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The document discusses the evolving perspective of economists on monopolies and antitrust policies, starting from a belief that only government-granted monopolies needed regulation to a more nuanced understanding of oligopolies and their market power. Recent shifts in opinion have led some economists to question the effectiveness and necessity of antitrust laws, citing instances where such policies have hindered competition rather than promoted it. Evidence suggests that monopolies and oligopolies may not have as much power to generate excessive profits as previously thought, with studies indicating a weak correlation between industry concentration and profitability.

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17 views

Document (4)2

The document discusses the evolving perspective of economists on monopolies and antitrust policies, starting from a belief that only government-granted monopolies needed regulation to a more nuanced understanding of oligopolies and their market power. Recent shifts in opinion have led some economists to question the effectiveness and necessity of antitrust laws, citing instances where such policies have hindered competition rather than promoted it. Evidence suggests that monopolies and oligopolies may not have as much power to generate excessive profits as previously thought, with studies indicating a weak correlation between industry concentration and profitability.

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biggykhair
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The desire of economists to have the state combat or control monopolies

has undergone a long cycle. As late as 1890, when the


Sherman ANTITRUST law was passed, most economists believed that the
only antimonopoly policy needed was to restrain government’s impulse to
grant exclusive privileges, such as that given to the British East India
Company to trade with India. They thought that other sources of market
dominance, such as superior EFFICIENCY, should be allowed to operate
freely, to the benefit of consumers, since consumers would ultimately be
protected from excessive prices by potential or actual rivals.

Traditionally, monopoly was identified with a single seller, and competition


with the existence of even a few rivals. But economists became much
more favorable toward antitrust policies as their view of monopoly and
competition changed. With the development of the concept of perfect
competition, which requires a vast number of rivals making the identical
commodity, many industries became classified as oligopolies (i.e., ones
with just a few sellers). And oligopolies, economists believed, surely often
had market power—the power to control prices, alone or in collusion.

More recently, and at the risk of being called fickle, many economists (I
am among them) have lost both our enthusiasm for antitrust policy and
much of our fear of oligopolies. The declining support for antitrust policy
has been due to the often objectionable uses to which that policy has
been put. The Robinson-Patman Act, ostensibly designed to prevent price
discrimination (i.e., companies charging different prices to different
buyers for the same good) has often been used to limit rivalry instead of
increase it. Antitrust laws have prevented many useful mergers, especially
vertical ones. (A vertical merger is one in which company A buys another
company that supplies A’s inputs or sells A’s output.) A favorite tool of
legal buccaneers is the private antitrust suit in which successful plaintiffs
are awarded triple damages.

How dangerous are monopolies and oligopolies? How much can they reap
in excessive profits? Several kinds of evidence suggest that monopolies
and small-number oligopolies have limited power to earn much more than
competitive rates of return on capital. A large number of studies have
compared the rate of return on investment with the degree to which
industries are concentrated (measured by share of the industry sales
made by, say, the four largest firms). The relationship between
profitability and concentration is almost invariably loose: less than 25
percent of the variation in profit rates across industries can be attributed
to concentration.

A more specific illustration of the effect the number of rivals has on price
can be found in Reuben Kessel’s study of the underwriting of state and
local government BONDS. Syndicates of investment bankers bid for the
right to sell an issue of bonds by, say, the state of California. The
successful bidder might bid 98.5 (or $985 for a $1,000 bond) and, in turn,
seek to sell the issue to investors at 100 ($1,000 for a $1,000 bond). In
this case the underwriter “spread” would be 1.5 (or $15 per $1,000 bond).

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