 It's time for our discussion of competition and monopoly Now when I was Studying economics back in school many years ago when we discussed issues related to monopoly and how competitive Markets are a lot of that discussion was sort of backward-looking we talked a lot about John D. Rockefeller and Andrew Carnegie and Cornelius Vanderbilt and the so-called robber barons of the 19th century early 20th century, but it was thought that markets had become much more competitive since then oh No monopoly is back with a vengeance so Senator Warren for example has made one of her key so one of her you know primary Primary part of her platform in her election campaign is that big tech companies Amazon Google Facebook and so forth have become too large and need to be broken up through aggressive sort of antitrust policy even you know the Trump even Trump's Department of Justice has already started a new set of investigations of Market concentration and abusive monopoly power particularly by tech companies You know if you're not sure how all this works You can always find a convenient explainer on vox.com so you can Matthew Iglesias will be happy to vox explain for you everything that's going on But it's a little bit weird if you think about think about these issues from sort of a common-sense perspective Right. I mean, what do we mean by competition in everyday language? I don't know if any of you were able to to watch it With travel and so forth but on Sunday morning Roger Federer and Novak Djokovic played an epic Wimbledon men's final match It was five hours and something the longest men's final in Wimbledon history and the first one ever to use the A new rule that they instituted this year of having a tiebreaker in the fifth set if it gets to 1212 So they got to 12 games each in the fifth set before playing this a tiebreaker and Federer who is what 37? hung in there till the very end and lost By a hair to Novak Djokovic and we would say commentators did say this is one of the most competitive Men's finals ever. This is a great example of sporting competition. What a fantastic competition between Federer and Djokovic and in the semi-finals Federer beat his longtime rival Rafael Nadal in another epic match But how many competitors are in these tennis matches? two What do your professors tell you about a market in which there are two competitors? That's a duopoly, right? It's not competitive at all We normally think competition means, you know an effort to beat somebody to do better than your rival You know in school you're competing against other kids or you enter the spelling bee. It's a competition You're in the band competition or a sporting competition We sometimes use the adjective form to describe a competition that is particularly intense, right? That was a really competitive match It was really close You know to get into college the college of your choice. You've got to pass a really competitive entrance exam or whatever obviously, you know, this is Not the way these terms are used in mainstream economics textbooks Now legally right the in common law systems There was an understanding of monopoly in the natural law tradition to use Judge Napolitano's terminology from last night that you know a monopoly was an exclusive grant of privilege That was conveyed by the ruler by the king By the sovereign, right? So, you know the the Dutch East India Company had a monopoly on trade between Amsterdam and the East Indies What that meant is it was illegal for anyone else other than the Dutch East India Company to sail ships around to Indonesia Or whatever it is and bring back cinnamon and nutmeg You know the Royal Navy would fire upon you and sink you you'd be you'd be thrown in jail You're goods confiscated if you attempted to do that and sometimes even today if you buy You know you buy some I know you're If you go to go to London on a school trip and you buy some little cookies or biscuits The gift shop and it says on the back, you know her royal But by order of her royal highness officially licensed, you know shortbread to the Queen or something like that, right? So that's what monopoly traditionally meant It means you don't have to compete with other firms or producers or as many other firms or producers Because the state has made it illegal for someone else to compete with you Oh, no, not in mainstream economics, right in neoclassical economics We have a whole different kind of language to describe competition models of so-called perfect and imperfect competition the definition of competition in these Models has to do with Essentially the ability of firms to charge prices that are higher than their marginal costs for reasons that we'll see in just a moment The Austrian school not surprisingly takes a different approach or has taken some different approaches To the understanding and definitions of competition and monopoly then the neoclassical Economist and I'll explain in just a moment what those are as well Okay, so in your in your undergraduate economics textbooks, you probably have chapters on competitive markets and Non-competitive markets or imperfectly competitive markets and the idea here is it's kind of an empirical exercise Right, so we look at a particular market in a particular place say, you know the market for toothpaste in Auburn, Alabama And we say, okay What kind of products are sold is there kind of a generic toothpaste and there are lots of different firms selling Essentially what our sub perfect substitutes or is it a market with differentiated products? Where a tube of crest is completely different from