Where Does Monopoly Power Come From?
By Bryan Caplan
Textbook accounts of monopoly usually take the existence of a monopoly for granted, then analyze its consequences. When I was an undergraduate, this usually provoked me to argue with the textbook. “Where did this ‘monopoly power’ come from?!” I’d ask. My inner rant then continued: “If the firm has a monopoly because the government made competition illegal, the solution isn’t antitrust; it’s legalizing competition. If the firm has a monopoly because it’s the best, the solution isn’t antitrust; it’s a little freakin’ appreciation.”
I’ve outgrown arguing with textbooks, but I stand by my basic point: You can’t analyze the consequences of monopoly if you don’t know where the monopoly came from.
If the monopoly came from government, then it’s silly to fret about market failure and muse about antitrust remedies; you’ve got to unleash your inner libertarian and call for free competition.
If the monopoly came from superior efficiency, broadly defined, you’ve got to realize that antitrust “remedies” penalize excellence – which almost any economic theory admits is a bad idea in the long-run.
If you’ve got some non-government non-efficiency story, you’ve got to explain why neither of the two simple explanations for the existence of monopoly work. It’s not impossible to craft such an explanation, but it’s harder than it looks. If you blame monopoly on long-term contracts, for example, this begs a crucial question: Why did customers sign these contracts in the first place? By hypothesis, you’re not allowed to answer, “The firm had a government monopoly” or “The firm was more efficient than any of its competitors.”
I don’t think I’m going to convert the typical economist to my antitrust abolitionism anytime soon. But it’s hardly radical to wonder about the origin of monopoly power – and whether its origin makes a difference. Even if my conclusions are wrong, there’s nothing weird or heterodox about my questions. Shouldn’t mainstream economists try to address them?