The title of this post is the title of my latest piece for Hoover’s Defining Ideas, published August 13.
Here’s one of the opening paragraphs:
Are these authors and commentators right? What is their evidence? More fundamentally, what do the words “monopoly,” “market power,” and “competition” mean, and what monopolies or forms of market power should we worry about? Also, when we do worry about monopoly or market power, what are the appropriate policies to deal with it? It turns out that economists over the last 200 years have carefully considered many of these issues. Unfortunately, some of their insights have been lost, and one main reason is that many of those who worry about monopoly have a static, rather than a dynamic, view of competition.
And later:
But there are two major problems with that measure [the percent of revenues of the top 50 firms in an industry.] I’ll illustrate the first one by highlighting an industry referenced in Obama’s CEA report. A table in the report shows that the top 50 firms in the second largest U.S. industry, retail trade, earned $1.56 trillion in revenue in 2012. Their share of revenue increased from 25.7 percent of industry revenues in 1997 to 36.9 percent, an increase of 11.2 percentage points.
Did any major change in retail trade happen between 1997 and 2012? Yes. It was called Amazon. Before Amazon became important, what typically mattered for you as a retail customer was the amount of competition in your local market. So, if you lived in San Francisco and wanted a lawn chair, you might go to Sears (remember them?), Home Depot, or your local hardware store. But after Amazon came into being, you had another major choice: saving a lot of time traveling from store to store and, instead, sitting at your desk or kitchen table, or even lounging on your old lawn chair, and ordering from home. Not only did you save time but also the odds are that you got a lower price. In short, Amazon made the relevant market for you much more competitive. And it did that even while, at times, wiping out local competitors.
Read the whole thing.
READER COMMENTS
Alan Goldhammer
Aug 14 2020 at 5:33pm
What the critics ignore is that Amazon is mainly a pass-through shipping agent. They charge a fee for this but what is wrong with that? Sure, they do have some private brands but as far as I can see those are relatively limited and the only ones I’ve used are the rechargeable AA batteries that run a lot of stuff in our house.
I do keep a spreadsheet of household expenses that is broken out into a lot of different categories. Spending at Amazon.com was an enormous 0.7% of our total expenditures for 2019, hardly the sign that I am being held captive by Jeff Bezos.
More retail is being crushed by the pandemic and bad business decisions than by Amazon.
Robert EV
Aug 15 2020 at 1:39pm
Amazon determines to a large extent which seller you do business with.
https://mattstoller.substack.com/p/absentee-ownership-how-amazon-facebook
(Scroll down to “I’m from Amazon and I’m here to help.”
@David Henderson
https://www.economicliberties.us/our-work/understanding-amazon-making-the-21st-century-gatekeeper-safe-for-democracy/#
Robert EV
Aug 15 2020 at 2:23pm
And by the way: Outside of the Amazon-label brands (of which there are more than 80 according to Business Insider), Amazon owns quite a few other companies that do business on Amazon (and elsewhere), which you may not be aware of. https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Amazon
And @David Henderson
The Economicliberties article I linked to does recognize government subsidization of monopolization, though not in the way you mention in your article:
Robert EV
Aug 15 2020 at 2:24pm
Hey David, I think the spam filter ate my prior reply to Alan Goldhammer and you, as it had two links in it. Here is an addendum to that prior comment:
@Alan Goldhammer
And by the way: Outside of the Amazon-label brands (of which there are more than 80 according to Business Insider), Amazon owns quite a few other companies that do business on Amazon (and elsewhere), which you may not be aware of. https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Amazon
And @David Henderson
The Economicliberties article I linked to does recognize government subsidization of monopolization, though not in the way you mention in your article:
David Henderson
Aug 16 2020 at 11:14am
You quote the following statement:
But what that refers to is the fact that the tax code is somewhat symmetrical: just as a firm with profits pays corporate taxes, so a firm with losses gets a tax break.
There is one way to make that problem, if you see it as problem, smaller: end the corporate income tax, something that economists across the political spectrum advocated in the 1970s and 1980s. Is that what you’re proposing? Fortunately, we’ve at least moved in that direction with the substantial reduction in the corporate income tax rate in the 2017 tax reform.
Also, I couldn’t find in the lengthy Stoller et al article (although I admit that I perused it quickly) any reference to whether Amazon is charging monopoly prices on books. Do the authors even examine the evidence on this?
Robert EV
Aug 16 2020 at 3:42pm
Sorry David, I’m not an economist. Resolving this problem is something for you guys to debate and people like me to read the debate. 😀
They have two arguments, the fundamental one against this idea of monopoly prices on a single category when the company itself is horizontally and vertically integrated (and thus can recoup loss-leaders elsewhere):
Footnotes:
There second argument is that Amazon is recouping through monopsony pricing (with consequent effects on innovation within a sector) instead of monopoly pricing. Thus consumers are getting cheaper prices along with constrained variety (through the bankruptcy, buyouts, or failure-to-launch of competitors within the category).
Robert EV
Aug 16 2020 at 3:48pm
A quote of this monopsony pricing (with footnotes):
Robert EV
Aug 16 2020 at 3:51pm
The spam filter ate my comments again.
An example addendum on their monopsony pricing claim. The footnotes contain detailed testimony from the PopSockets CEO and more general testimony from Amazon.
Robert EV
Aug 16 2020 at 4:37pm
I did just find evidence of price increases on books sold through Amazon:
http://teleread.com/baen-inks-deal-with-amazon-makes-major-changes-to-webscriptions-and-free-library/index.html
Robert EV
Aug 18 2020 at 1:35pm
For those who don’t want to read the link on Amazon monopoly price increases:
And sure, other large companies do this to: Amazon is not the only one leveraging a monopoly.
