Response to “X, non-X, What’s The Dif?”

Noticed a reflection on one of my rambling posts reflecting on “New Epstein Book” …

Some interesting discussion. Certainly I could be wrong in my analysis, but that’s always a possibility. I do recognize that there’s a great deal more to be known about the function of and development of monopolies in the capitalist economic system.

Again, I will offer the caveat that I have not read the book about which the original post to Positive Liberty was in reference.

I do not think of myself as an expert in economics. But, I think I know some things, and we may end up having to agree to disagree. Even still it’s important to have these kinds of exchanges and even if we’ve agreed to disagree, keeping the conversation going is important.

Anecdotally, I hear a story about a course on monopoly economics that used to be taught by a tenured professor at the UW, which disappeared when that faculty member retired. It is a shame that more discussion, or better dialogue, does not take place about the economic system in which we all function. Not having that discussion is like playing cricket without learning the rules. Much like involvement in politics, awareness or care for issues of economics is missing from most public discourse.

Via Positive Liberty, “X, non-X, What’s The Dif?“:

“Only a government-endorsed enterprise can be a monopoly, because only coercive force—which government has the exclusive right to use—can create ‘exclusive control.’”

Perhaps we’re using the term monopoly differently. Milton Friedman actually offers two sources, one of which is government endorsed. The other is collusion between participants in the market. [source] Coersion isn’t mentioned, but I agree that power is an issue.

So government-endorsement is an answer, but it’s not the only answer.

Microsoft and IBM, for example, were both determined to be monopolies. They were not, to my understanding, government-endorsed, unless one means by that that the government was a customer and issued corporate charters. Or, are we talking about patents, copyrights and the DMCA? If so, then I think it can be demonstrated that those grants of exclusivity are an increasing function of the influence of industry on policy. Examples abound, not the least of which is the tactics of ever increasing copyright durations which stifle the public domain and sphere of discourse. Asking whether these are government mandated or a function of industry power over policy is a bit like the pointlessness of demanding a binary answer to nature versus nurture. They are both involved in greater or lesser ways in variance over time.

The notion of “exclusive” in a market is, I suspect rarely absolute. Exclusive control is functional. Even government mandated exclusive control is at the mercy of the black market, I recognize. But there is control of a market which is greater or lesser, on a scale of exclusivity.

The presence of a monopoly does not preclude the existence of other market players, but the monopolist has in some way insulated themselves from competition.

I suspect that I am also imprecise when I use the term monopoly. I likely also intend to imply the function of a cartel as a functional monopoly, which is not precisely what a monopoly is. This is more the area in which one would speak of oligopoly, oligopsony and oligonomy. [source]

I also suspect when I talk about monopoly power, I mean a scale of market control, not a binary is/is not. There’s an element here also of hegemony, in that smaller companies may believe it is in their own best interest to behave in the way the market leader indicates, or that the smaller company assumes the market leader will approve.

The primary example, in my experience, of this is the way that small companies in the technical market tended to have two strategies in relation to Microsoft. First, they would try to develop a business in a niche where the market leader would not move. Second, they would enter a niche in which they believed they would become a desirable target for acquisition by the market leader. That’s not an example one would expect if new entrants were free to compete. (Unless one means the kind of freedom one has to make self-destructive choices.)

OEMs found it in their best interest to secure exclusive agreements with Microsoft, not through coercion but because there appeared to be economic advantage to supporting this hegemon, the market leader. There grew a measure of coercion because deals on unit pricing could be offered to competitors, but just like the difference between economic incentives and the imposition of fine or fees, the actor in the market likes to have the perception of free will over feeling forced.

I’m not necessarily trying to suggest conspiracy, but at least there’s common sense involved which determines behaviour in the market. That’s a pattern then, that can be gamed and abused by the market leader.

Coercion is not necessarily required for this kind of control in the market.

“A monopoly is an entity which can coercively forbid its own competition. The post office, for example, is a true monopoly because it is illegal to compete with it.”

In fact, there are some government legal monopolies, like printing money which wasn’t always the case, but even there, banks are part of the captured regulatory body, the federal reserve. However, it should be obvious that the post office is not an exclusive controller of the market for mail and shipping services. In fact, the post office has had to respond to many market forces, including technical innovation such as e-mail and overnight carriers. The post office is, in fact, struggling to find a place in the market precisely because they are not the only carriers in the marketplace.