a tube of Colgate or whatever in which in which case each firm has a monopoly on its own brand Right. Are there lots and lots of buyers and sellers or are there just a few buyers or just a few sellers? How easy is it for a new company to get into the market? Not only looking at the issue of legal privilege like we mentioned before but even if it's just economically difficult to get in Right. I mean, there's no law that prevents me from setting up an online retail Business and trying to compete with Amazon But I'm not gonna do very well at least not at first and probably not at all if I'm just selling general-purpose goods so mainstream economists would say well There's Amazon's existing size and brand penetration constitutes an entry barrier and So new new firms can't come in and therefore that market's not competitive You know, what do people know is there perfect information asymmetric asymmetric information and so forth So, you know, that's why your textbooks say well the wheat market is pretty competitive or almost perfectly competitive Because wheat is just wheat. You don't care which farm it came from There are lots and lots of sellers of wheat There are no particular entry barriers to getting into wheat. Of course none of that is actually true, right? There are lots of different kinds of wheat. There are different grades of wheat And of course nowadays there's organic wheat and GMO free wheat and wheat made with sustainable Farms paying a living wage. There's all different kinds of wheat. So it's not even true But your textbooks use like agricultural commodity markets as examples of things that are sort of close to perfect competition Or you could have a market like the market for large-body commercial aviation, which is where they're basically just two firms Airbus and Boeing There are some smaller firms of the firms that make the little jets like Embraer and so forth that are starting to build bigger ones But for you know, wide-body planes really there's just two firms Or in a market like the market for internet search where according to your textbooks, there's only one firm Google right Google has basically a hundred percent of the market for search I mean, it's not really a hundred percent But when was the last time you binged something to find out where it was or how to do it? Not not very often. So markets real-world markets can be characterized according to the conventional wisdom as being either perfectly competitive oligopolistic or monopolistic and according to the conventional analysis, there's some important welfare implications that flow from that and Implications for what the government ought to do about it How many of you have seen a picture like this before raise your hands? Yeah, most of you, right? So the so-called perfectly competitive firm of economics textbooks you know There's the it's just this is one firm, you know one little wheat farmer selling wheat to the wheat market And there's millions of wheat farmers. So no individual farmer is in a position to to drive up the price by Withholding his wheat or drive down the price by bringing a few extra bushels to market So these firms are modeled as price takers quote unquote, right? Each firm pays faces a perfectly elastic demand curve and if firms choose to Maximize their profit by producing where marginal revenue is equal to marginal cost you get The prices and quantities that are given here in this graph and in equilibrium and in the long run, right? If if if the market price is high enough that firms are earning economic profits other firms will come in and drive those profits down by expanding industry output If firms are making economic losses They'll begin to exit and that exit will reduce the supply and help to drive the market price up Until you get this long run equilibrium where everybody's exactly breaking even right so Prices not only equal to marginal cost in the short run short run equilibrium of this model But in a long run equilibrium prices are reflected the average cost of production So this is the most efficient way to distribute resources in society Right. This is the thing that you got for several weeks probably in your intro econ class But you know sinister sounding music now some markets are not like that because some markets can Some firms can have so-called market power Right. What's market power? Well, so I suggested before it's supposed to sort of capture the ability of a seller To charge a price that's higher than marginal cost Right. Why well because this seller by definition is the only seller in the market Right so for example this search engine is the only search engine in the market so it can charge a very high price for search Oh, wait a minute. Search is free. I gotta go rethink that. Okay. There's a hypothetical monopolist, right? That is the only provider of this product in the market So, you know the downward sloping demand curve for the industry is also the downward sloping demand curve for this firms own Output because it's the only firm in the industry according to this story, right? So rather than rather than the individual firm facing a perfectly elastic Horizontal demand curve it faces a downward sloping demand curve And so when it charges a price where marginal revenue is equal to marginal cost. It's Right, that's this price heat. Sorry here the monopoly price is up here where the marginal cost curve the blue line Intersects the downward sloping green line the marginal revenue curve, right? That gives you the monopolist quantity and then you go up to the demand curve to find the monopoly price