Bryan Caplan  

Antitrust Through the Lens of Marginal Revolution

Greg Mankiw's Problem... Where Does Monopoly Power Come...
Marginal Revolution premiered six years and tens days ago.  Alex and Tyler may not have been the very first academic economists to start blogging, but they still got in at the ground floor.  I don't know how many people read MR's first post - 50? 100? - but over the years they've built a fan base of tens of thousands. 

MR isn't just a big player in the econoblog market; it's clearly got some monopoly power.  Alex and Tyler don't face a horizontal demand curve; if they started offering a less attractive package, they wouldn't lose all their readers overnight.  In fact, MR could probably get a lot worse and still keep thousands of readers.

Now as far as I know, antitrust authorities have largely left blogs alone - even though you could easily argue that the blogosphere is a den of predatory pricing.  But hypothetically speaking, what would happen if Alex and Tyler fell under the antitrust spotlight?  What could they get away with?  What would get them in trouble?

For the time being, Marginal Revolution is basically priced at its marginal cost of 0.  But antitrust authorities would have no objection if its owners raised their price.  In fact, they could ask for a million dollars a minute, and they'd be legally safe.  When a firm creates a unique product, the antitrust authorities let them charge all the market will bear.  So what would attract unwanted attention from the antitrust authorities?

1. Horizontal mergers.  If MR wanted to merge with a close substitute - say Mankiw's blog.

2. Long-term contracts.  If MR made readers sign contracts to keep reading MR every day for the next five years.

3. Exclusive dealing.  If MR made readers sign contracts promising not to read other blogs.

4. Price-fixing.  If MR and Mankiw explicitly agreed to raise their prices by $1/month.

5. Predation.  If MR tried to put Mankiw out of business by churning out massive quantities of high-quality posts.

6. Etc.

If you asked economists (not lawyers) in antitrust enforcement why they'd allow Marginal Revolution to raise its price above marginal cost, what would they say?  They'd probably appeal to dynamic efficiency: In the long-run, it's socially beneficial if firms can cash in on monopoly power over products that, but for their efforts, wouldn't have existed. 

My question: Once you buy the dynamic efficiency rationale, why not let firms use their monopoly power however they see fit?  If it's OK for exceptionally fascinating blogs to charge an exorbitant price, why isn't it OK for exceptionally fascinating blogs to merge, or insist on exclusive deals, or fix prices?

Wouldn't that be abusive?  You're probably no more worried that MR will collude with Mankiw than that MR will start charging $30/month.  If you were worried, I'd be tempted to repeat what Bart told Comic Book Guy: "They're giving you thousands of hours of entertainment for free.  What could they possibly owe you?  I mean, if anything, you owe them." 

But ethics aside, the fundamental check on mergers, cartels, exclusive dealing, etc. is the same as the check on monopoly prices: entry.  Personally, I think entry is a mighty force, but I can understand why someone would disagree.  What I can't understand is why antitrust authorities think it's efficiency-enhancing to scrutinize every exercise of monopoly power except for high prices.  Care to enlighten me?

Comments and Sharing

COMMENTS (11 to date)
Chip writes:

One quibble. In no way is Mankiw's blog a close substitute for MR. Maybe this blog, though.

ed writes:

One answer: it's hard to know when a price is "high," because cost is poorly observed by outsiders (and it's even hard for insiders.) By concentration mergers, concentration, contracts, etc. are relatively easy to observe.

Phil writes:

A high price doesn't reduce competition; it leaves it unchanged in the short run, and encourages it in the long run. The other five actions you mention all reduce competition in the short run.

david writes:

I agree with ed. How do a regulator be sure what the marginal cost is? (I wonder what MR's current bandwidth rates are - certainly nonzero).

There is also the point that all of the actions that you've mentioned do not immediately punish the monopolist's customers - except for, of course, raising the price. All the others only slowly corrode market competitiveness.

All the others also discourage new entrants, for that matter. Only higher prices encourages new entrants.

Matt Matson writes:

Phil bears repeating: "A high price doesn't reduce competition; it leaves it unchanged in the short run, and encourages it in the long run. The other five actions you mention all reduce competition in the short run."

Although you may not believe it, antitrust regulators seek to promote competitive markets for the benefit of consumers and to minimize government interference in markets. The goal is not to force price=marginal cost or eliminate profits. Rather, the focus is on whether a practice reduces competition and harms consumers.

As you note, an important "check on mergers, cartels, exclusive dealing, etc. is the same as the check on monopoly prices: entry." That is why regulators are most concerned with those industries where entry is difficult and why regulators focus on practices that make entry more difficult. Price-fixing agreements between competitors are treated harshly because they limit competition and have no apparent benefits to consumers.

As for MR, antitrust regulators would not care about mergers, long term contracts, exclusive dealing, or predation because--despite MR's fame--it does not have market power in a market of few competitors that is difficult to enter.

Zhaofeng Xue writes:

The U.S. antitrust laws do not say anything about the absolute height of price per se. It is always the collusion, monopolization and attempt to monopolize (in a word, the lessened competition) that the law makers were concerned about. Over time, everything except for high price has been found of connections with that particular antitrust concern. So it is a law-driven consequence that "antitrust authorities think it's efficiency-enhancing to scrutinize every exercise of monopoly power except for high prices." Alternatively, without much legal tradition to observe, China's new Anti-Monopoly Law is more inclusive, in which "selling commodities at unfair high prices or buying commodities at unfair low prices" is prohibitted (Article 17).

Adam writes:

Is there some predatory pricing going on with MR? Both Alex and Tyler appear to be tenured Professors with secure salaries. They also appear to produce intellectual products for sale and rent. Aren't they using these other sources of income to underprice their blog and eliminate competitors who have non-zero costs of entry (e.g., like a young Ph.D. without other employment)? Looks like a Microsoft case to me! Time for Holder to organize a 'preliminary investigation'. Don't leave Mankiw out of this--collusion and conspiracy may also be a part of the MR business strategy.

econgirl writes:

...and by tens of thousands you mean hundreds of thousands. Marginal Revolution has 176,445 feed subscribers alone, according to Google Reader. Not that I am envious or anything. :)

-from a young Ph.D without other employment (thanks, Adam, for reminding me!)

Tony writes:

I think most hardboiled MR readers consider Mankiw's blog to be more of a complementary good. Hard to see it getting many hits if his body of academic work wasn't so impressive. This blog or even Overcoming Bias are better examples of substitutes.

Willem writes:

I worked at one of those antitrust authorities. We didn't really touch prices where market power seemed to exist since A. What would the price be that we set?, B. (Friedman) When would we stop setting the price? and C. We really lost most of our cases in court.

We did try to make sure that entry barriers were as low as possible. We even went so far as to point out the excellent opportunities and profit margins in our country to commercial providers from abroad.

Divine writes:

Recommended reading: The Pros and Cons of High Prices

The Pros and Cons of High Prices was the theme of the volume and the
international seminar in Stockholm on the 9th November 2007.

Could there be any pros of high prices? The question is as natural as
the question we got four years ago when we published "The Pros and Cons
of Low Prices" – could there be any cons of low prices? These are
questions competition authorities get from the public from time to
other. It is a somewhat hard pedagogical task to answer them. The answer
to both questions is yes, there are indeed pros of high prices and cons
of low prices. The volume is devoted to exploring the pros and cons of
high prices.

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