Question

First, read the attached article.

What’s worse: monopoly power or government

intervention?

Politicians of all stripes increasingly agree with Karl Marx on one point –

that monopolies are an inevitable consequence of free-market

capitalism, and must be broken up. Are they right? Stuart Watkins isn’t

so sure.

by: Stuart Watkins

1 OCT 2020

MoneyWeek

Free markets left to themselves in a capitalist context are great at producing wealth, but will

inevitably tend to concentrate that wealth in ever fewer hands, leading to increasing inequalities

of income, power and wealth, and undermining the benefits that might be supposed to flow to

consumers, such as cheaper prices. The logic inherent in market exchange must, in other words,

progressively undermine the very qualities that the champions of the market promise they will

deliver.

This, at least, was the view of Karl Marx. Perhaps surprisingly, it is also the mainstream view

today. It is not all that easy to find a mainstream commentator, economist, think-tanker or

policymaker who will raise a squeak of protest against the idea. All the main political parties –

particularly in the US, where the problem is deemed to be particularly acute – agree that

something must be done to curb the rise of the monopolies, namely that the state should step in

and break them up, or at least restrain them.

Indeed, “Market Power, Inequality and Financial Instability” – a new paper by Federal Reserve

Board economists Isabel Cairo and Jae Sim – argues that the concentration of market power in a

handful of companies, and the resulting decline in competition, explains the deepening of

inequality and financial instability in the US, as Craig Torres reports on Bloomberg. They blame

the rising market power of big companies for the decline in the share of wealth that goes to

workers, the rise in inequalities of wealth and income, and the growing debt burden. The authors

call for policies that will redistribute wealth to the poor, perhaps by gradually raising the tax on

dividend income from zero to 30%. They suggest that such policies might help to slow the rise of

inequality and the growth in debt, and make financial crises less likely.

The paper is just the latest voice in a rising chorus. Towards the end of last year, The Great

Reversal, a book by economist Thomas Philippon, presented a detailed empirical analysis of the

question and argued that America can no longer be considered a free-market economy in any real sense. As well as confirming that the trends already sketched are indeed in play, he concludes

that the main explanation is political – namely, that politicians have not enforced competition

policy as they should, thanks in part to lobbying and campaign contributions. The result, to quote

just one example, is that the price of broadband access in the US is roughly double that of

comparable countries, leading to predictably higher profits.

The year before Philippon’s book, a similar one by Jonathan Tepper and Denise Hearn (The

Myth of Capitalism) made the same point. “I realised that particularly in the US, which is

probably the most advanced in this trend, you’re seeing more and more industrial concentration,”

he said in an interview with MoneyWeek at the time of publication. That gives companies

pricing power over consumers, more power over workers as they don’t have to bid against rivals

for their labour, and power over suppliers. The result is that a small number of huge companies

are capturing very high profit margins. Tepper, too, blames lax enforcement of competition laws

for the problem.

The problem may be about to get worse. The response of governments to the coronavirus

pandemic has led to a huge economic crisis, and their response to what they have caused is to

throw money at it. The combined effect will be to push smaller firms out of business, quenching

the fires of creative destruction, and for the well-connected, better organised larger companies to

obtain all the government cash and bolster their already dominant position. Low interest rates

may also contribute, as bigger companies are in a better position to get hold of cheap credit and

invest it in expansion. If rising concentration and monopolies are a problem, it’s one that seems

set to get worse.

The case for the defense

Are Marx and his mainstream followers correct? The answer, as ever, is – it’s complicated. A

sounder tradition in economics would lead us to be cautious about the claims from first

principles. As Edmond Bradley, a writer for the Mises Institute, put it back when Microsoft was

the monopolistic bogeyman in the early 2000s, “the fear of industrial concentration is the last

refuge of socialist theory” and the idea that governments must step in to save us from it is

“wildly incorrect”. A company operating in a market economy might look like a monopoly

“under myopically static analysis”, but a broader and historical view will reveal that even very

large, dominant companies face intense competitive pressure – whether from the fear of potential

competition from new entrants eyeing their high profits; or from competitors offering products

and services of a different but nevertheless substitutable kind; or from losing customers

altogether, should they decide they’d rather do without what is being offered.

And if that’s what first principles tell us, there are plenty of reasons to be sceptical about what

the real-world data are showing, too. A roundtable discussion of the subject by experts, hosted by

the OECD group of wealthy nations in 2018, concluded that although market power did indeed

appear to be rising in many countries, the causes were unclear. It might reflect a reduction in

competitive intensity, but it might equally be the outcome of intense competition. If the causes

are unclear, then there’s no way to be confident about what the correct policy response should

be.

