Bryan Caplan  

The Monopoly Motive

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Today's the first day of GMU's fall semester, and for some reason I'm thinking about a class I haven't taught in years: Industrial Organization.  I wrote the notes when I was much younger and more enamored of theory.  Much of the class was a critique of the Structure-Conduct-Performance model so prevalent at Berkeley and Princeton.  Slogan version of the model, to paraphrase Orwell: "Many firms good, few firms bad."

While I hate to claim vindication by vaguely-defined events, the last two decades seem wildly incompatible with the S-C-P model.  Many of our favorite new firms have no close competitors.  What's the next-best-thing to Amazon?  Netflix?  Facebook?  Starbucks?  Even weirder, a sizable chunk of these apparent monopolies give their product away gratis.  Meanwhile, the spread of occupational licensing and rise of Uber have raised awareness of the elephant in the IO room: governments' deliberate effort to make markets less competitive than they would naturally be.  (And don't get me started on immigration restrictions).

Still, it's easy to see the intuitive appeal of S-C-P.  Namely: If you are a monopoly, you'll charge high prices, and hence produce low quantity.

The problem with S-C-P is that it ignores an even more intuitive truism.  Namely: If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices.

In short, the desire to become and remain a monopoly leads firms to do the exact opposite of what they'd do if their monopoly status were a law of nature - or the law of the land.


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COMMENTS (19 to date)
Bill Conerly writes:

sounds like you're echoing Peter Thiel's book Zero to One.

ThomasH writes:

How did Starbucks git into this picture show instead of our neighborhood cable company?

JohnBinNH writes:

The next best to Amazon in the book realm is Barnes and Noble; there are other competitors in other realms.

Here in New England, the next best to Starbucks is Dunkin' Donuts.

My 20-ish informant assures me that Facebook is passe ("for old people") and Twitter is what they use. Of course, that's what you'd tell an old person.

So I think it's clear that there is competition, even if the competitors are smaller and focused on competing in only part of the market.

Andrew Hirsch writes:
Even weirder, a sizable chunk of these apparent monopolies give their product away gratis.

It's important to remember that Facebook, Google, et al. are not selling social networking and searches. They're selling advertisements. The social networking and search features are just there to get the eyeballs to the ads. Their actual product is not given away gratis.

Urstoff writes:

Answering the rhetorical questions: for books, the next best thing to Amazon is Abebooks/Bookfinder/Amazon Marketplace. B&N is decent, and I do have a membership because I like browsing books and buying them on the spot, but their free shipping online is something like 4-6 business days, and their prices are only competitive if you have the 10% of membership. Sometimes they do send me a 20% off coupon, though, which amazon doesn't do.

As for Starbucks, there always seems to be lots of competition, and the only reason to patronize a Starbucks over any other coffee shop is for the drive-through or location.

Netflix, of course, has tons of competition from Hulu, Amazon, Redbox, and standard cable channels. All of this competition seems to be why we're getting such good TV (although that didn't seem to be the case when the Sopranos/Wire kicked off the new TV renaissance).

Kelly Sherwood writes:

This reminded me of the European antitrust investigation of Google. The complaint against Google is that they favor certain search results that they profit from and this creates a conflict of interest. To which I respond, so what? No one has to use Google. The only reason this practice feels unfair is that Google is so much better than the nearest competitor. There is absolutely no harm to consumers when one company out-competes the others by such a wide margin.

Google would only have to get as bad as Bing or Yahoo before people would switch in droves to Bing or Yahoo. Such is not the stuff that monopolies are made of.

Hazel Meade writes:

Speaking of Amazon I found this article over the weekend interesting:
http://www.newyorker.com/business/currency/is-amazon-creating-a-cultural-monopoly

Essentially a group of authors is agitating that Amazon be investigated for anti-trust because their prices are too low.

Colombo writes:

I'm interested in how will google, facebook or amazon crumble, and what would the kings of those companies do to prevent or survive the crumbling.

For example, facebook is largely a generational phenomenon, like BBS and geocities. At some point, provided that the actual users of facebook have kids, this kids will probably avoid anything that looks like facebook. In their subjective scale of values, facebook will be seen as "parently" and old. New people, new aesthetics, new techology, new networks. They may adapt, but email today is very different form email twenty years ago.

Facebook could try some variation of the licensing ruse: have the Government make it so that people who want to "communicate" must use Facebook.

Many people are getting excommunicated from facebook. Some because of their evil ways, some because they say things that the company does not want to be said in their property. Because facebook is not exactly the "public sphere" not many people claim that there is a freedom of speech violation with that attitude. But it is shocking that some facebook users are allowed to troll a vex other users as long as they defend political correctness and the victims say weird things.

Normally, the kicking away of users, legitimate users who say "crazy" things but do not abuse others, should be detrimental to facebook's position. But, for now, it seems the situation is under control.

Can the government of a huge company screw up as much as the Government of a country? Can the government of a company patch up things better and faster than the Government of a country?