Jon Murphy
Aug 14 2020 at 5:46pm
Very good article. In particular, the point you highlight about the difference between being a monopolist and acting like a monopolist is huge. The negative welfare effects (compared to perfect competition) of a monopolist comes from them increasing prices above marginal cost and restricting output. But the tech guys are operating at a zero monetary price. Standard Oil undercut their competition. Etc. The focus on the number of firms in an industry, as opposed to firm behavior, is a mistake a lot of anti-trust people make.*
*As an aside, protectionists make a similar mistake when they argue that tariffs, by supposedly forcing firms to come operate in the US, increases competition because the number of firms in the country might rise. Even if the number of firms rise, the higher prices caused by the tariffs allow the firms to act relatively more like monopolists and cause the net welfare losses, as we saw with the washing machine industry
Dylan
Aug 15 2020 at 6:52am
Agreed that it was a very good article.
This is one negative effect of a monopoly but it ignores non-monetary costs. One way to think about a monopolist is, can a normal person going about their normal life realistically manage to not do business with the firm? I tried an experiment with this a couple of years ago by trying to rid all Google products from my life. I’d already gotten rid of my Gmail accounts, and stopped using Google Search for anything. I had an Android phone that I rooted to remove all Google services from. This essentially prevented me from using commercial 3rd party apps on my phone so, with a few exceptions, I was limited to open source apps only.
I was helped by the fact that I worked at a very small business that didn’t use Google services, nor did our few clients. Still, there were plenty of leakages. I regularly had to email people that were on Gmail. I used 3rd party mapping applications, but the data many times was wrong or incomplete (I spent one afternoon in Lisbon walking around in a giant circle because my mapping software put the train station about half a mile from it’s actual location, and instead showed it built in the side of a mountain).
Still, some major inconveniences aside, it worked OK until I started looking for work. Many jobs required a Google account just to apply. Others, you needed a Google account if you wanted to join their virtual interview. I finally got a freelance position with a company that uses Google Suite. They require you use your phone for 2FA, which must be signed in to a Google account with Google given permissions to access everything, including location at all times. These are hefty prices to be paid, even if they aren’t measured monetarily.
David Henderson
Aug 16 2020 at 11:01am
You write:
But notice that the “hefty price” you are paying is a price for not using Google. The usual argument against monopoly is that the output is too low. But your complaint amounts to saying that you want the output to be even lower.
Dylan
Aug 16 2020 at 3:26pm
Actually, the hefty price I was referring to in my last paragraph is from using Google. As a condition of my employment, I have to give Google access to my devices and the ability to always know where I am.
You’re right that it’s hard to put this into a standard economic story of an monopolist restricting output and increasing price. Yet, it seems like many would consider the inability to opt out of the services of any particular entity to at least be suggestive of a monopoly?
I don’t know what the solution is, everything I’ve read in support of breaking up the tech companies or regulating them, suggests to me that the people don’t really understand the nature of the problem they are trying to address. I don’t know that there is a good solution, but that doesn’t mean I don’t see problems with the status quo.
MarkW
Aug 16 2020 at 4:46pm
As a condition of my employment, I have to give Google access to my devices and the ability to always know where I am.
But not to all of your devices — only those you use to do the employer’s work during hours when you are working for them. Surely you could get a cheap extra Android phone to use exclusively for that client, no? Some employers impose even more draconian conditions — not only insisting on knowing where you’re located during business hours, but insisting that location be inside their office building. Would you describe such a requirement as an even heavier price to pay?
Jon Murphy
Aug 16 2020 at 5:06pm
That’s a consequence of your job, not of Google.
Dylan
Aug 16 2020 at 6:35pm
I think there’s a misunderstanding here, it isn’t the employer that requires the location be on. They’ve just chosen a Google tool, and the price of using that tool requires that Google have access to my data. The cost the company pays is smaller than it otherwise would be, because Google can monetize the costs of the employees (or contractors in my case) personal data.
Jon Murphy
Aug 16 2020 at 6:50pm
Fine, but that still is a consequence of you working for your employer.
Dylan
Aug 17 2020 at 11:05am
Jon, yes it is a consequence of my employer, but it isn’t an uncommon one. From the start of the year I’ve taken on 7 freelance positions. 4 of them have required Google services, 2 have required Microsoft, only 1 has been a roll your own provider (which unsurprisingly, doesn’t have 10% of the functionality of the big two).
Functional duopolies are common of course, the only thing I’m trying to point out is that if you’re only looking at the monetary cost of the services to the market, you’re missing out on the true cost that is being paid.
David Henderson
Aug 16 2020 at 11:19am
Dylan,
In my haste, I forgot to thank you and Jon for the compliment. Thanks to both.
Ike Coffman
Aug 17 2020 at 4:10pm
I am going to be a contrarian and disagree with the premise of the article. Here is what the article says: “Is competition alive and well in the United States? In the areas where government allows it, yes. In areas where the government restricts competition, no.”
Look at the profitability of FAANG stocks. These are not regulated companies, and there is almost no competition. Why? The barrier to entry is the infrastructure you would need to build to compete. Way before any competitor could build that infrastructure they would get bought out, and we have seen that happen over and over.
So what are the costs of allowing these companies to hold monopoly status? I maintain it is a lack of innovation. Hard to quantify, certainly, because we don’t know what we night have had if companies had to innovate to compete, but how much has changed in the last ten years? Ten years should be an eternity in a nation that prides itself on the ability to innovate. Think about it: the last major innovation was moving our economy online, first with computers then with cell phones. What else has happened lately?
Think about it, get back to me.
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