Previously, I discussed the importance of competition. Since competition is the foundation of antitrust law, it is worth exploring the consequences to our economy and society when competition is nearly nonexistent.
Adam Smith in his magnum opus The Wealth of Nations stated that competitive markets would form when:
the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want. Rather than want it altogether, some of them will be willing to give more.
In my opinion, monopoly formation in free market capitalist societies is inevitable, or at the very least the pursuit of them is, since they allow, but do not guarantee, the fundamental and fiduciary economic objective of firms; to obtain total market power.
Conversely, this is not to say that free market capitalism is inherently reprehensible. Nobel Prize winning economist Milton Friedman stated that:
The extraordinary economic growth experienced by Western countries during the past two centuries and the wide distribution of the benefits of free enterprise have enormously reduced the extent of poverty in any absolute sense in the capitalistic countries of the West. But poverty is in part a relative matter, and even in these countries, there are clearly many people living under conditions that the rest of us label as poverty.
I find it hard to disagree with this statement, but even Friedman admitted that government is necessary to preserve our freedom from the concentration of power.
Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.
Today, the United States has numerous mega-mergers pending before our government. Some include Bayer-Monsanto, Anthem-Cigna, Aetna-Humana, and AT&T-Time Warner. All of which, I believe if they were approved, would drastically decrease competition in their respective markets, harm consumers, and further increase the market and political power of each company. Furthermore, allowing these mergers sets a dangerous precedent for future mergers that ultimately should be prohibited.
Upon entering the White House, this issue will be one of the first to tests of how tolerating the new administration will be toward big business. Both Hillary Clinton and Donald Trump have drastically different beliefs about antitrust. Thus, it is important to explore monopolies in greater detail, including their inherent nature, how they are formed, and what consequences they have.
To put it generally, a monopoly is when an enterprise is the only supplier of a particular commodity. By their nature, given their market power, certain monopolies present numerous threats to the market.
The analysis of monopoly creation contains two considerations. First, the degree of leniency corporations can exploit from the government and second, the business practices they use that subsequently create the monopoly they are seeking to become.
Government leniency is a necessary element in the creation of monopolies. In some cases, there are nonexistent antitrust enforcement mechanisms, which allow an entire country to be dominated by monopolies. In other cases, the Government itself uses its inherent power to create, sustain, and enforce the creation of monopolies. With this, we can classify monopolies into several types, which allows us to differentiate the economically beneficial monopolies from the indefensible.
A geographic monopoly is a monopoly where the market is confined to a specific geographic location. The reasons for their existence can vary, but most commonly refer to situations where a market may be too small to support another viable competitor. An example of this can be a town with a local “mom-and-pop” pharmacy. With a small enough population, there may not be sufficient demand to ensure another financially viable competitor.
Given this small-town example, this type of monopoly can be justified since natural market supply and demand forces, rather than anti-competitive practices or government intervention, are determining the existence of a monopoly and individuals are capable of entering into the market freely.
A government monopoly is fully enforced by the state. These are often controversial depending on the type of government the monopoly exists in but can be justified in limited circumstances. Notorious examples of state-run monopolies are PetroChina and Saudi Aramco. For each company, their existence is dependent on and enforced by the state. Meaningful competition or attempt at creating competition is often prohibited.
A natural monopoly is a monopoly in an industry where high infrastructural costs and other barriers to entry, relative to the size of the market, give the largest supplier in an industry an overwhelming advantage over potential competitors. As such, large economies of scale are often needed even to sustain the business can result in monopolistic markets. One of the best examples of a natural monopoly is electric companies. The infrastructure is based on one dominant standard of electrical cable, and the only way to compete is to build more cables. Due to their high public use value, they are often converted to government sanctioned and regulated monopolies, and thus can be beneficial to society and the market.
Technology monopolies are monopolies that occur when a single firm controls manufacturing methods necessary to produce a certain product or has exclusive rights to the technology used to manufacture it. Technological monopolies differ from those based on vertical or horizontal consolidation in that the exclusivity derives from the production process itself.
Technological monopolies present the greatest threat to our economy and our economic liberty, as such, these monopolies are the main subject of this post.
Given the threat technology monopolies pose to our markets, I believe a new definition is needed to more accurately reflect their impact. Technology is not defined in the conventional sense such as Apple and Microsoft. It is technology in the broadest sense possible. It is best to think of technology that is used by these monopolies as tangible or intangible routinely exploitable infrastructure, which provides consistent and possibly near perpetual economic efficiency and financial returns with maintenance costs significantly lower than the initial investment. This infrastructure is so integral to an industry that it is either is a platform for the entire market to use possibly becoming immovable and/or where its long-term probability to be significantly replaced is insignificant for the foreseeable future.
- Coca-Cola’s bottling process
- Procter and Gamble’s Laundry detergent production facilities
- Microsoft’s Office and Windows computer code
- Union Pacific’s Railroad tracks
Often a company’s technology has taken decades, and in some circumstances centuries, to create and is designed to create/move/distribute products or services at the most efficient price as possible.