So the argument is if this industry were perfectly competitive like the one on the previous graph The industry quantity would be Qc and the industry price would be PC But because only one firm controls the whole industry that firm can Restrict output deliver less to the market jack the price way up all the way up to PM Right, so you get the firm earned some monopoly profit, but the benefits to consumers are reduced Less so-called consumer surplus and you got this this whole little guy here so-called deadweight loss triangle Which is supposed to represent some Inefficiency in the market so you get prices that are too high Outputs that are too low Deadweight loss. This is terrible We cannot allow this to go on right so what should we do? Well, sometimes the textbooks are a little bit vague on this But it's implied if not outright stated that the the government either needs to force the firm to charge a lower price Just compel it by law to charge a price It's closer to the so-called competitive price increases output or maybe break it up Right use antitrust to split this firm into how many well two three five is not going to cut it Just have like an infinite number. It's a little bit hard to do an antitrust But the point is we the government needs to do something to make this market structure look more like the one on the previous slide That's what you get in a standard micro course Well, it turns out I've sort of hinted at this already right even within the framework of neoclassical economics There are a number of difficulties with the standard kind of so-called market power approach So one kind of criticism that was offered Famously by Joseph Schumpeter, but also by others is that look even if it's true That in the short run you get some kind of allocative Inefficiency some reduction in consumer well-being from having monopoly markets like the ones on the previous picture That's kind of the price that we as a society have to pay for innovation Because remember the perfectly competitive firm the wheat farmer in this perfectly competitive industry earns zero economic profit Right gets just enough financial Return to cover his opportunity cost, but not a penny more So that farmer doesn't have any money left over to do anything like research and development Right who's going to invent new GMO seeds or GMO free Technologies who's going to invent new tractors and you know fancy computerized GPS enabled plowing devices Who's going to come up use fancy genetics to make roundup ready seeds and so forth? The farmers can't do that because they don't have any money. They don't have any retained earnings. They don't have any profit You according to Schumpeter we need to allow some monopolies because monopoly profits can be used for Things that are socially beneficial in the long run like R&D Okay Other mainstream economists like the great UCLA economist Harold Demsets Argued that look the standard way of looking at it misses one important fact Right. Why is it that? Google has a very large share of the search market Why is it that Netflix has a very large but decreasing share of the market for streaming video? Why is it that why is it that uber and Lyft have between them have most of the market share for ride sharing in the US but not in other countries, right? Well, it's because they're good at it Because the thing they offer is better than the thing that rivals offer, right? We as consumers prefer to use a Google search There's no law that prevents us from using anybody else's search technology, but we don't Most of us don't because we don't like it. We don't like the results. It's not as useful I mean and of course noticed that in a free market even Even if one firm has a large market share nothing prevents Consumers from patronizing other firms with smaller market shares now. I suspect in a crowd like this. They're at least a few highly paranoid privacy enthusiasts who you know Don't use Google products or you use duck duck go for your searches because they don't track you and then that's fine You can certainly do that right but the masses like the convenience of Google So Demsett's argued if you essentially punish firms for having a large market share by breaking them up or regulating them Then no firms will have an incentive to be large and how do you get large by being good? By being efficient having low costs producing stuff that people want and we don't we don't want to penalize success There was back in the 1980s and 90s There was a popular theory that was offered by William Balmall among others who was person I mentioned yesterday with that quote about the ghost the specter Haunting economic theory the missing entrepreneur Balmall and some of his colleagues pointed out that really what matters are one of the things that matters for determining How competitive the market is is not the number of firms who are currently in the market But the number of firms who could easily get into the market if necessary Right so, you know if here in Auburn, Alabama, you know, there's only one firm selling, you know Lemonades or whatever. I don't know if you guys know there's a famous place down in downtown Auburn called tumors lemonade tumors drugstore They sell a famous lemonade if tumors is the only place selling lemonade in Auburn and they jack up the price to you know $20 lemonade Well, then it would be in the incentive That would be an incentive for you know Individuals companies in Atlanta in Montgomery in San Francisco Who knows from all over the world to converge on Auburn, Alabama and start offering lemonade That's just as