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Anti-trust activists try to point to conditions which prevail in a market setting that indicate when a firm has (inappropriate) market power (because of course, government ‘monopoly power’ is of no concern) and should be subject to stricter anti-trust regulation. The most common indicator would be identifying goods for which the price being sold on the market exceeds the cost of the last unit produced. If a market were truly competitive, so the theory goes, a competitor would be able to come in and sell the good for a somewhat lower price, yet still above this marginal cost, and make a profit while luring customers away from the alleged monopolist.

If we do not see such competitive action, it is claimed, then it must be the case that the market is not competitive and something must be done. However, little thought is ever given to the possibility that measured prices and costs in many situations are not reflective of the true prices and costs facing firms and consumers. This is easiest to see in the case of goods such as music. Once a band creates a digital album, it costs very little to sell one more unit of that album. Thus, for any measured price that album sells for, that price very likely exceeds the cost of producing one more unit. But think about what is not being captured in that cost of production. If you allow others to imitate the music or to produce it at cost, then what you are doing is undermining the incentive to create new music and other products. But this future cost is never captured by measuring the costs of actually producing a unit, and is unlikely that the wizards at anti-trust will make efforts to measure it, even if they are cognizant of the possibility. Because this cost is not recorded, that observed prices exceed marginal costs may very well be illusory. So while anti-trust zealots try like heck to make sure that there are no barriers to entry in a particular market, they might very well be creating new barriers to entry by not permitting companies and entrepreneurs to cover their true costs.

As Demsetz argues, “it cannot be said that there is a barrier in one case and not the potential of a barrier in the other case.” What I find most troubling about this is that in other situations policymakers spend a good deal of time and energy trying to convince themselves and others of the existence of other unobserved benefits and costs. One need look no further than the health insurance debates (e.g. “the uninsured impose costs on the rest of us), the cigarette tax debate (e.g. “the smokers impose costs on the rest of us), the idea behind public schools (e.g. self-interested and cheap private individuals would never have the foresight to educate their children, especially since that education confers benefits on others) … I could go on forever. The point being, policymakers, particularly of the progressive-type, spend tremendous effort trying to convince us that external benefits and costs exist and are important (even if we cannot easily observe them) but then when it comes to anti-trust and competitive policy seem to do a 180.

What is the common thread in this behavior? Maybe I am too jaded. The identification of external costs when it comes to mitigating pollution and other externalities, and the lack of identification of external costs when it comes to market power issues can only be reconciled, in my mind, by the need for the state religionists to get their grimy fingers on the economy and to regulate the behavior of free individuals. In other words, they really are nothing more than ex post justifications for increasing the power of the state rather than ex ante justifications for improving the well being of the citizenry (which in my view is still not reason for them to act).

One Response to “Monopoly Power and Knowledge Goods”

  1. Harry says:

    I especially liked the expression, “wizards of antitrust.”

    For a while there, your rhetorical cadence there reminded me of Bastiat, and we should forgive any extra verbosity since this medium is so easy to throw in extra words. Keep up the good work, perfesser!

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