There’s a reason why monopolies rely on government protection.
The American economy produces roughly $18 trillion worth of goods and services every year as firms compete to provide consumers the goods and services they demand. But over time, the government has come to play a much larger role in the economy, imposing regulations that cost the economy over $1.9 trillion annually. Unfortunately for consumers, these regulations are often put in place to limit competition and restrict entry into the marketplace by firms trying to avoid the gales of creative destruction. And now, there is a renewed interest in weaponized antitrust, with America’s tech giants under renewed scrutiny at home and abroad. The culprits are competitors seeking to increase their market share through government intervention. Unfortunately, for consumers, this typically means higher prices and reduced choices in the marketplace.
Google’s $2.7 billion fine in the EU highlights the bite of the antitrust watchdogs. At home in the U.S., Amazon’s $13 billion pursuit of Whole Foods has raised some eyebrows, as have concerns about its pricing practices. And Facebook’s Instagram has been accused of drowning out SnapChat. Yet unlike past antitrust enforcement there is no evidence of consumer harm, the traditional trigger for antitrust action. Many of the services provided by the large tech companies are free, and they offer consumer a wide range of choices, whether it’s online shopping or booking a hotel. Critics, however, point to network effects that act as barriers to entry, making it difficult to compete with established firms.
While it may be tough to compete, that does not necessarily warrant government intervention. Competition in the marketplace is fierce and daunting, with rivals constantly driving profit margins down and attempting to lure customers away from rivals. This competition serves consumers well, but the market is littered with firms who failed to deliver. Unfortunately, many firms often turn to laws and regulations to gain and protect their market share. This allows them to behave like monopolists, raising prices and reducing consumer welfare due to government interventions designed to create the “ideal” market.
But this ignores the dynamic power of markets that disciplines even the largest incumbents. In his book Zero to One, Peter Thiel discusses monopolies and urges startups and entrepreneurs to strive to be monopolists in a dynamic marketplace. That is, a monopolist without a government protected monopoly. For without government protection, monopolies tend to be transient and dissipate over time. Yet, having monopoly power, if just for a while, provides firms with the resources to bring new ideas to the market and enhance consumer welfare.
And unless there is a government mandate artificially protecting a firm’s monopoly, there is nothing wrong with monopolies in a dynamic marketplace. As Justice Scalia once wrote, “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system.” Because that monopoly price is a signal to all potential competitors that there is profit to made, enticing new entrants and new products that can provide consumers greater satisfaction. This is what drives market economies to maximize consumer welfare.
Which brings up the question of government intervention. Do antitrust lawyers really have a better vision of what the marketplace should look like? Any antitrust enforcement action can only exist with continued government oversight of the market, with federal regulators trying to divvy up the market according to their idea of the ideal marketplace. This limits the ability of firms to innovate and add value for consumers, as federal regulators instead focus on providing market share for weaker rivals. This has been the traditional approach to antitrust law in the EU and elsewhere around the globe, and now many are urging the United States to abandon the consumer welfare test and adopt a similar approach. But with increased choices and falling prices, it is difficult to identify what harm America’s innovators are incurring on consumers. The better question may be how much will consumer benefits fall as markets become less competitive and less responsive to consumer demand as we hobble those companies that innovate and create new products?