 I'm so glad to be here this afternoon with the serious students while the other people are upstairs listening to Bob Murphy. We're going to talk about monopoly competition and antitrust, which is obviously a very important issue in economics. And it's an issue on which Austrians have a lot to say and an issue on which Austrian economics Austrian economists typically differ from most of their economist colleagues, even those who also support free markets in general. So one of the things that you'll see in our discussion, I hope, is that the Austrian understanding of competition and monopoly, the policy implications that flow from that really come out of the more general Austrian understanding of markets, Austrian understanding of entrepreneurship, calculation and so forth issues that we've been talking about, you know, in the last day and a half. So Austrians have a very sort of integrated notion of competition and monopoly that fits together nicely with the overall Austrian perspective. And I think it's useful to start by thinking about, well, what would we ordinarily mean by competition or monopoly compared to what many economists mean, right? So think about, you know, the ordinary language notion of these terms, you know, when we use competition in everyday discourse, what do we typically mean by a competition, right? Well, you might think of a competition in school, sort of a rivalry, you know, all students submit a science fair project and whichever project is judged to be the best, that student wins the prize. Or, you know, we're running a race and whoever crosses the finish line first is the winner of that competition, right? It's some kind of a rivalrous activity where people are trying to compete with each other to do better, right? Or, I mean, the word competitive as a noun, what does it mean to say something is a competitive activity? You might say, well, when I was in school, I did competitive swimming or, you know, a competitive soccer or whatever, right? So you were in some kind of an organized league where you, again, were engaged in a process of rivalry with other folks. If we say, well, you know, your friends ask you, well, Mises University, you know, what's that? Well, it's a summer program. Is it competitive? Is it competitive? Right? Well, I mean, one sense is, yeah, there's sort of free entry. I mean, anybody can apply to go to Mises U and only the best applications are accepted, right? So it's a competitive program. Not everybody who wanted to come here was allowed to come, though anybody can send in an application, right? You don't have to be, you know, the student of a Mises Institute professor or something like that. We have a lot of, you know, Walter Block students and other eccentric folks who come to these conferences, but you don't have to be a Walter Block student. Anybody can apply. The contest is open to all. We also use the term sometimes to refer to the intensity of a rivalry, right? You know, like you might say, well, you know, Klein and Salerno are really competitive in their Mises U lectures. Each one's trying to do better than the other. I mean, really, Salerno's kind of obsessed with me. I don't know why, but, you know, he wants to know how many people came to my classes versus his and what my slides were like and so forth. I don't care about him at all, but you might say, you know, Roger Federer and Rafael Nadal have a competitive relationship because there's this really intense competition between them. Okay. Oddly enough, and as those of you who have taken economics courses from anyone other than an Austrian school professor will realize this is not the way these terms are used in mainstream economics. They're used in a very odd way in mainstream economics, right? What does it mean for something to be not competitive? You might say, well, you know, the, you know, here in Auburn, Alabama, the company that provides the organization that provides the water service to people's homes and businesses. That's not a competitive activity because only one company is allowed to do that. The Auburn Water Works Inc. or whatever it's called. There's only one company by law that is allowed to lay a water pipe or a sewage pipe to or from your home or business. So that organization has a monopoly on that activity, right? So normally when we think of what does it mean to have a monopoly? What means it's the absence of competition, right? There's only one contestant in the race. There's only one individual or group allowed to compete, okay? Now, economists use these words in bizarre ways, right? So let's talk a little bit about what competition and monopoly typically mean in mainstream economic analysis. So I refer here to the imaginary constructions of perfect competition, imperfect competition, and so on. You might remember that Mises and Rothbard used the term imaginary constructions, right? In describing kind of hypothetical models or hypothetical descriptions of scenarios that possibly could exist but do not exist in reality, but yet are used as sort of tools for thinking through certain relationships. We discussed yesterday the concept of the evenly rotating economy as a kind of long run equilibrium, which is something that according to Mises and Rothbard doesn't exist and really could never exist in reality, but it's a useful imaginary construction that we can use to sort of think through certain relationships, difference between profit and interest, for example, in the ERE. So what economists describe as perfectly competitive markets, for example, that is a kind of imaginary construction. But remember, not all imaginary constructions are equally useful. So we might say, are these imaginary constructions good ones? Are they ones we want to think about? Do they help our thinking or do they cause confusion? So what does it mean? How are these different kind of imaginary constructions defined? How are they distinguished from each other? Well, what mainstream scholars typically do is they say, well, different markets can be characterized