“Bell claims that cellular telephone companies are “colluding to create a dynamic of scarcity in order to keep prices and profits high,” which is, of course, absurd. In a free market, such collusions do not work, because it is always in the interest of one of the companies to undercut others that might agree to such collusion.”

Unfortunately, the mantra of the free market as a panacea just ignores the issue of power. I’m not sure that there is such a pure thing as the free market. It’s a convenient idealistic curtain behind which power tends to prevail, after all. But most importantly the increase of monopoly or monopoly like power is matched by the diminishment of equality and opportunity in a market. I’m not sure we disagree on that point.

I don’t think I mentioned cellular companies. If I go back and look perhaps I did. I was talking about broadband access, and the providers of that access.

It is not always in the interest of companies to undercut each other. Competition is costly, and it would be corporate common sense to avoid it if possible. Companies may chose their collective battle field and determine the constraints of the marketplace in a way to exclude new competition while maintaining the appearance of competition among the players.

A simple recent example of this is that ABC decided to sell episodes of Survivor online via their own website, instead of through iTunes, the market leader. However, did they reduce the price? No, they priced the episodes the same, and just kept the difference. Further, not only did they not undercut the going market price, they added additional restrictions to use. That’s not what one would expect if the market really did encourage competition to undercut each other.

Turning products into merely a commodity, with commodity pricing, is also a thing companies try to avoid as much as possible.

Corporations would love to approach monopoly power in the marketplace. For example, Microsoft, when faced with questions about their use of monopoly power responded that they were merely doing what they were supposed to do in the marketplace. Where monopoly power is not possible, power, when gained, attempts to maintain power by raising barriers to the entry of new players when possible.

Witness the patent cold war between high tech companies. Major players tend not to bother each other, but they bring their patent portfolio to the table against smaller players. Witness the attempt to use the DMCA to squash generic garage door openers, etc … or the other successful uses, such as against printer ink refilling companies.

“As a consumer you have vastly greater power to control the choices of Nike or Coca-Cola, than you have over the post office in your capacity as a voter. Namely: you can shop elsewhere. When Coca-Cola introduces a brand you don’t like, you can choose to purchase Pepsi instead.”

I think this notion sounds reasonable, but fails to signify the massive effect of persuasion in the marketplace. In fact, there are social consequences to alternate market choices because we’ve given so much control over culture away to the market, and to biased purveyors of culture.

The example of Coke reminds me of the debacle of New Coke. The new product was not well received by the consumer, and Old Coke was reintroduced. However, Old Coke was not the same formula as the real Old Coke because, primarily, the use of high-frutose corn syrup. The primary reason for the New recipe was to change sweetener from the usually more expensive sugar toward high fructose corn syrup. So, Coke’s reaction to the rejection of New Coke was to introduce a “Old” Coke recipe that included the primary innovation they wanted to introduce with the “New” recipe. The rest was merely marketing. (And, yes, they did lose market share, primarily in the South over the feeling of betrayal, but I think my example is still illustrative.)

“(It’s worth noting that one reason the Progressives admired government-run monopolies was precisely because the public did not have control over them; they would be run by disinterested “experts,” immunized from political influence, who could run state-organized enterprises (and ultimately the entire economy) in the “right” way.)”

This is an important point. It’s the reason taxes are necessary: because individuals do not make choices to maximize the collective good often enough to avoid tragedy. But, I recognize the apparent problem. There should be a balance and checks on the balance between what a government offers and other entities offer without destroying the diversity of methods services and goods are offered. Private enterprise is checked by the potential of public entities entering the market, and visa versa.

I guess the primary point is that of potential for transparency. While bad intentioned people can abuse both private and public entities, I suspect that it is easier to abuse the public through private means than public. I also suspect that it is easier to coordinate for the greater good of all through collective, public activity.

“In large part it’s because people are free to compete with existing businesses if they choose. The same cannot be said of government-protected monopolies.”

In fact, I tend to agree. The DMCA and the infinite extension of intellectual property rights could almost be a plague of excess power, where moderate protections would offer an incentive to innovate. There is a difference between government monopolies and government-protected monopolies. I argued against the latter, not the former. On this point, we seem to agree even if we don’t agree on the notion that “people are free to compete” with privately colluded monopoly or monopoly like powers in the market.

The final paragraph of the Positive Liberty post is a weak straw man, which is roundly attacked with great storm and thunder. But the point that monopoly power in the market is related to the issue of poverty sustains, and therefore, by virtue of interdependence so do the issues of race and war in this discussion.

Thanks, Timothy Sandefur for the post on Positive Liberty I’ve responded to here!