 |
|
27 November 2006 How Big is the Problem of Monopoly? The economic issue of monopoly often arouses popular passions, and political reactions to them. Are these justified? In economic theory, monopoly is a potential problem. The ‘economic' case against monopoly is that it reduces aggregate economic welfare (as opposed to simply transferring wealth from consumers to producers). When the monopolist raises prices above ‘competitive' levels, customers reduce their purchases, less is produced, and society's income is lowered. How serious is the economic problem of monopoly? A monopoly arises when a firm is the sole seller of a product without close substitutes. These conditions are quite stringent. In the absence of barriers to entry into a market, most firms cannot raise prices by much and for long without attracting competitors. Similarly, many goods are substitutable for one another. Ultimately what we don't spend on something can be spent on something else. Even a genuine monopolist faces a limit on pricing: if it raises prices too far it will lose customers and profits. The lure of temporary ‘monopoly' positions – an ability to make high profits from entrepreneurial endeavours – is part of what makes the economic world go round. Last year George Mason University economist Tyler Cowen gave a talk to the Law and Economics Association of New Zealand in which he praised this process. His three favourite monopolies of the last 10 years were eBay, Amazon and Google. Strictly speaking, they may not be monopolies but they are certainly dominant firms, and they have improved the lives of millions worldwide. Does anyone resent the success of TradeMe, no matter how much money it has made? And will these firms be around in 10 years' time, as others rise to eclipse them? Whether monopoly is a problem is best seen as a difficult empirical issue, not a theoretical one. There was reason to be concerned about monopoly in the ‘old' New Zealand, when many firms enjoyed privileges such as import licences or export monopolies (for example, the Dairy Board). In today's open economy, most of those privileges have disappeared. Exceptions that should worry us are statutory monopolies such as ACC and Pharmac, and the dominant public health and education systems. Empirical evidence that monopoly in open markets is a major economic problem is hard to find. Countries like the United States and New Zealand grew to become among the wealthiest in the world before they introduced anti-monopoly regulation (apart from the common law). Hong Kong and Singapore have little in the way of antitrust laws. A cardinal rule of public policy is that is it not enough to identify a problem; the key issue is whether government intervention can improve matters. Antitrust (competition) policy that uses the textbook standard of ‘perfect competition' and ‘competitive prices' is fraught with difficulty. We can see this easily by observing that it frowns equally on ‘monopoly pricing' (prices set above ‘competitive' levels), ‘predatory pricing' (prices set below competitive levels) and collusion (equal pricing). None of these problems is straightforward. Even ‘plain vanilla' cartels, such as union-based collective wage bargaining in an open labour market, may make economic sense (although there is no reason why the labour market should be excluded from the Commerce Act). None of this is to argue that we should not have a Commerce Act and a Commerce Commission. However, there are serious risks that regulation in this area can do more harm than good, particularly in deterring investment and entrepreneurship. In his well-known textbook, Greg Mankiw, a former member of the US Council of Economic Advisors, summarised current economic thinking by saying, “In the end, monopoly power is a matter of degree. It is true that many firms have some monopoly power. It is also true that their monopoly power is usually quite limited. In these cases, we will not go far wrong assuming that firms operate in competitive markets, even if that is not precisely the case.” It is ironic that at a time when New Zealand's markets have never been more open, and when globalisation is constraining the pricing power of firms worldwide, we are seeing more, not less, activist behaviour by the Commission and the regulators of the electricity and telecommunication industries. Today significant problems of market power seem likely to be confined largely to statutory monopolies and parts of the utility sector. The risks of ‘political failure' arising from the imperfections of real political and bureaucratic processes must be weighed against problems of ‘market failure'. We are at serious risk of overkill.
Roger Kerr is the executive director of the New Zealand Business Roundtable. |