according to certain conditions, right? Are the products that different firms offer exactly the same? Are they close substitutes? Are they very different? Are there lots of buyers and sellers or just a few buyers and sellers? Is it easy to enter and exit or is it difficult costly to enter or exit that industry? Does everybody know the same thing as everybody else? Perfect information or do some people know things that other people don't? Imperfect information. So the idea is by characterizing markets according to these kinds of criteria, we can say whether a market is competitive or not. So for example, perfect competition is the model that most of you have studied before in school. People say, well, the wheat market is perfectly competitive or almost perfectly competitive because you have, you know, it's just wheat, everybody's selling the same wheat and there are lots of buyers and lots of sellers and anybody can become a wheat farmer and anybody who's a wheat farmer can quit and go become an economics professor or whatever. In fact, I mean, none of those things are strictly speaking true, especially nowadays because there's like, you know, organic wheat and GMO wheat and GMO free wheat and there's lots and lots of different kinds of wheat. And actually it turns out it's not super easy to become a wheat farmer. If you aren't already one, there's a lot of capital requirements and so forth. But a market like the wheat market seems to be different from, for example, you know, the market for streaming video where you have people say, well, it's a duopoly with Netflix and Amazon Prime. I forget what their market share is now. But between the two of them controlling a large share of the market for streaming video, of course, there are other streaming video firms. There's Hulu and, you know, it's a bunch of smaller ones. And of course on YouTube, you can get streaming content also. But people might say, look, in streaming video, you have two giants and really nobody else matters. And in that way, it's not like the wheat market where you have lots of small firms. Here you just have two giants, right? You might think of, you know, Apple and Samsung as having sort of a duopoly in the handset market. Or people would say in the market for internet search, it's a monopoly, right? I mean, one firm so dominates that industry that its name has become the verb for doing the thing that you do with that product, right? I mean, so yeah, there's Bing and I don't know, probably a few other search engines out there. But Google so dominates the market for search that it is common to characterize Google as having a monopoly, according to sort of this mainstream way of thinking about markets. But is that the right way to think about competition? Imperfect competition or even pure monopoly? I'm going to argue following the logic of the Austrian tradition that these are not useful ways to think about markets. How many of you have seen this kind of diagram before? Probably most of you, right? So ask your professor, what does it mean to say a market is competitive? And your professor will say, oh, well, a market that looks like this, right? You have lots and lots of small sellers such that each seller, if this is an individual firm, right? Each seller faces a perfectly elastic demand curve. They could sell as little or as much as they want at the going market price without affecting that price because they're so small, right? And if they have an upward sloping marginal cost curve, the firm maximizes profit by setting price equal to marginal cost, marginal revenue equal to marginal cost. And in the long run, right? Because of costless entry and exit, this will drive the market price to the level where it's just at the minimum of average total cost, right? So in the long run, in this kind of hypothetical scenario, in this imaginary construct, you get not only prices equal to marginal cost, sort of allocative efficiency as they call it, but also you get price, you get output produced at the minimum of average cost. That's the cheapest possible way that we can get stuff produced. So we have like perfect efficiency, right? This is like the nirvana world. This is like the best you can possibly get. And by the way, what sort of economic profits do firms earn in this long run competitive equilibrium state? Zero. Zero, yeah. It's like that's the ideal state. Firms earning zero profits. It's a little bit odd, okay? As opposed to a firm that has quote unquote market power, right? So in the standard approach, if a market is not perfectly competitive, then one or more firms does have the ability to influence price by their decisions to produce more or to produce less, right? This sort of standard monopoly diagram. The firm has a downward sloping demand curve for its product, not a horizontal demand curve for its product, because this firm is big enough that it can sort of drive the market price up or down, okay? And then it's got a marginal revenue curve that's also downward sloping into the left of that demand curve. And when the firm chooses to maximize profits by producing where marginal revenue is equal to marginal cost, you get an outcome that's not so good, right? So first of all, the firm is earning positive economic profits or monopoly rents as they sometimes call them, right? But you also have this problem, you know, the so-called deadweight loss, right? The output at the profit maximizing quantity of QM and the profit maximizing quantity of PM. Notice that's a lower quantity than the quantity that would have obtained if the firm were producing where the marginal cost curve hits the demand curve as opposed to the marginal revenue curve. Right? And of course, the monopolist by restricting output is able to increase price, you know, moving up into the left on that demand curve and charges the monopoly price PM, which is a higher price than the so-called competitive price PC. So the monopolist, because of the ability to the possession of this market power, right, can restrict output below the competitive