good as the tumors lemonade at a much lower price, right? So if tumors knows and look this lemonade we're talking about It wouldn't take more than 10 minutes for somebody to come up and set up a competing lemonade operation Okay, tumors knows that if it raised prices beyond a certain level other people would just rush in and therefore tumors Doesn't raise though it doesn't ever do that But it doesn't ever take the action that would trigger these new firms coming in so the presence of potential Competitors can discipline You know price pricing behavior by incumbent firms, even if those potential competitors are not actually in the market yet They could be in the market Some economists at the University of Chicago Have been in the in the in the econ Twitterverse In the last week or so because they've they've got a new book coming out called Chicago price theory This is a like a graduate level text that is supposed to incorporate the contents of the legendary intro microeconomics course at the University of Chicago and they some Other economists quoted out of context a line from this price theory text Where where the author says something like well perfect competition is a reasonable approximation In most markets, you know for doing certain kinds of analysis and all of these sort of non Chicago mainstream economists with large numbers of followers Started dunking on these people and saying oh, this is the most idiotic thing ever Who thinks that real-world markets are perfectly competitive these Chicago guys are out of their minds really all the authors meant was that Perfect competition is a useful analytical tool. They weren't making an empirical claim about markets But they were saying you know the standard model of competition is okay, even though in reality It doesn't describe real real markets. Okay These are perfectly fine criticisms, but they're not fundamental They don't get at the heart of the problem the way spoiler alert the Austrians have done so okay So what are some Austrian critiques of the standard kind of market power approach? Okay, so first let's talk about this idea of the perfectly elastic demand curve The horizontal demand curve versus downward-sloping demand curve Rothbard pointed out in man economy and state, you know, there is no such thing as a perfectly elastic demand curve Right every seller contributes some discrete quantity of goods and services to the market Right, even if doing so doesn't have a huge effect on price doesn't doesn't have a zero effect either Remember in Austrian causal realist analysis We don't think of mathematical Approximations where we have perfectly smooth and divisible curves twice differentiable curves and so forth We don't think in terms of infinitely large or infinitely small Units or periods of time or whatever. We're studying the world of real human action Human action takes place in discrete increments in real time, right? So in the world of purpose purposeful human action There are no infinite infinitesimally small units and there's no way to have a mathematically Perfectly elastic demand curve, right anytime a new seller enters the market or anytime a seller brings a new bushel of wheat to market that has some Potential impact on market price. So this whole notion. I mean all sellers have a downward subbing demand curve So we can't ex ante say this market is competitive This market is not competitive just by looking at the shape of the demand curve facing the firm. Okay second point It sounds like a normative point, but it's really just a positive one requiring firms with antitrust or regulation to increase output beyond You know the profit maximizing point that's so-called monopoly quantity in the traditional monopoly graph Is actually a violation of people's property rights and Therefore a reduction in social welfare in the meaningful sense that Austrian use Austrian's use terms like social welfare What do I mean? Well, it's easy to see with an example like the following I looked it up last week in 20 I guess 2018 the last year for which complete data were available the highest paid Movie star in Hollywood Was my doppelganger? George Clooney I Forgive me. Yeah, I forget the number, but it was a big number Look, but we all know that you know, I guess if you read the tabloids or whatever I mean every once in a while George Clooney is spotted, you know at the beach or Going into a store or hanging out at home or at a party. He's not working making a movie every single moment of every day Right, obviously his services are in high demand So you could argue well under perfect competition, right? The market would demand a higher a larger quantity of George Clooney films or Or you know scenes in movies with George Clooney in them. However, we measure that then the one that we actually have Right, how does George Clooney manage to get you know, 25 30 million a picture because he only does so many pictures a year He makes himself artificially scarce But if he if he were in the studio every single day if he were in every movie if he were in every single TV show Like you know, Samuel L. Jackson, right? His market price would go down because he's sort of super abundant So, you know any celebrity entertainer artist skilled professional Deliberately withhold some of their supply from the market so that they command a hire they can command a higher price That's exactly what the non competitive You know producer in the standard model is supposed to be doing Restricting output below the perfectly competitive level to jack up the price, but nobody thinks We could increase