More on Monopoly
By David Henderson
My co-blogger, Bryan, posted an excellent piece on the origins of monopoly. I think it also led to one of the highest-quality set of comments I’ve seen on Econlog. Here’s some additional backing for Bryan’s points from some of my articles.
http://www.davidrhenderson.com/articles/0600_ashorthistory.html, On Microsoft:
Does this mean that path dependence fails as a theory, or are QWERTY and VHS just bad examples? And since the issue here is Microsoft’s dominant position in operating systems, are we locked into an inferior technology because of network effects and path dependence? Many experts in software development believe that we are. They find that what is needed to write software for Windows is clumsy and time-consuming. They see alternatives that are easier to work with, such as Macintosh OS X and Linux. Then they look at the fact that most of us ignorant consumers are quite happy with Windows, and they feel frustrated. Surely, they conclude, there is something to this lock-in effect.
And there is. But what overcomes it is marketing. Microsoft has done it well, and Apple Computer didn’t, for a long time. Mr. Gates saw early that aggressive marketing was as vital as “insanely great” technology (Steve Jobs’s description of the Macintosh). Jim Carlton’s 1997 book, Apple: The Inside Story of Intrigue, Egomania, and Business Blunders, contains a revealing 1985 Gates memo to Apple CEO John Sculley. Mr. Gates, who wanted Apple to succeed because much of his profit came from selling Macintosh application software, recommended that Apple allow other manufacturers to produce the Mac. That way, reasoned Mr. Gates, Apple would “have the independent support required to gain momentum and establish a standard.” This memo shows Mr. Gates as hardly the “Mac killer” that many believe him to be. More importantly, it shows that he understood network effects and thought carefully about the marketing strategy required to take advantage of them.
http://www.davidrhenderson.com/articles/0895_antitrustbusters.html On the Effects of the 19th Century Trusts on Prices:
Even the antitrust critic Richard Posner, in his 1976 book, Antitrust Law: An Economic Perspective, expressed the conventional belief that “the Sherman Act was passed in 1890 against a background of rampant cartelization and monopolization of the American economy.” But the research of some economists in the ’80s cast new light on the trusts of 100 years earlier. If the trusts’ main impact had been to monopolize industries to the detriment of consumers, then a study of those industries should find that prices were growing more quickly and output more slowly than in industries where the trusts were not taking over. The economist Thomas DiLorenzo, who is now at Loyola University in Baltimore, did such a study in 1985. In his article, “The Origins of Antitrust: An Interest-Group Perspective,” published in the International Review of Law and Economics, Mr. DiLorenzo found that between 1880 and 1890, while real gross domestic product rose 24 percent, real output in the allegedly monopolized industries for which data were available rose 175 percent, seven times the economy’s growth rate. Meanwhile, prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal, which stayed constant.
In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, reinforced Mr. DiLorenzo’s theme, pointing out that between 1880 and 1890 the output of petroleum products rose 393 percent and the price fell 61 percent. These findings turn the conventional wisdom on its head. Writes Mr. Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.”
http://www.davidrhenderson.com/articles/0895_antitrustbusters.html On Mainstream Economists’ Views on Antitrust:
Although Bryan correctly notes that mainstreams are way too in favor of antitrust laws, this passage from my review of The Causes and Consequences of Antitrust: The Public Choice Perspective, edited by Fred S. McChesney and William F. Shughart II, shows that the mainstream economists who write on antitrust, even though they favor it, show that the effects are not clearly positive:
Part One presents evidence by various researchers that is inconsistent with the standard public interest view of antitrust. Part One’s most striking article is Paul Rubin’s “What Do Economists Think of Antitrust?: A Random Walk Down Pennsylvania Avenue.” Rubin uses a simple but marvelously clever methodology. He takes all the antitrust articles cited in a major industrial organization textbook by Frederic M. Scherer and David Ross. Rubin notes that Scherer is a leading proponent of antitrust and that, therefore, any bias in the cases cited in the book would be in favor of cases where the antitrust authorities were acting to preserve or increase competition.
Rubin then summarizes each case and categorizes them, by the standards of the author writing about the case, as justified or unjustified. The bottom line: In the view of the economists writing the articles, there were 14 justified cases and nine unjustified ones. Moreover, the plaintiffs won a lower percentage of the justified cases (64 percent) than of the unjustified ones (78 percent). Concludes Rubin: “Factors other than a search for efficiency must be driving antitrust policy.”