And why huge companies are not democracies? Is it just in order to save on the campaign costs?

I think Google will implode. Perhaps that is why they are reorganizing. Also, a generational change in workers and clients.

Nowadays, people are into webscrapping more than ever. For business. Some people want to make it illegal. But google wouldn't exist without some form of webscrapping. So, who knows.

Amazon, because of their connection with the "real" world, may have a better adaptation to the times and seasons. The best thing about amazon is that it can help the publishing industry to print only the best books, and leave the bad books in ebook only or to the on-demand printing service. That would make the experience of entering in a real bookstore so much better.

Maniel writes:

Don't true monopolies require government enforcement, as in "you must buy all your automobile rides from a city-licensed taxi service," or "you must buy all your cocaine from a criminal organization?"

Michael B. writes:

When I was in school, my Industrial Organization professor talked about this in class. He called it contestability. The more contestable a market is, the more that firms act as if they are in a competitive market, even if they are a monopoly. A perfectly contestable market has no sunk costs, no barriers to entry/exit, and firms have access to the same technology.

Hazel Meade writes:

@Columbo

Many people are getting excommunicated from facebook. Some because of their evil ways, some because they say things that the company does not want to be said in their property. Because facebook is not exactly the "public sphere" not many people claim that there is a freedom of speech violation with that attitude. But it is shocking that some facebook users are allowed to troll a vex other users as long as they defend political correctness and the victims say weird things.

That is very interesting. I had not head that. Do you have a cite?

I agree that if facebook is cancelling accounts because users say un-PC things, that would be bad for Facebook's position. Eventually , someone else will create an alternative. And it would be depressing if social media split into politically polarized communities, especially for libertarians who might want to maintain social ties to both left and right leaning friends.

Personally, I find it a bit wierd that they would do this given that people can easily unfriend or ignore users that say offensive things, and that individuals can easily restrict their friends list to only actual friends. The habit of inviting one's employer or professors onto one's friends list strikes me as extremely foolish. I would rather delete my facebook account if I was being pressured to do that.

Nathan W writes:

I wouldn't give Amazon, Netflix, Facebook or Starbucks a free pass. The moment they calculate that they can take advantage of their monopoly, they will. They only reason Starbucks probably won't is that it's very easy to open a coffee shop.

Amazon already faces complaints about its prices of ebooks, Netflix will jack prices the moment they decide that they have enough market share and influence with suppliers to maintain their share under higher prices, and Facebook's history of arbitrary changes to customer policy shows that it is perfectly willing to abuse its position as monopolist. They will, and in some cases already have, abuse their near-monopolist position to the maximum extent that will hopefully (from their perspective) not bring in huge demands for new entrants into markets which have near-zero cost to entertain the marginal user.

The only reason that they have not abused their strong market shares is precisely the fact that there continues to be a lot of competition in the shadows, waiting for precisely the moment when encumbents go too far in abusing therr monopoly positions, and at that time these competitors will strike. This eternal threat, and not any benefit of their strong market share, is what may nevertheless keep the encumbents in check.

Levi Russell writes:

"Still, it's easy to see the intuitive appeal of S-C-P. Namely: If you are a monopoly, you'll charge high prices, and hence produce low quantity.

The problem with S-C-P is that it ignores an even more intuitive truism. Namely: If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices.

In short, the desire to become and remain a monopoly leads firms to do the exact opposite of what they'd do if their monopoly status were a law of nature - or the law of the land."

The only way to "become" a monopoly without actually becoming one is to get a grant of privilege by law.

I was mildly baffled in my Antitrust and Regulation class when we learned about the SCP/Harvard school of IO. It's interesting to consider how it could possibly have survived improvements in price theory (though we did learn it has lost its initial appeal). The way we learned it, it seemed like such an inflexible model of the economy - almost like what a non-economist would see the economy like.

msreekan writes:

"If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices."

Another way to sustain a monopoly would be to regulate the competition out of business. Hence resources are diverted to influencing policy instead of producing high quality and low prices.

msreekan writes:

"If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices."

Another way to sustain a monopoly would be to regulate the competition out of business. Hence resources are diverted to influencing policy instead of producing high quality and low prices.

Glen W Smith writes:

The users of Facebook are more like employees or contractors. Instead of being paid in cash, we get free access to things like games. The customers are those that place adds and use different scrapping techniques to create or score marketing programs.

Daublin writes:

These online sites are singular while they are huge, but they do get displaced. MySpace, AltaVista, and Hotmail were all once dominant in their niche, but nowadays are nothing.

Terrence Yang writes:

Great piece. I wrote on Quora about some of the flaws in this blog, incorporating a few of the many great reader comments here.

https://www.quora.com/What-are-the-biggest-flaws-in-this-Monopoly-Motive-blog-referred-to-by-Marc-Andreessen-on-Twitter

Would love feedback here or on Quora (where I find the content much more evergreen).

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