social efficiency somehow by compelling George Clooney to work every single moment of every single day Well, should we compel Jeff Bezos? To produce more to offer more Amazon products and services to the market than he is currently offering. I mean by the same argument, right? Jeff Bezos and his shareholders the owners of the assets of Amazon.com are using those assets in a way that Their minds is you know, they're attempting to maximize their profits It wouldn't make sense to say well, they should be they should be compelled to instead of producing QM They should be compelled to expand output to QC because that will reduce deadweight loss. I Mean that'd be just like saying George Clooney should be forced to make more movies to reduce deadweight loss Doesn't make any sense, right? It's a violation of owners Ability to make decisions about how the resources they owned should be used in the highest valued ways. Okay? another point is that You know the shape of the demand curve the elasticity of the demand curve which mainstream economists make a big deal about That is not given by nature Right, you guys you students know the elasticity of demand Reflects the sensitivity of market prices to changes in quantity Right represents changes in quantity how sensitive our Quantities demanded to changes in market prices that those are preferences of people in the market Right, so if consumers want it You know it if consumers want to make the demand curve more inelastic they can do so by adjusting their behavior By changing their willingness to buy or not to buy depending on the market price So elasticity of demand is itself an economic concept not a sort of a technical Concept people said well wait a minute isn't demand elasticity caused by the availability of substitutes Right, you know if you're a smoker you got to have cigarettes. There's no you know, there's a patch and chewing tobacco and and The one e-cigarettes and all that well those are not a good enough substitute Therefore the elasticity of demand is very small for cigarettes that very inelastic demand and therefore cigarette makers can charge high prices Well, what things are or are not a good substitute for smoking a cigarette? That is a hundred percent in the minds of cigarette consumers Okay, they can choose whether something is a substitute or not. That's not a technological concept. That's an economic valuation concept Okay so as I think Joe Salerno mentioned in his opening talk on Sunday evening Mises and Rothbard had slight a slight difference of interpretation on monopoly theory I think I think Joe mentioned this as well that in in Mises Understanding it was sort of conceivable that a firm could charge monopoly prices if it had exclusive control of a particular Resource or factor Right, so you could imagine a case where there's a single seller of a good or service or a perfect cartel among sellers of a good or Service and if according to Mises if the demand curve is inelastic above the competitive price the price that would have obtained under other circumstances then Firms can actually charge prices that are different from competitive prices so-called monopoly prices as Joe pointed out Mises thought that You know this was in a sense of violation of consumer sovereignty Consumers would prefer a higher quantity on the market So, you know when Mises talks as he does in many places about you know The the entrepreneur is not the captain of the ship the consumer is the captain of the ship and Producers are forced to forced Consumer producers are compelled to try to satisfy the wants of the consumers and so forth Mises says well, this is one possible exception where consumer sovereignty does not obtain But Mises thought this was in practical terms very unlikely to occur in a free unregulated market Right because again, what does it mean to be a single seller? I mean what is or is not a substitute is subjective? Cartels are very rare on the market. They typically break apart So Mises didn't think this was very common, but he did think it was sort of a theoretical theoretical possibility Rothbard basically accepted Mises approach to monopoly but with some refinements Right Rothbard as I suggested before pointed out that all sellers face a downward-sloping demand curve According to Rothbard, there's really no way Praxeologically to distinguish a monopoly price from a competitive price. There are just market prices Okay, all firms are trying to maximize their net income given their estimates of future consumer demand All firms price in the elastic range of their demand curve Right, they would never price in the inelastic range because if so they could raise price even more and increase their total revenue Right, and if they're selling less quantity less quantity, they'd also be lowering their costs And as we pointed out before elasticity is sort of the result itself the result of consumer preference So Rothbard thought that not only is monopoly as Mises defined it Extremely rare on the free market. It's really not even conceptually distinguishable from any other kind of market phenomenon so Rothbard rejected the idea of monopoly prices as things distinct from competitive prices There are only prices on the market according to Rothbard and of course in Rothbard's view as many of you knew No, he he he accepted the common law notion of monopoly as an exclusive government grant Right. So, you know in some cases that could be like the post office It's illegal for anybody else to send a letter or use a postal mailbox or the East India Company like I mentioned before but