Monopoly: What an ugly word!

Why does the word “monopoly” result in such aversion in an average person? Is it because monopolies are “bad”? Surely monopolies only exist to make as much money as possible, right? Think of some of the examples of monopolies (or near monopolies) in our history: AT&T, Standard Oil, US Steel, your local energy company, De Beers, MLB, NFL, etc.  Even oligopolies invite collusive agreements.

Yet, being a monopoly doesn't mean that they are always profitable. The real reason that monopolies are so “bad”, most economists argue, is that monopolies reduce consumer surplus and, therefore, overall economic welfare.

So what do we do about it? Our answer to everything in the United States is to regulate ourselves to death. We pass antitrust regulations. We increase corporate tax to penalize these companies for making lots of money.

Except that increasing taxes and regulation decreases economic output and chases corporations away from states or even countries. Some people have gone too far and have used regulations to limit competition, interfering with potentially good mergers. Think of some possible mergers that could have resulted in a positive economic benefit (especially consider vertical mergers): United Airlines & US Air, Staples & Office Depot, and GE & Honeywell.

Regulation doesn't always lead to the death of monopolies, though. In fact, many monopolies (or near monopolies) are supported by government regulation. Think about the government’s support for agricultural prices, public utilities, or the post office.

So what is the alternative to monopolies? How do we prevent them from occurring? How do we control them? Do we have to? Should we just force public ownership on these companies if they don’t guarantee perfect competition or something like it?


Dave Tufte said...

Andy: 94/100 (Got the link that's required for a post, Andy?)

I don't think most economists would argue that monopolies are bad because they reduce consumer surplus. Much of that gets converted into producer surplus. So, it ends up with different people, but society as a whole gets the same amount.

Where society is hurt by monopolies is through deadweight loss. This is potential surplus that is not earned by either consumers or producers.

Bruce said...

Like most things in life, there is a give and take with monopolies. Not all monopolies are considered 'bad' by economists, nor are all of them considered 'good.' A good example of this is within your blog, saying that the United States tries to rid us of monopolies via regulation while others are supported by regulation.

It seems that the issue does not lie with whether there are monopolies or not, but where the monopolies exist. There is a big difference in having a monopoly in the utilities industry versus having one in the telecommunications industry. By regulating one way or another, the government is attempting to establish which industries do the least harm to society under monopoly power. Whether we want the government to be the one to decide this issue is another issue in and of itself.

Another main concern of monopolies are the inefficiencies they cause, the deadweight losses to society. No matter how efficient a company thinks they are they will not achieve optimal efficiency levels in a monopoly setting, mainly due to lack of competition. This is very similar to social loafing, maybe it could be called economic loafing.

Dave Tufte said...

Bruce: 50/50

Agreed. This all seems good to me.

I like the phrase "economic loafing". But I think what you mean is covered by the existing phrase "lazy monopolist".*

I'm all for new terms like "economic loafing".

I think one example where economics has shot its own metaphorical foot is with price discrimination. That's a hugely useful idea, and a common practice that not many object to ... but I've had students tell me flatly that all discrimination is wrong and should be illegal. We need a new name for that to avoid that knee jerk reaction.

One of my pet ideas is that I think we ought to call consumer surplus something like household profit. In class, we can get the idea across that both parties to an exchange get surplus ... but outside of class it's hard to sell people on the idea that both parties to a trade profit from it in their own way. I think people would have less animosity towards business practices if they recognized that they do it too.