Here is an exam question for my Introduction to Economics students: Below are two sets of organizations. How are they similar, and how do they differ? Which factor — the factor they share in common, or the factor that differentiates them — should be of greater concern to economists and regulators?
|Type A||Type B|
|Rockefeller Oil||US Postal Service|
|Microsoft||Local Public School|
|AT&T (before 1984)|
French Salt Monopoly
|Apple||Local Utility Company|
It should be obvious that all of these companies, at least colloquially understood, are monopolies, in the sense that they have dominant or 100% share of their respective markets. For example, the US Postal Service has 100% share of the market for delivering first-class mail. Rockefeller Oil, at its market share peak in 1877, had a dominant 90% share of the oil refining industry. And Google, in the antitrust complaint recently filed against it on October 20 by the US Department of Justice and 11 state attorneys general, is said to have 88% of the Internet search market.
But consider how these two groups differ. What separates them is *how* they gained and maintain their large market shares. Observe that the Type A companies gained their market shares by making a superior product that millions of customers chose to buy. They either invented a new, superior product (e.g., Apple’s iPhone) or they figured out a lower-cost way to manufacture and distribute their product by pioneering massive scale economies (e.g., Rockefeller Oil).
In case such innovation is not obvious, recall just how significant an improvement Apple’s iPhone smartphone was in the history of mobile phones. Recall the long lines of people who waited for hours to buy them. And consider the many competitors who have since chosen to imitate Apple by making similar phones.
As for Rockefeller Oil, its innovation was the development of enormous scale economies that rapidly brought down the cost of refining kerosene from 3 cents/gallon in 1870 to 0.452 cents/gallon in 1885, and 0.29 cents/gallon in 1896, shortly before it faced prosecution under the nation’s first antitrust law, the Sherman Antitrust Act (1890). At the same time, its output increased many-fold, yet antitrust doctrine holds that “monopolists” reduce output and raise prices.
As for Google, the subject of the government’s latest antitrust case, it is surprising that the company has only been around since 1998. In such a short time, Google became the go-to Internet search engine by developing superior methods of indexing and searching the Internet. Simultaneously, it developed a continuous stream of free “add-ons” such as Google Mail, Maps, Chrome, and Drive, that made Google the irresistible choice for millions of Internet users. All of these actions enabled it to out-compete and gain market share from numerous other Internet search companies.
The Type A companies gained their dominant market positions by competing; they out-competed the other players in their market, or competed by inventing brand-new markets that they then dominated… until new innovators came along.
In glaring contrast to the continuous innovation and customer focus of the Type A organizations, what is common about all of the Type B organizations? First, they are characterized by poor service and/or unusually high prices. For example, the extremely high prices of salt under the 14th-18th century French salt monopoly (which actually continued in some form until 1946) became a casus belli of the French Revolution. In some French provinces, salt prices were 20x higher than in other provinces due to French government enforcement of the salt monopoly. Such high prices for a dietary staple severely hurt the poor peasants of that era.
Or consider an example we are all familiar with: the United States Postal Service. Who has not experienced the long lines and often surly attitudes of the often slow-moving clerks of this government-owned and operated monopoly? There was actually someone who tried to do something about the wasteful expense and poor service of the US Postal Service monopoly. His name was Lysander Spooner. In 1844 he formed the American Letter Mail Company and innovated by offering, for the first time, pre-paid postage stamps at a much lower cost than the US Postal Service was charging to deliver mail. Despite offering cheaper and better service, and causing the US Postal Service to lower its prices and improve its service in response, Spooner was fined and threatened with jail and had to close down his company.
How do the Type B organizations get away with providing such poor service? The answer is obvious: in each case, the government uses force to squelch competition. The government makes it illegal to compete with these companies, threatening would-be competitors, like Lysander Spooner, with jail, fines, or worse. Because they do not have to compete for customers, they provide poor service, harming customers, and creating what economists call “deadweight losses” and a loss of “consumer welfare.”
The “Package Deal” Fallacy
Now, here is the neat trick that comes from a sloppy definition. By defining “monopoly” primarily by an incidental characteristic like “market share,” the government can ascribe the bad behavior of the Type B companies to the Type A companies. It is a linguistic sleight-of-hand, a fallacy that Ayn Rand calls the “package deal.” She explains:
“Package-dealing” is the fallacy of failing to discriminate crucial differences. It consists of treating together, as parts of a single conceptual whole or “package,” elements which differ essentially in nature, truth-status, importance or value.
[Package-dealing employs] the shabby old gimmick of equating opposites by substituting nonessentials for their essential characteristics, obliterating differences.
“Monopoly” is just such a package deal. By grouping companies together by a nonessential characteristic, market share, the government smears the Type A companies with the implication that they are behaving in the harmful manner of the Type B entities. Then, using vague antitrust laws, the government can persecute successful Type A companies in large measure just because they have dominated a market, all the while ignoring the crucial fact of how they attained such dominance.
The Department of Justice, in a guide it publishes to explain what constitutes an illegal monopoly, reveals the government’s obsession with market share. It says, “to establish monopoly power, lower courts generally require a minimum market share of between 70% and 80%.” Later, it cites a court decision that “a market share between seventy-five percent and eighty percent of sales is more than adequate to establish a prima facie case of power.”
Lost in this focus on market share is how the large market share was obtained. Was it by relentlessly competing for customers with ever-improving products and services, or was it obtained by government coercion? By lumping together the Type A and Type B companies in the sloppy definition of monopoly, this crucial difference between them is obliterated.
A New Term Is Needed for the Highly-Competitive Companies That Have Large Market Shares
A new term is needed for the highly-competitive innovators who achieve large market shares by creatively providing outstanding, innovative, and lower-cost products and services that are of such value that millions of people choose to buy their products. To call them “monopoly” is to define them by a nonessential characteristic. In my freshman Introduction to Economics class, I called them Highly Competitive Large Market Share Companies (“HCLMCs”, for short). My students will remember this term, but it is awkward. I call on someone with a good marketing sense who can coin a better term. We can keep the term “monopoly,” but it should be reserved for describing those government-created and sanctioned dinosaurs like the US Postal Service.
When such conceptual clarity is achieved, maybe our legislators will then consider repealing the antitrust laws, as the economist and antitrust expert, Dominick Armentano, has recommended. And follow that up by eliminating the laws that outlaw competition and create the true “Type B” monopolies that harm us all.
Made available by the American Institute for Economic Research.