Companies purchase other businesses to:
- Access to new technologies and customer distribution channels
- Expedited access to a new market
- Increase in cash on hand
- Access to new clients, potentially ones that would otherwise be unobtainable
- Access to new geographic markets
- Cheaper financing of operations, mostly through increased economies of scale
- Seeking for hidden or nonperforming assets belonging to a target company (e.g. real estate)
- Generate superior bargaining power over their suppliers and clients
- Prevent another competitor from increasing their market position (e.g. Facebook and What’s App)
- Purchasing a competing company’s assets at a discounted rate that is in financial trouble to obtain intellectual property
However, because these processes are nearly mastered, leaving little room to significantly increase efficiency and innovation, these companies use their excess financial capital to, along with reinvesting in their infrastructure, merge with or acquire other businesses. These mergers and acquisitions allow companies to become horizontally and vertically integrated. Horizontal integrations consist of companies of a similar “nature,” usually in the same industry. An example would be Google merging with Yahoo. Both companies consist of search engines providing the backbone to their advertising platform, which they market out to third parties. Vertical integrations consist of a company that purchases another whose business occurs along the supply chain of the buying company. An example would be Microsoft buying Dell. In this merger, Microsoft, the producer of the Windows operating system, would now own, Dell, the manufacturer of personal computers with Windows on it. These integration methods are regulated, in various degrees, by the Department of Justice and Federal Trade Commission, which we will go into more detail on this topic in later posts. Over time the continuous consolidations give companies immense market and economic power, resulting in increased political power as well, ultimately forming monopolies and oligopolies, which have dire consequences on our economy.
Consequences of a Monopoly
Increases Barriers to Entry
As a company’s market power increases, it is rational for a company not only to maintain that power, but prevent others from having it by increasing the barriers to entry into that market.
One of the simplest methods to accomplish this is, counter-intuitively, to increase the regulatory requirements of business operations. Unfortunately, this practice has drastic consequences. It decreases worker mobility, an essential feature of economic growth. It disproportionately impacts middle class jobs and wages. Moreover, consolidating markets can also increase barriers to entry because new entrants cannot possibly produce at the capacity and distribution of their oligopolic counterparts.
Monopolies have the ability to raise prices without consequence. The textbook method which monopolies accomplish raising prices is by restricting supply. A prime example of this is the OPEC oil price increase in the 1970’s.
Paradoxically, monopolies also have the ability to decrease prices below the point most favorable for effective competition. Companies obtain this ability mainly through exploiting their economies of scale and using government subsidies or simply produce the product at a loss to stifle any competition.
Decreased Innovation Expenditures
Consolidated markets also detrimentally affect expenditures on research and innovation. Researchers found after mergers in the pharmaceutical industry, patenting, research, and development of the merged entity and its non-merging rivals declined substantially.
I believe this behavior is rational. A company has a decreased incentive to expend superfluous financial resources than it must to obtain total market power when it is already the dominant or set of dominant players.
It is worth noting, I have seen no evidence that high levels of innovation systematically prevent market concentration.
Decreased Willingness to Create New Businesses
Many sources, including President Obama, state that the American economy is roaring back.
But the reality is that due to the level of consolidation, innovation and entrepreneurship suffer. For example, since 2008 there have been more firm exits than entrants. While many factors may be at play, once again, this cannot be a coincidence that this has taken place during the period of the greatest market consolidation period in a century.
It is important to understand that monopolistic markets are undesirable, not only because they inhibit entrepreneurs from entering a market, but monopolies stifle the market itself.
Increased in Political Power
As companies increase their market power, it is only rational to influence politics in their favor.The Supreme Court decision Citizens United, this has only exacerbated the capacity of companies to retain and increase their political control.
I find there to be no coincidence that during the greatest market consolidation we have seen in decades takes place during the greatest influx of money flowing into our elections.
The existence and pursuit of monopolies may be excusable to the extent it is in line with the profit motive inherent to all corporations, and arguably the fiduciary duty of executives is nevertheless indefensible. The mere existence of corporate monopolies presents a significant threat to individual, societal, and economic liberty.
I do not find it radical to conclude that as we are living through the most partisan times in recent memory, and at a time where congressional approval ratings and bill approval are at historic lows, our infrastructure is crumbling, and entrepreneurship in this country is stagnating coincides with the highest rates of consolidation since the Gilded Age.
I do not mean to detract from the power of consumer choice. Consumer choice, time and again, can challenge even the most dominate of companies (e.g. Eastman Kodak and McDonald’s), and given the rise of the internet, it is not an unreasonable claim that consumers have a greater ability than ever to make choices about how they interact with the market.
However, what we are not taking into account is how unmeaningful consumer choice is in the marketplace today. Corporations have subverted the power of consumers by methodically and intentionally displacing the only reasonable mechanism which consumers have to act on their opinion about a company, their choice. The genuine power of consumers exists and thrives only in a competitive market. This points to what I believe is the true purpose of antitrust law as the necessary government economic correction mechanism against the natural free market tendency to consolidate. I believe consumer choice is an essential element of economic liberty and it is currently being eroded by monopolistic markets. Although we have been here before at the turn of the 20th century, today’s markets are just as worse today. Moreover, it is not that this is happening in any one particular market in the United States and around the world for that matter, it is happening in all of them. For the past 40 years markets, more than ever, are being dominated by large corporations, we can change it if we choose to.
We have heard the same mumbo jumbo before from corporations, that consolidation and free markets will lead to better prices for consumers, increased innovation, and that their mergers are needed to maintain global competitiveness and supposedly promote innovation. Even though we know these arguments to be little more than a farce, these mergers happen anyway. Given the state of our marketplace, I believe more than ever that if we want to fundamentally change many of the economic ails of our country we need to radically change our approach to antitrust politics.
I end this post with a slideshow of as many markets I have been able to reasonably find to inform the public of how concentrated our markets are and justify the need for a more progressive antitrust policy.
Today we live in an American that is overrun by monopolies and oligopolies, it almost seems unnoticeable. But I am convinced there is almost no action where a person does not at least once interacts with a monopolized market.
Suggestions and additions are welcome by commenting on my reddit page: https://redd.it/6hk8py
Hopefully, this will be the beginning of a movement.
As you watch the slideshow I implore you to try and contemplate a time during the day where you are not interacting with a monopoly; you will soon discover this task is harder than it looks.