Saturday, March 28, 2015

An Interesting Quote on the Problem of Monopoly

Last night I was searching the web for a copy of Harold Demsetz's essay entitled "Two Systems of Belief About Monopoly" and I ran across Pete Boettke's book "The Elgar Companion to Austrian Economics." I thought I'd share a short section of the book with some commentary or clarification for the non-specialist reader in brackets.

The problem of monopoly
Once one views competition as a dynamic, rivalrous process [This view comes from Adam Smith and is juxtaposed against the neoclassical view of competition as an equilibrium end state. Modern Austrians in the tradition of Hayek have developed and made use of a rigorous theory of entrepreneurship around this view of the market competitive process. See Israel Kirzner's book "Competition and Entrepreneurship" for more.] and acknowledges the importance of entrepreneurship, many of the business activities that the PC/SCP model [this refers to the Perfect Competition/Structure-Conduct-Performance model] views suspiciously as monopolistic are interpreted as essential parts of the competitive process. This is not to suggest that monopoly is not a problem, but that its origins are not likely to be the free market. There have long been 'two systems of belief' about monopoly, as Harold Demsetz has written (Goldschmid, Mann, and Weston, 1974). One system of belief, PC/SCP model, sees monopoly as primarily the result of the divergence of real-world markets from the perfectly competitive ideal. The alternative system - often associated wit the Austrian school - sees government as the source of monopoly through protectionism, monopoly franchises, occupational licensure, government enterprises and myriad other mercantilistic laws and regulations.
To Austrian economists, the search for so-called 'free-market monopoly' is a misallocation of intellectual resources. It is socially wasteful for an economist to spend his career seeking to uncover the extent to which price diverges from marginal cost at a point in time or spinning endless oligopoly tales. Cloistered in his windowless office, he ignores the fact that he is paying a monopolistic price for his cable TV, is forced to cater only to the US Postal Service's monopoly in first-class mail, he must send his children to a monopolistic public school system, have his garbage collected by a government monopoly, pay gas, electric and water bills to other government-sponsored monopolies, pay supracompetitive prices for the services of taxi drivers, physicians, attorneys, hairdressers, undertakers, and myriad other service providers because of supply-reducing occupational licensing laws, he is victimized by misguided antitrust regulation which encourages inefficient businesses to sue their more efficient rivals for cutting their prices or expanding their product lines, and he pays higher food prices caused by acreage allotments and other forms of farm protectionism [The author doesn't mention it, but a great deal of public mistrust of agriculture could be mitigated if government regulations and favors didn't help create monopoly conditions at other segments of the agricultural supply chain such as meat processing, animal slaughter, biotechnology, pesticide development, etc.] 
These are just a few examples of government-sponsored monopolies that have been largely ignored by most industrial organization economists because of the PC/SCP model's preoccupation with market structure as the benchmark of competition.
I hope to share more interesting quotes like this in the future.

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