans.
B. Monopolies also use their weapons to manipulate and sabotage public institutions for their own gains...

Unlike worries about big business (or today's FANGs), most monopolies are associations of smaller businesses
Monopolies are difficult to detect...they  form power relationships of infinite complexity that are hard to untangle....
From the literature in the 1940s he mentions
labor unions and farmers. (with “concealed protection of monopoly by doctored building and other ordinances”), retail trade (with “so-called ‘fair-trade’ laws which compel businessmen to act as if they were monopolists even if they wish not to”), farming (where farmers enjoy “the pleasures and profits of monopolistic behavior”)...Professional associations,... union- management monopolies.
Jim is not just assembling evidence on particular markets. He has a methodological quest, to revive and reinvigorate a tradition from Henry Simons and Thurman Arnold in the first half of the 20th century, and to displace and destroy the conventional paradigm as taught over and over again in textbooks.

What we repeat to generations of undergraduates is that a monopoly is a business that has a downward sloping demand curve. It raises its price, or restricts its output, to earn greater profits. One of many troubles with this view is that it's hard to see that much damage. The Harberger triangle is small. In fact, one of the many theorems about standard analysis is that the perfectly price-discriminating monopolist is efficient,  since it produces the same amount as the competitive firm. Dealing with airlines, credit card companies, and college tuition doesn't feel that way. The textbook goes on to say we need anti-trust to reestablish competition.

Jim argues that this entirely misses the point. Most monopolies get their restrictions from government in the first place, and their damage lies in sabotaging low-cost competitors and innovation.

Why do we tell the same tired story over and over? It's an interesting reflection on intellectual traditions. Much of Jim's analysis is verbal, historical, and empirical. It's so much easier to push the graphs around, and tell the clearest parables over and over. But in doing so, we lose much of the richness of experience that an earlier generation had.


  1. The problem is to pin down why monopolies would have higher costs and less innovation. Many of us have a sort of gut feeling that that's true, but why? A monopoly has about as much incentive to have low costs and innovate--quite possibly more, since it can price-discriminate and capture what in a competitive industry would go to consumer surplus. But there are likely organizaitonal reasons why one monopoly is worse than five oligopolists for innovation and for cost-cutting. Somethign like the old Joe Farrell paper,

  2. "Much of Jim's analysis is verbal, historical, and empirical. It's so much easier to push the graphs around, and tell the clearest parables over and over. But in doing so, we lose much of the richness of experience that an earlier generation had." I am sure Deirdre McCloskey would agree! (See The Rhetoric of Economics)

  3. Concealed protection of monopoly is a consequence of regulatory capture.

  4. Monopoly and competition are often seen as mutually exclusive institutions, when the presence of competition means the absence of a monopoly - and vice versa. Finding a balance between monopoly and competition is very difficult. Moreover, today there is a convergence of approaches to the organization of the economic system, and mixed economies dominate the world.

  5. Excellent article by Jim Schmitz....FTC, which regulates monopolies says "Exclusionary Conduct
    Judging the conduct of an alleged monopolist requires an in-depth analysis of the market and the means used to achieve or maintain the monopoly. Obtaining a monopoly by superior products, innovation, or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.Exclusionary or predatory acts may include such things as exclusive supply or purchase agreements; tying; predatory pricing; or refusal to deal."

    several examples that Jim lays out should be caught under the above provision of FTC. But key question is how does one convince the ftc and the antitrust division of the dept of justice to see these as monopolies when several of these are wittingly or unwittingly created by the government


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