I See Dead Policies

Monopoly is bad; we all know that.

Except “knowing” something in economics often just proves again the wisdom of the old Josh Billings quip: Our most dangerous beliefs are things we know, that just ain’t so.

There’s a great cartoon by Dale Everett which was preserved by the Conversable Economist, Timothy Taylor.

It’s a women’s prison, and one of the long-time inmates asks, “What are you ladies in for?”

One woman responds that she was charging prices that were too high, and people were upset because she was price-gouging. Price-gouging, of course, is a sign of abuse of monopoly power, as we “all know.”

The second woman answers that she was charging prices that were the same as her competitors. But that’s an obvious antitrust violation, price-fixing, a sign of abuse of monopoly power, as we “all know.”

The third woman replies that she was charging prices that were less than her competitors, and that’s obviously predatory pricing, trying to drive her competitors out of business, a sign of abuse of monopoly power, as we “all know.”

Well, gosh. What’s a lady entrepreneur to do? The government says that “we” want to encourage innovation and a dynamic economy—that’s why monopoly is bad, it prevents innovation, as we “all know”—and so firms can do anything they want. Just as long as they don’t charge a price that’s more than consumers think they should have to pay, the same as competitors, or less than other firms can match, given their inefficient cost structures.

Antitrust is a Dead Policy

I hope you see the problem. It’s actually antitrust policy itself that blocks innovation and puts up a big “open for business” sign in the courts for special pleadings by rent-seeking entities in the society.  Artificial restrictions on price, either ceilings or floors, create valuable “rents,” or unearned bonuses, for unscrupulous litigants and lobbyists. Attaching a moral authorization to rent-seeking makes the problem much, much worse.

As I have argued in a number of forums, the idea of “price-gouging” as an abuse of monopoly power is not just wrong, but actively harmful. It’s true that sellers may make excess profits in a period of shortage or emergency, but the profit signals that come from “high prices” are by far the best means of ending the shortage quickly. 

As for “collusion,” the problem is more one of intent. If I see a corner with three gas stations, and they are all charging $3.67 per gallon for regular gas, should I call the Justice Department?  Having similar prices for the same commodity is just called “competition,” and in fact the doctrine of a single price is one of the key assumptions of the classical model of perfect competition, borne out in laboratory experiments when competition, not monopoly, is the driving force. Single price is not a sign of collusion, unless that price is somehow artificially raised above the market price, and maintained at that price by government policy. (A great example where government is “the big cheese,” or at least the guarantor of high cheese prices, is presented here). There are examples of price-fixing attempts, to be sure. But without government enforcement such arrangements are very difficult to sustain.

Finally, consider predatory pricing, or (in international trade) “dumping.” The story is that the ambitious wanna-be monopolist charges prices below her own costs, to drive out all the other firms, and then raise the jolly roger and jack up prices: “Garrrr! I have you now!” If you ask antitrust enthusiasts, they’ll list WalMart, or Amazon, as examples, firms that exercise market power to drive others out of business.

But wait. Consider two firms, A and B. If A charges a price less than A’s costs, they may be trying to expand their market share. Clearly, consumers benefit from the low prices.  Yes, that hurts B, but there is no reason to indemnify firms against the risks of competition. You pays your money and you takes your chances.

The fact is, though, that there are very few examples of that kind of “predatory pricing.” What usually happens is that A is charging a price below B’s costs, because B is bloated, inefficient, or has not kept up with the new technology of production and delivery. WalMart is profitable, even though it has prices below the costs of many competitors; those competitors have left the market, freeing up those resources to be used for other purposes.

And that’s the important thing: In no case, in not one single documented instance, has WalMart then raised its prices, after driving out competing “mom-and-pop” or other retailers. Consumers don’t sign on to Amazon because it’s a monopoly; they use Amazon because their prices are lower, their selection is wider, and their delivery costs are cheaper.  

We may not like high prices for things we need; we may not like what looks like a lack of competition and “bargains,” and we may not like the kind of aggressive competition that bankrupts inefficient and anachronistic businesses. But antitrust and the regulation of pricing decisions are much more harmful than these things we don’t like about competition.

There is a strong movement in Washington, among progressive legislators and regulators, to reverse the presumption in cases of antitrust enforcement. What that means is that instead of innocent until proven guilty, any firm would be required to prove that its pricing and production decisions were not monopolistic. This is a terrible idea for many reasons, but perhaps the most important is the “damned if I do, damned if I don’t,” position in which it puts large firms. If they charge high prices, they are monopolies, if they compete on price they are colluding, and if they charge low prices they are predating.  If this perspective wins the day, I see dead policies.

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This article, I See Dead Policies, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.

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