Monday, November 19, 2012

How I Learned to Stop Worrying and Love the Monopoly

"Monopoly" is a maddening word. Time was, a monopoly was a privilege granted by the crown so that (a) a merchant would enjoy protection from competition backed by the Royal House and (b) a cash-strapped royalty could raise treasure without begging the House of Commons or sending goons across the countryside. A characteristic of a venture granted monopoly rights is a lack of competition. What was once a mere feature has become the defining characteristic of sole-provider firms. This is frustrating for some of us in economics because there are important, genuine distinctions between production characteristics of protected and non-protected monopolies, yet in many principles textbooks, monopoly is taught as if they're the same thing. They're emphatically not!

But what I'm interested in today is less the Econ 101 definitions and more the pedestrian perception of the fringes of monopoly. I have a hunch that the following four factors color perception of big enterprise or monopoly: firm size, market thickness, consumer separation, and government involvement. Let me elaborate below the fold.

Firm Size
I've noted before that folks seem to have a distrust of anonymity, and when (probably) amplified by perceptions of greed, firms that enjoy statutory monopoly status occupy a position of distrust in more than a few people I've spoken with. Here's an example of two people I actually know in real life (no joke... the two people with umbrellas about a minute in not only attended the same community college as me, but were both involved in the same student publication I worked on several years ago).

Needless to say, this is Penn and Teller, so expect a little salty language. Note that the anti-Wal-Mart sentiment is chiefly based on size. The town that the Wal-Mart moved into previously had one and only one bicycle shop, one and only one hardware store, one and only one nursery (which was actually pretty good and managed to stay open) and one and only one bookseller. Before the Big Smiley moved to town, these places were de facto monopolies, relying on transaction cost frictions to keep prices up. If I'm buying new inner tubes for my bike, I can either pony up the cash or suffer the 45 minute slog up I-5 to Olympia. Wal-Mart had the audacity to barge in and save me from paying more for stuff I wanted.

Now, I'm not posting this here to mock anyone. I really do think that not only is the attitude displayed above common, it's something people are pretty easily prone to. Big, anonymous firms are suspect because they are big and anonymous. The older department stores, the Woolworth's and the JC Penney's and the Searses grew up alongside America. Take a look at old photos from Downtown, USA and there will be a corner Macy's. Brand cachet stamps these firms are part of the landscape. The juggernaut of Wal-Mart storms in from nowhere and smashes that to flinders, as you can see in the sample frame above. It's a cipher, never having made friends with the community first. From the point of view of my friends in the video, it's a cancer that metastasized from the flabby underbelly of Alabama. Or China. Or India... it doesn't really matter where, so long as it's foreign.

Seems weird this inversion, doesn't it? The old local monopoly is actually exercising classic monopoly power to extract rents from customers, but people cheer when a firm that offers to undercut the small monopolist is shut down by zoning restrictions. Now, it could be that this is a bad example. Perhaps Wal-Mart really does exploit its workers (?) (and I'm sensitive to charges of eminent domain abuse) or what-have you, but swap in any big multi-national firm and see if the same moral intuitions still hold. Remember when Japanese cars stopped being laughable junk imports and began to seriously threaten Detroit? Don't be too surprised to hear much of the same bluster if Tata muscles up and heads to the States.

Market Thickness
Diamonds are a pretty good example of a thick market run by a monopolist. Thin market monopoly (or, more to the point monopsony*) can be found in company towns all o'er the land. Mining is a decent enough example. Colorado is dotted with mining towns like Empire (one of the few dedicated molybdenum mines in the world, and as far as I know, the only one in the US). In this case, I think if you were to take a random sample of people, you might find more distaste for the monopolist in the thinner market.

Why do I claim this? Well, it's kind of hard to get a good reading on this, since real-world examples will be colored by all sorts of perception, but a big, market with lots of volume means that each one-off purchase can make up in volume what it doesn't get in price. That is to say, if some monopoly rents are extracted, a high-volume industry can still stay flush even if they raise their prices above marginal cost by just a little bit. From the customer's perspective, well, that isn't quite as bad as the sort of extortion that happens in thin markets. The lone employer in a mining town can pay its workers peanuts, have lousy working conditions and get away with it so long as those workers' BATNAs are lousy. It's an empirical matter whether this is indeed the case or not, but we're looking at intuition here, not empirics.

Consumer Separation
Before I began my trek down the path of the dismal scientist, I put in half a dozen years in the nuclear Navy. The history of the nuke fleet is an interesting one and chock full of tales of Admiral Hyman Rickover. A bit of an enigma, he stared down Congress on more than one occasion, to the extent that Naval reactors are not under the jurisdiction of the Department of Energy's Nuclear Regulatory Commission. Isn't that remarkable? There's a story, perhaps a bit apocryphal, that Admiral Rickover broke the back of the hafnium racket.

The story goes that the sole provider of processed hafnium, the material used to make reactor control rods, attempted to raise the price of the metal tenfold, knowing that there were no substitutes suitable for shipboard use. The carbon rods used in civilian plants had to be replaced frequently, a task impractical to perform underway since it required quite a bit of core downtime. Rickover, canny as a fox, designed a core that required no control rods whatsoever. He stuck his thumb right in their eye. They blinked in a hurry and dropped the price right back down.

Now, this is a funny little story to tell, but I have a feeling that the actions of the monopolists here don't raise the hackles of John Q. Public quite as much as some other stories might. We've got a coercer being coerced, so it's cute but not outrageous. Cost incidence may be lost on the average Chad (no reason to pick on Joe all the time). If it's happening far enough up the supply chain, people probably won't get too bent out of shape by monopoly rent extraction. When it's closer to home, the story changes. People get crabby over expensive gasoline, not over raw melamine.

Government Involvement
One of the justifications for government intervention in the marketplace is to protect consumers from predatory monopolies. As I pointed out in my opening remarks, it's often the government that grants firms the right to be predators. De jure, regulators are meant to protect the public from the monopoly. De facto, it often ends up that the regulators protect the monopoly from the public. Despite this, the average person (please check the GSS if you don't believe me) believes strongly that business needs to be regulated. And folks don't believe this in the sense of a tolerable administration of justice, or robust property rights or a reliable rule of law. People like the EPA, they like the FDA, they like OSHA. Indeed, it seems to me that the moral intuition is reversed here too: folks are comfortable when market discipline has been revoked in favor of crony manipulation coated with a heavy layer of regulatory kayfabe.

Anyway, these are some possible sources of moral intuitions. I suspect that euvoluntarity may be in the eye of the beholder and if someone suspects that a particular transaction is exploitative just by dint of one of the above, it may not actually be the case.

As always, I adore comments and if you think you've got other components to attitudes towards monopoly, please share them below. Cheers!

*this is economics jargon: a monopoly is a single seller, a monopsony is a single buyer. Here, the market is for labor, and the monopsonist is the only local employer.

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Do you have suggestions on where we could find more examples of this phenomenon?