Apologies that my posts are much shorter than Irfan’s. But sometimes I have only the nugget of an idea that still seems worth developing enough to warrant sharing at a preliminary stage. I’ve done a lot of reflecting in recent years on the growing problems of oligopoly and monopoly in American commerce — having taught about this in an interdisciplinary course on Market Failures and Public Goods. It is not a ‘sexy’ issue that draws a lot of attention like culture wars material. And that’s a shame, because it is a far bigger part of “structural injustice” than many of the things discussed in the culture wars (imho). And, because most people finish high school without even 10 minutes on what public goods are and what kinds of problems prevent markets from working optimally, less than maybe 2% of Americans understand why big tech companies like Microsoft, Apple, Amazon, Google, Facebook etc. now have so much power and are driving up economic inequality by buying up every competitor or driving them out of business via unfair advantages. The root cause is what’s known as a network externality in which the goods being sold are not merely non-rival, but even anti-rival: because they become a “standard,” the more people use them, the more valuable they become. They are also get a critical edge in visibility, and no competitors can get over the threshold to compete well enough with them. The result is a so-called “long tail” distribution in which one company in a sector may get 50% of the profits, the next-strongest getting 10%, the third strongest getting 3%, and so on down through thousands each getting much less than 1%.
Our incredibly weak and outdated anti-trust laws even allow them to become vertical oligopolies owning many steps in the supply chains. For example, a big oil company may own the drilling rigs, the refineries, the pipelines and other distribution systems, and the gas station on your corner. A big health insurer may now have its own doctors and also own a pharmacy — and give customers an incentive not to use other doctors or pharmacies. For instance United Healthcare now may give you three-month refills on a prescription if you use their Optum RX pharmacy, and one month refill via Rite Aid or CVS. OptumRX can mail your medicine to you, but United forces CVS not to mail the same refill. Why this does not earn them a multibillion dollar lawsuit is beyond me Okay, actually it isn’t entirely: the reason is right-wing judges have gutted what little anti-monpoly law we had. Read all about it in Amy Klobachur’s massive and insightful book titled Antitrust.
All this means that no competitor could compete effectively without hundreds of billions of initial investment and advertising to offer customers a comparably integrated supply chain. Imagine trying to create an entire multi-state integrated system of doctors, insurance, and pharmacy service from scratch to compete with United Healthcare — which will doubtless soon enough own a big drug manufacturer, a chain of hospitals, fertility clinics, and a score of graveyards, making a complete Cradle-to-Grave healthcare oligopoly. It will own a few dozen members of the House of Representatives as well.
I’ve thought of a simple way to fight this through the tax code, without having to update antitrust law (which requires the nearly-impossible 60 senators) or update judges (which requires decades). The idea is to make the alternative minimum (AM) corporate tax depend on how much market share a corporation has, rising exponentially as that share grows. The law would define different sectors. So if one company has, say, 2% of the greeting card business or the gas stations in the nation, its AM corporate tax is zero. But once it reaches (say) 8%, it starts to pay some AM corporate tax. Once it reaches something like 30% of a sector like general retail (Amazon and Ebay) then it starts to pay much higher rates, like 20% of net profits. If it gets over 40 or 50%, the AM corporate tax goes up in increasingly steep increments to (say) crippling numbers like 40%.
Then Amazon prices will be higher than your local high street store’s for many products. And no company will be too big to fail (another market failure in which some hefty chunk of a company’s risk-costs are externalized onto the public). This approach could be tailored to make the AM corporate tax penalty higher for companies that also try to own different major rungs of supply chains, as defined by the law. It also has to be tailored to break up giant holding companies that hold significant market shares in several distinct sectors. These steps would ultimately lower prices on most goods and services, make for more efficient markets and thus more productivity increases, and reverse the trend towards increasing economic inequality. It would do these things much more cleanly than massive subsidies for things like college costs. But that’s another topic that can await another day!
Given the ways in which government intervention promotes capital centralisation and corporate centralisation, why should we regard the problems you describe as cases of market failure?
Click to access cjohnson-state-monopolies.pdf
I remember my principles of microeconomics from long ago. The rap against monopoly and oligopoly is that they result in lower output and higher prices than would be the case under something closer to perfect competition. But here’s the thing: Monopoly and oligopoly can produce the best outcomes in some markets because of economies of scale. In any event, market shares reflect the relative sizes (scales) of the firms operating in a market, but say nothing about whether outputs and prices could be improved by “trust-busting”. In fact, the likely result (if there are economies of scale) is lower outputs and higher prices. By the way, I hold no brief for Amazon, etc. Their out-sized influence on information and culture is a bane that I would like to see corrected, but breaking them up might not be the right way to go about it.
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There are also diseconomies of scale, though, which would place an upper limit on the extent of firm size and concentration — were it not for government-granted privileges that enable the corporate elite to reap the benefits of the economies of scale while shifting the costs of the diseconomies of scale onto the rest of us. (So I disagree with both you and John but for different reasons.)
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Thanks I entirely agree that oligopoly can be driven by corporate “rent seeking” as well — sweetheart deals, laws favoring one firm, or big gob purchases. And where there is an economy of scale, there is a kind of market failure, just meaning that technically perfect competition is not feasible for this good or service. It might be that in such a case, some gov or non-profit support is needed to ensure two or three producers that can meet that threshold. If there is only room for one, you have a case for a publicly owned utility, which may be operated by an independent board charged with keeping prices no higher than needed to cover costs.
The way I suggest thinking about this whole set of problems is to imagine all the ways that buyers or sellers can avoid competing with other buyers and sellers of the same (or similar) products at the same time. Every one of those ways is a potential market failure that law may be required to prevent (to the extent feasible). I’ll do another post about examples featuring example of “unraveled” markets from Alvin Roth at Stanford. I learned a lot teaching this course! But yes, government action can be one of several ways that buyers and sellers manage to avoid competition. I stress this because I believe it is thousands of such cases compounding over time that causes most rising inequality. It’s like death by a thousand paper cuts.
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I take the concern about rising inequality to be one about rising socio-economic inequality between individuals. But the unfair competition leads to unequal profits across firms in a sector. What is the connection between the latter and the former?
PS thanks for the Cowen reference. I had not seen this one!
I think this kind of tax policy would be an effective, though simple and blunt, instrument for addressing monopoly and oligopoly as a problem of dangerous concentration of power. However, because a firm could dominate a sector through fair competition, such a policy would not very precisely target unfair competition and profit (due to network effects or due to other factors).
Also, more importantly, any purely scale-targeted solution such as yours will be insensitive to cases in which we should want to tolerate the dangers of scale because of the benefits (this is similar to LV’s point). Plausibly, we should not want to give up the economic (and national-power strategic) benefits of our highly-efficient and highly-profitable e-commerce sector, social-media sector, or financial services sector. This point pushes in the direction of solutions of regulatory control or oversight (and to safeguards against collusion with or co-opting of government power). However, maybe your proposal would work as part of some kind of hybrid policy that is still sensitive to allowing big when big is good?
Here are some visible, important abuses of power that might well lead to legislative action in the near future: (i) social media and its fortunes influencing elections, (ii) content moderation in social media shading into elitist or partisan censorship, (iii) the addictive, click-bait nature of social media having deleterious effects on the development of children and adolescents. These and other abuses might lead to some patchwork regulation that pushes broadly in the right direction. But I think we’ll have to wait for shifts in judicial interpretation or new legislation for antitrust law to target unfair competition (and profits) — and problems of dangerous concentration of power — in a general, principled way (not just when prices to consumers are raised).