Monopoly government granted monopoly is also reflected in patents Right a patent grants the patent holder a fixed term Exclusive license to use that technology or produce that product There can be all kinds of grants and charters and licenses Even tariffs and quotas other kinds of trade protectionism, etc Give some de facto monopoly protection to domestic firms because they don't have to compete against foreign firms and so forth So what do the Austrians say about these sort of you know proposed regulatory and antitrust solutions to monopoly issues As I mentioned before in the in the standard approach in the mainstream neoclassical approach There's sort of two possible remedies that the government should use to deal with the problem of monopoly prices One is to use regulation right just pass a law that says the price cannot be higher than X Right, so you could try to force the monopolist To lower the price that it's charging to something closer to the actual marginal cost Right just you know pass a law You know two obvious problems with this approach, I mean first of all It's easy to draw a silly diagram like your professors do in your textbooks do it's oh, yeah where these lines cross right here That's what the price should be Okay, but remember demand curves marginal revenue curves Marginal cost curves are not they don't exist in reality Those are abstractions constructed by the analyst I mean firms don't know what their actual marginal revenue curve is they can they can estimate they can estimate their marginal cost curves Right, how in the world is some government regulator going to know How the price that we actually observe on the market compares to some hypothetical pure monopoly price Some hypothetical perfectly competitive price some intermediate oligopoly price No way that even a well-intentioned government regulator could possibly know what the right prices are Okay Moreover Why would these regulators have an incentive to to get the prices right? Okay, as Harold Demsett's who I mentioned before and Ronald Kosoff and emphasized, you know the textbooks usually have Page after page chapter after chapter on so-called market failure Like monopoly for example, and they don't you know, they probably don't devote a single page to government failure Right. I mean the regulator is going to get things wrong the regulator could be corrupt the regulator has a short time horizon The regulator can easily be bought off Regulators can be captured by the industries. They're supposed to regulate and so on and so on and so forth Right so in other words even from a neoclassical economics perspective Even if you thought monopoly prices were somehow harmful you might think that setting up a super powerful government entity With the right to tell firms how to price or the ability to take a firm and break it up into pieces Would be even worse than just allowing monopoly prices to to prevail Okay, you can't compare the real-world market against some stylized Hypothetical benchmark like perfect competition unless you're also going to compare the real-world regulator To this hypothetical perfect benevolent regulator in the textbooks. Okay, but hardly anyone in the mainstream ever does that So again second approach instead of using price regulation is just to use some kind of antitrust Right so in the US you have the Sherman Act and subsequent pieces of legislation that outlaw certain things That are not very precisely defined Okay, the Sherman Act outlaws restraints on trade now, it's been up to the courts Including on and up to the Supreme Court to define what constitutes a restraint on trade because it's not completely obvious There are other practices like so-called price discrimination charging different prices to different buyers So called tying, you know telling the buyer if you buy my product a you've got to buy my product b that goes with it Which have also been restricted or completely banned by other acts like the other legislation like the Clayton Act Laws that specifically deal with so-called predatory pricing and so forth in the European Union Competition policy is a little bit more aggressive than it is in the US But based on founded on the same general principles and certainly in most parts of the world You have a so-called competition authority The job of which is to police the market and make sure markets are competitive in the neoclassical sense Using in particular antitrust policy and similar kinds of remedies As I mentioned you guys before you know when I was in school Back in the 80s and 90s, you know what I learned was oh, yeah people really concerned about monopoly pricing and you know Antitrust is really aggressive in the early 20th century to bust up these evil monopolies and so forth But you know now markets are pretty competitive and antitrust doesn't have that much to do anymore That in the last I'd say even even within just the last decade Maybe two decades. There's been a radical change in how mainstream economists and legal scholars think about antitrust So back in the I don't know from say the 1940s to the 1970s or 80s The dominant theoretical paradigm in the analysis of antitrust was something called the structure conduct performance paradigm or SCP paradigm Which held that? You know you can look at the structure of any market Count the number of firms or look at the market shares of the biggest firms and therefore deduce Whether that market is in fact competitive if the market has the wrong market structure. It's too heavily concentrated Then the conduct of those firms will be You know they'll charge