In any case, the rise in industrial concentration may not be all it appears to be. As a 2019 paper

by Alessandra Bonfiglioli, Rosario Crinò and Gino Gancia for the Centre for Economic Policy

Research notes, all the existing evidence for the increase in industrial concentration and the fear

that this will usher in a new era of monopolies has been based on national data. They find that when competition from foreign imports is included, the overall level of competition may in fact

have intensified rather than fallen – even if the number of firms from the home country entering

the market falls. So increased global competition and greater national concentration may be two

sides of the same coin – “growing global competition may force unproductive firms to exit and

top firms to consolidate on their best products”.

Is monopoly such a bad thing anyway?

Amazon is one of the companies charged with unfairly exploiting its dominant position to crush

competition and hence harm customers. Indeed, its boss, Jeff Bezos, was recently dragged before

the US Congress and had to defend his firm from hostile questioning. But if Amazon is a

monopoly, then the first question that arises is, is that such a bad thing? Amazon started out as an

idea in Bezos’s mind, which he put into action using money he raised himself from family and

investors, working from his basement and carrying parcels to the post office. It was, from the

beginning, a high-risk venture, deemed by most to be almost certain to fail. Yet by consistently

offering consumers what they didn’t know they wanted, and winning their approval and then

loyalty, Amazon rose above its competitors by sheer excellence. It’s not as if its customers have

been forced into anything.

Moreover, even in its current dominant position, Amazon faces plenty of intense competition. As

Bezos pointed out in his testimony to Congress, customer trust is hard to win and easy to lose.

Amazon’s globe-spanning dominance would end very quickly should that trust disappear. There

are plenty of competitors snapping at its heels. Amazon accounts for less than 1% of the $25trn

global retail market, according to Bezos, and less than 4% of retail in the US. There are more

than 80 retailers in the US alone that earn more than $1bn in annual revenue – that includes

Walmart, which is more than twice Amazon’s size and whose online sales grew 74% in the first

quarter. In the wake of the pandemic, plenty of other companies are competing with Amazon in

the race for online orders for goods, including Shopify and Instacart.

The briefest review of relatively recent history should be enough to show that large companies of

the kind that draw fire from those concerned about monopolies are in reality always in danger of

having their profits competed away at any moment – witness Kodak and Myspace, to take just

two commonly cited examples. As those economists who most consistently defend free markets

insist, monopolies are only ever really a threat, not as a result of companies operating in free

markets, but as a result of government interference – particularly, in our day, as a result of

money printing and ultra-low interest rates. What is needed, then, is not more government

interference to solve the problems they have created, but less. In this sense, the rising threat of

monopoly as a result of the coronavirus pandemic is a clue to the real source of the problem.

QUESTIONS: What do you think of the article? Do you think the author's examples of monopolies are actually that? Is there such a thing as "excess profits"? Are the firms mentioned truly monopolies, in that they are the ONLY providers for that good or service? Do we need more regulation, or less? Why?

Answer 1

The article has broadened the horizon of whether one should consider a monopoly truly a monopoly. Because they do face several forms of competitive pressures. Because of the article one realizes that even though a firm is a monopoly, there are several other competitive aspects it has to consider in order to stay in the game. And it is only a monopoly for a limited duration because it does face several competitive aspects.

The author's examples of monopolies are actually that because monopolies hold a larger share of the market and earn supernormal profits. But the author has emphasized that even though they are monopolies and one considers monopoly's to not face any competition, in the real world they do face various forms of competitive aspects ranging from intense competition.

There is such a thing as excess profits as the firms are charging higher prices for their products, the firms also get pricing power over consumers and workers leading to greater profit margins. Because of the prevalence of such excess profits, new firms try to enter the market.

Some firms are truly monopolies such as Kodak, Microsoft, etc. However there are other firms such as Amazon and Walmart who are not the only providers of goods and services.

There needn't be more regulation in controlling the level of competition and instead there should be less as there are several competitive forces already facing the monopoly firms such as products becoming redundant and gaining the trust of consumers which can be lost in an instant. The government should encourage small businesses and firms but let the monopolies reap their benefits, which might be only prevalent for a short duration. Because new firms emerge and enter the markets, because the monopolies earn supernormal profits.