This got me to thinking about antitrust generally. First, what are the main problems with market power in the economy? We're doing a good job in developed economies with mergers, price-fixing, and unfair practices. We're doing a bad job with monopoly labor unions, monopoly government providers of services, trademark monopolies, and copyright monopolies. Marginal improvements in antitrust law are of trivial importance compared with the legal monopoly given to Microsoft Windows, either looking at the output restriction or the lost entry by more efficient competitors.
Nonetheless, antitrust policy is interesting at the margins, if not important. This week the theory workshop had a neat idea about merger policy. I won't try to trace the credit for it, but it goes like this. Suppose our aim is to maximize the sum of producer and consumer surplus. Should we make our merger rule, "The merger's OK if (PS+CS) go up"? No. If we impose that as a constraint, a company will propose the merger in that category which most increases PS, not the merger that most increases PS+CS. If, instead, we had a rule of "The merger's OK if CS goes up", then the company will still only propose efficient mergers, because we don't have to require the company to make sure PS goes up too. The only problem is that sometimes companies will not have any CS-increasing mergers to propose, and we'll lose some efficient mergers in which PS+CS would rise but CS fall.
What I really need to do, though, is figure out how to categorize monopoly as a form of market failure. Market failure taxonomy is a mess. Component problems include: real externalities, asymmetric information, rentseeking, and poor thinking. Market power is *not* directly a problem, though it is a contributor.
If there is perfect information and contract enforcement, a monopoly will use perfect price discrimination and there will be no triangle losses. It is only because a monopolist doesn't know the demand curve of each consumer or can't prevent resale that he would use simple monopoly pricing and restrict output. Otherwise, the Coase Theorem works.
The monopoly position is a contributor, though, because if sellers compete, then not knowing demand curves and not being able to enforce fancy contracts doesn't matter.
One way we might look at the monopoly problem is as a form of rentseeking. The loss is not directly from monopoly, but from inefficiencies arising in the attempt to manipulate a market. Indeed, rentseeking itself is really an informational problem. If Smith knows that Jones can spend $200 on a gun and steal Smith's car, then Jones can offer Smith $1 for the car and get it without having to buy the gun. Rentseeking losses occur only when the rentseeker and victim cannot reach an agreement.
It is useful to think of two kinds of rentseeking. One is direct taking of goods-- pickpocketing, for example. The other is attempts to manipulate prices --- monopoly output restriction. But where, then, do I put attempts to change rules?
To view the post on a separate page, click: at 10/17/2007 04:56:00 AM (the permalink).