higher prices than they're supposed to and then the performance in that market for consumers for the economy Is going to be weak and so antitrust needs to look basically at market structure You know concentration indexes some of you have heard of the famous her von Dahl index of concentration That basically the antitrust authorities job is to measure her from the her von Dahl index in different industries And then recommend antitrust breakups with the her von Dahl index is too high Okay, that view really kind of intellectually was severely challenged in the 70s and 80s and kind of fell out of favor there was Oliver Williamson's transaction cost approach to Market structure, which held that many practices both in terms of sort of horizontal market share and vertical integration that Deviate from the perfectly competitive model are not in fact harmful and and welfare reducing But are actually welfare enhancing because they promote more efficient coordination Among firms and between firms They allow us to produce things more efficiently and actually make prices lower than the otherwise would be an increase consumer well-being and of course there was the Chicago school 60 70s and 80s Associated most famously with people like Robert Bork who was nominated for the Supreme Court in some time in the mid 80s And in a famous probably one of one of the first sort of really vicious Senate confirmation hearings was was turned down by the Senate by the whatever committee it is For a position on the Supreme Court Judiciary Committee and that that gave us the the verb to Bork To Bork someone it's kind of like and nowadays you get in your generation you have words like you know You have new verbs like docks Like to docks somebody or gaslight somebody back in the 80s We talked about borking someone to Bork someone means basically to attack them viciously in some kind of political Process in a way that's not really fair Right, so Bork was criticized for a lot of things that were not even remotely close to his actual views But the idea was that the Chicago school had challenged The ideas of the old structure conduct performance paradigm like some of the things I said before that potential Competition may be as effective as actual competition that large market share may reflect superior efficiency rather than some kind of devious manipulation of the market and that therefore and I trust court should have a presumption in favor of you know the defendants in other words, it should be pretty obvious That some kind of anti-competitive conduct has taken place for the Justice Department or the plaintiff to win We should have a presumption in favor of competition and only in very rare cases should we accept that markets are actually Imperfectly competitive or that they're sufficiently imperfectly competitive that antitrust should be used In the 90s and 2000s The theory of antitrust and regulation the whole theory of market structure was sort of revolutionized by game theory So how many of you had a course where they talked about? Duopoly or oligopoly using the prisoner's dilemma or some kind of a game theoretic model a lot of you So the game theoretic approach was sometimes called post Chicago Not only because it was developed later than the Chicago school But also because it challenged many of the conclusions of the Chicago school and so-called post Chicago antitrust game Theoretic antitrust is is much more friendly towards aggressive antitrust nowadays something has emerged that is sometimes called hipster antitrust or Neo Brandeisian antitrust after the famous Supreme Court just justice a Lewis Brandeis who was very favorable to strong antitrust There's a well an activist I would say like a nonprofit journalist activist Person named Lena Kahn Who wrote a law review piece? I think it was two years ago. It's called It's something like an antitrust in a post Amazon world Making this is this is where Elizabeth Warren gets her argument Right, so the so-called hipster neo Brandeisians say all of that stuff about antitrust in the old era doesn't really apply anymore Because you know as I mentioned with Google remember the conventional argument has always been Well monopoly is bad because they restrict output and charge higher prices Okay, well, what does Amazon do charge lower prices for everything then you could then then you could get anywhere else Google gives away almost all of its products for free You know that Facebook subscription that gets on your nerves because they keep changing the privacy policy or whatever How much do you pay for your Facebook account? Right, so you can't argue that firms with large market shares in the tech sector are Exploiting their market share by raising prices because they're not they give all their stuff away for free Or they charge prices lower than the incumbents So Lena Kahn and other antitrust scholars have said well We need a whole new way to look at it that these terms are anti competitive because well You know here's kind of argument you hear Amazon and as you guys probably know Amazon's Biggest revenue source is not the commissions that it charges on stuff that you buy and sell on Amazon comm It's what it the money it makes from Amazon web services. It's back office sort of web hosting operation So the argument is well these large tech platforms They charge higher prices to other companies in the wholesale market than they otherwise would And they engage in this pretty aggressive practice practice of buying up competitors If some little firm comes along and it has something that facilitates e-commerce