From: sip1@ellis.uchicago.edu (Timothy F. Sipples)
Newsgroups: comp.os.os2.advocacy
Subject: Re: FCC will proclaim Microsoft is run by Communists! :)
Date: 2 Jan 93 06:02:23 GMT
Reply-To: sip1@midway.uchicago.edu
Organization: Dept. of Econ., Univ. of Chicago

In article <1993Jan2.041302.24465@noose.ecn.purdue.edu> helz@ecn.purdue.edu (Randall A Helzerman) writes:
>|> A quick look at anti-trust case history reveals several examples.
>|> Without arguing the individual merits of each case, how about Standard
>|> Oil or U.S. Steel?
>We've already established that these weren't really monopolies but in a quick
>review in 1911 when Standard Oil was broken up it controlled only 66% of
>the market, and had been losing Market share for almost 20 years because of
>stiff competition from Texico and Gulf.

Sorry -- I had my economist hat on.  If you take the term "monopoly"
literally, it means a single supplier with 100% market share.
Unfortunately, this definition, while simple, doesn't really tell you
much about the economics of the situation.  Instead, people start
talking about "monopoly power," "oligopoly," "anticompetitive
behavior," or "practical monopolies."

Why isn't the former definition very useful?  Well, it really depends
on how you define the market.  Suppose I held a monopoly in the
production of sugar beets -- 100% market share.  The U.S. Government
treats sugar beet production as a separate market.  But is it a
meaningful distinction?  I humbly suggest that cane sugar is a perfect
substitute for sugar beet sugar, and if you were to substitute one for
the other you'd be hard pressed to taste any difference.

Also, you do not need an absolute monopoly to exercise monopoly-like
power.  (However, excess rents diminish rapidly as market share
declines from 100%.  Other factors include the nature of the product
and what the other participants in the market are like, especially in
terms of market share.  Also, is there collusion, linking two or more
market participants?)

Now the theory is rather straightforward, if somewhat imprecise.  (It
turns out that it is difficult to define a market, for example.)  It
is also generally accepted that, at the macroeconomic level, the sum
total of excess rents generated by monopoly-like influence amounts to
"peanuts."  (This line of work started with Harberger, notably.)  In
individual cases, exercise of monopoly-like power does seem to occur.
However, the trouble is that these practices are extremely difficult
to pin down, mainly because any successful monopoly or quasi-monopoly
tends not to advertise the fact.

Then, once you've identified this behavior which hurts consumers (or,
more precisely, behavior which results in a net loss in social welfare
which would not occur in a competitive market), it isn't clear that
its existence can be effectively remedied by government.  The
resources expended by government in eliminating the behavior and/or
the cost of imperfect enforcement may outweigh any benefit.  (Side
note: Government may decide that reputation is worth maintaining and
will expend more resources than the one incident is "worth."  This
expenditure will occur for the same reason that your credit card
company will go to great pains to collect just one dollar that you
refuse to pay.  Why?  If the credit card company were lax, and this
information spread, it might induce future default which would not
otherwise occur.  Similarly, if Government did not vigorously enforce
antitrust laws, it might encourage other companies to behave
monopolistically.)

However, I find the discussion about whether monopoly-like power
exists to be surprising.  I didn't think anyone questioned the
existence of such phenomena any more.  I also find it surprising that
the Microsoft DOS contracting and pricing schemes do not at least
raise a few eyebrows.  The pricing and contract requirements, as I
understand them, are remarkably similar to examples in the antitrust
case histories, and it should not be surprising that the FTC has taken
notice.

The arguments about Microsoft not holding a gun to anyone's head are
irrelevant.  That isn't the point of antitrust law.

The arguments about free entry are interesting (namely that if a
monopoly were to develop then a competitor would simply come in and
charge a lower price), and that does happen quite frequently.
However, entry into a market may be restricted for various reasons.
There may be a high fixed cost to entry, for example.

End of economics lesson.  :-)

-- 
Timothy F. Sipples      | Read the OS/2 FAQ List 2.0h, available from
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