Friday, 4 September 2009

Where does monopoly power come from?

At EconLog Bryan Caplan asks Where Does Monopoly Power Come From? He writes,
You can't analyze the consequences of monopoly if you don't know where the monopoly came from.

If the monopoly came from government, then it's silly to fret about market failure and muse about antitrust remedies; you've got to unleash your inner libertarian and call for free competition.

If the monopoly came from superior efficiency, broadly defined, you've got to realize that antitrust "remedies" penalize excellence - which almost any economic theory admits is a bad idea in the long-run.

If you've got some non-government non-efficiency story, you've got to explain why neither of the two simple explanations for the existence of monopoly work. It's not impossible to craft such an explanation, but it's harder than it looks. If you blame monopoly on long-term contracts, for example, this begs a crucial question: Why did customers sign these contracts in the first place? By hypothesis, you're not allowed to answer, "The firm had a government monopoly" or "The firm was more efficient than any of its competitors."
Caplan's question is a simple but important one for those who support anti-trust policy against "monopoly". If they can't answer it then, how can they correctly deal with alleged monopoly?

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