or web services Amazon will just buy it up and they've got huge cash hordes You know Apple has what a billion dollars in cash sitting in the bank They can just buy up any firms that threaten their market position and yeah, even though they don't raise prices It's still harmful in the long run because they're holding back innovation or they're hurting Workers or they're hurting some kind of intermediate goods firms and so forth therefore. We still need to break them up Okay, so that is the zeitgeist today And that's where you get most of the competition programs and well not only of the Democratic candidates, but the the Republican economists and Congress people who are attacking Twitter and Facebook and so forth based on content issues Are also making these same kind of claims everybody in washington wants facebook google amazon Maybe apple etc Split broken up. Okay There are lots and lots of problems in practice with doing competition policy. I'll just hint at a few First of all, you know, what is the relevant market Is the market For you know for Colgate toothpaste is a relevant market Colgate In which Colgate has a hundred percent monopoly or is the market toothpaste In which its market share is smaller is the market consumer health and beauty products In which its market share is even smaller Right is the market for amazon other online big retailers. Does it include walmart or not? Is it international or is it domestic? So there's no way objectively to say what is the relevant market that we use to compute the market share um One of the most famous Antitrust cases in the 20th century was called brown shoe You can look it up where brown shoe was a national retailer of shoes that had like a chain. They had a store in every town The justice department they wanted to buy another shoe company another national chain Kenny and the justice department intervened to try to block the merger and brown shoe argued that the relevant market is Uh Is the local town So the justice department said well if we allow these two national chains to merge then there will be only one big national chain That's not competitive And brown shoe said no the relevant market is is alburn, alabama Or whatever town If you know and if brown shoe is competing with small local shoe stores in alburn, alabama, then it faces competition The competition is the local market. The relevant market is the local market. Not the national market Um, the supreme court argued in favor of the government and not in favor of brown shoe How do we know when contact conduct is really anti competitive if you can't look at prices You got to come up with these highly speculative speculative counterfactuals Like the one i just mentioned about amazon well if it weren't for amazon We would have had more innovation in web services and in retail and we would have gotten even better stuff than we now have Okay, I guess I can imagine a world in which that is true I can imagine worlds in which a lot of other things are true Is that a basis for throwing somebody in jail, right or forcing them to divest their holdings or break up their company? Doesn't seem like it. Um, you know, you want to take a dynamic rather than a static view Uh, a lot of firms, right? Remember firms can file a civil antitrust suit So firm a can file an antitrust suit against firm b For engaging in monopolistic conduct. Guess what? It's a great opportunity for firm a to engage You know to use the political process to hurt its rival Right to waste its rival's time spend a lot of its rival's money defending itself in court So there's a lot of opportunities for rent seeking um Can the government really keep up with changes in the market? There's a famous, uh, book from the 1980s about the US government's attempt to break up IBM in the 60s Books called folded spindled and mutilated Which some of you old timers will recognize that term but Basically what happened is the IBM was alleged to have monopolized the market for computer mainframes And the justice department began what turned out to be something like a 10 year investigation, you know judicial proceedings are slow And at some point 10 years later the prosecutors finally realized Oh, the the thing that we claimed IBM had a monopoly in the mainframe Doesn't exist anymore Because now people use PCs and other devices. So let's just drop the whole thing Right the market disciplines so-called anti-competitive conduct much more quickly than bureaucracy And of course the problem is you can't define anti-competitive conduct ex ante So if you're a firm, you don't really know if you've engaged in anti-competitive behavior until you get a subpoena in the mail And so it's basically punishing behavior exposed that you couldn't have known about ex ante and that's obviously inefficient. Okay, um I did have a little piece. I was going to say about minimum wages But I'll defer that to mark thorton who's giving a minimum wage lecture later But I'll just mention that there's a parallel argument on monopoly pricing that applies to input markets. That's called monopsony And it turns out nowadays that most of the arguments in favor of minimum wages are not the traditional ones. They're about this kind of stuff They say that large firms have monopsony power They have bargain they have buying power in the labor market And they use that monopsony power to push wages down And they're they're their government needs to intervene to make wages higher and get them closer to their competitive levels But you can ask mark thorton about that during and after his lecture. So thanks very much