This week, we read a seminal paper by Gordon Tullock on the costs a monopoly imposes on society. The actions monopolies take to preserve their economic profit—and the actions others take to secure it for themselves—waste economic resources in pursuit of a simple transfer of wealth, Tullock argues. This economic waste exceeds the textbook "deadweight loss" that we traditionally associate with the higher prices and restricted output that typify a monopolized market.
But there are many different types of monopolies, and some may be better for society than others. So argued Peter Thiel, co-founder of PayPal, in the Wall Street Journal last month. Thiel is quick to clarify that he is not extolling "illegal bullies" or "government favorites," but rather companies that innovate their way to the top, that is, natural monopolies. What differentiates natural monopolies from their nefarious cousins is that they reach their dominant position because they do something better than anyone else—whether that's producing the same product at lower costs or creating new products that no one else has thought up. These monopolies, Thiel argues, create value; they're the Apple and Google of the world, the economic equivalent of Louis Pasteur and Alexander Fleming. They provide for us goods and services we actually want. And they can do all this because they enjoy economic profits, which frees them up to worry about things other than the bottom line: things like creation, design, invention, and innovation.
Of course, Tullock's argument still applies to natural monopolies. They enjoy profits, and therefore must expend resources protecting those profits, just as others will jealously seek the wealth for themselves. The question in my mind is whether the social benefits that these monopolies produce outweigh the wasteful costs associated with the rent-seeking that inevitably dogs monopolistic enterprises. I'm not certain anyone has a definite answer to this question. Thiel is right to point out that the government recognizes the usefulness of natural monopolies, as evidenced by the fact that it virtually creates them through the patent office (even as it prosecutes other types via anti-trust litigation). Moreover, I can't intuitively see why I should prefer cut-throat competition—where prices reign supreme and innovation and quality suffer (like the airline industry)—to a world in which monopolistic enterprises use their economic profit to innovate and create. Perhaps these natural monopolies impose similar costs on society as those outlined by Tullock in his paper; but their social benefits might just tip the scales in their favor.
1 comment:
I think Tullock would not be too irked by a natural monopoly.
Natural monopolies, like you mentioned, arise not from effort to secure rent from the government, but rather from innovation that allows a firm to deliver a unique product or a similar product at a lower price. The transfer of surplus from the consumer to the producer is relatively efficient as it is maintained by firm innovation rather than artificially maintained by externality creating bargaining and implementation costs.
Government sanctioned monopolies, on the other hand, see more loss during the transfer of surplus from consumer to producer. This loss comes about from the firm's inefficient use of effort and money used to secure rent seeking monopoly opportunities. Firms incur the costs of bargaining with the government and other externalities that arise while securing and implementing monopoly status that neither benefit the consumer, producer, nor the government (and thus are a loss and not a transfer of wealth).
It seems to me that natural monopolies that continue to innovate waste less money in securing and implementing their monopolies than those that must bargain with the government for monopoly protection, and it should be noted that many natural monopolies, instead of continuing innovation, become rent seeking monopolies in order to maintain monopoly status, and thus fall in with the rest of the scoundrels creating costly inefficiencies to society.
Finally, I would like to point out that Tullock’s assessment of the efficiency of a monopoly assumes that all monopolies “provide for us goods and services we actually want” (or else no one would buy the good / service of the monopoly). The differentiating factor is how monopolies spend resources to obtain monopoly status. With the natural monopoly, there is low inefficiency; with the government-protected monopoly, there is much more inefficiency in the transfer of wealth via bargaining costs, implementation costs, and other externalities necessary to obtain lasting rent opportunities over the competition.
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