Saturday, September 12, 2015

Bryan Caplan on Monopoly

Over the last year I've posted several times on monopoly theory. I've discussed the usefulness of what Ronald Coase called "blackboard economics" and alternative ways of evaluating firms' real-world competitive behavior.

In a post on industrial organization and the Structure-Conduct-Performance (S-C-P) model, Bryan Caplan offered a very interesting insight on standard monopoly theory (italics in original):
Still, it's easy to see the intuitive appeal of S-C-P.  Namely: If you are a monopoly, you'll charge high prices, and hence produce low quantity. 
The problem with S-C-P is that it ignores an even more intuitive truism.  Namely: If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices.
So the question is, how does a firm obtain monopoly status without going through the process of becoming a monopoly? Caplan concludes:
In short, the desire to become and remain a monopoly leads firms to do the exact opposite of what they'd do if their monopoly status were a law of nature - or the law of the land.
This is one of those cases where an important and interesting insight is obvious once it's pointed out. It's also an example of the power of the economic way of thinking and the importance of economic intuition.

No comments:

Post a Comment