level and jack up the price in order to increase its profits. And this leaves consumers worse off than the otherwise would be, right, in a world that is more competitive, quote, unquote. Most of you have probably, a lot of you probably see these kind of diagrams in your nightmares, okay? If it's, if this is new to you or it's been a long time since you've seen these, you can find a million examples with a Google search, okay? This is all the stuff that's in all the sort of standard textbooks. So, but let's try to think through it a little bit more and then we'll develop some applications. Okay, what's wrong with the market power approach to competition and monopoly? In other words, what's wrong with defining monopoly in terms of market power and defining competition as the absence of market power? Well, even within the neoclassical economics tradition, there are a number of tensions and ambiguities associated with this sort of standard approach. For example, some economists have argued, even if you accept this analysis in its entirety, that market power and monopoly profits, even with that deadweight loss that goes along with them, may not be so bad because you may need monopoly profits to fund research and development expenditure so that we get innovation and technological change. Right? This is basically the position of Joseph Schumpeter. Okay, that, yeah, monopoly, ideally we wouldn't have any monopoly, but if markets were perfectly competitive in this way that, you know, I've described, all firms would earn zero economic profits. There wouldn't be anything left over to develop new stuff. We wouldn't have iPhones and so forth because you need those retained earnings. You need big companies with lots of retained earnings so they can fund innovation. The other problem that this kind of analysis typically leaves out is it really doesn't say anything. It's not a causal story. It doesn't say anything about cause and effect. I mean, how did it come to be that Google has 95% of this market for search? Right? I mean, we might want to know, well, it might be interesting to say, well, what are the consequences of the fact that this company has 95% of the market share for internet search, but that's not enough, right? We might want to know, well, why do so many people choose to use that company? Why does it have a 95% market share? Maybe because it's actually better than the alternatives, right? Maybe people use Google to search not out of blind instinct, not because that's the way they were raised. My mother and father used Google search and that's why I... No, I mean, maybe because it actually gives you the best search results. Maybe it doesn't. But it might be that large market share is a consequence of some kind of superior performance offering a better product to the market rather than saying, oh, that firm has a lot of profits because it has a high market share. That may be getting the causality reversed. There are other critiques. For example, it might be that a firm with a very large market share has a disincentive to increase its prices, because if it did so, other firms would come into the market, firms that aren't currently in the market but could be in the market. So potential competition may deter some sort of aggressive behavior by firms, even if that competition is not actually in play at the moment. There's big literature on so-called contestable markets, which takes this perspective. But leaving all that aside, I think we can offer some more fundamental Austrian-style criticisms of the market power approach. First, if you just think it through logically or praxeologically, this distinction between a perfectly elastic demand curve and a less than perfectly elastic demand curve doesn't totally make sense, because consumers don't buy, producers don't make. We don't exchange in markets infinitesimally small units on which we can perform calculus. There's not a smooth continuous demand curve. All demand curves are choppy, and no firm faces a literally perfectly elastic demand curve. That's the point that Rothbard makes. Even the little teeny tiny wheat farmer does face a downward-sloping demand curve. It's not downward-sloping by very much. It's not very steep. But even conceptually, the distinction is something that should make us uncomfortable. Second point is there's a strange notion of efficiency bound up in the claim that a firm which produces less than you could imagine it might produce is somehow reducing overall well-being in society. That there's some kind of efficiency loss from a firm producing less than the maximum amount it could produce and charging a higher price than some alternative price it could have charged. I always find it odd that when people talk about a firm of your choice, Microsoft or something, Microsoft doesn't provide as many copies of some piece of software as it could, because that allows it to charge a higher price, and we should. It would be better if it produced more. What about Tom Cruise? Tom Cruise makes a lot of movies. He makes a lot of movies. There's always a new Tom Cruise movie coming out or in the works. He just came out with that really bad movie about the mummy. There's a new movie that looks pretty good where he's a CIA-sponsored drug pilot in the 1980s that looks good, and then there's a new Mission Impossible movie he's working on and so forth. I imagine Tom Cruise takes vacation. He's not working every single moment. He's not working every waking hour. In fact, of course, there's only one Tom Cruise. People say there's no perfect substitute for Tom Cruise. In a sense, he's withholding some of his labor from the market. He has a monopoly on being Tom Cruise. He's the only provider of Tom Cruise hours. By providing less than 16 hours a day of Tom Cruise acting services, he's withholding some units of that good from the market so he can charge a higher price. If he were working 24-7, he wouldn't make as much from each movie, I guess. But nobody would think, oh, we would increase social efficiency by enslaving Tom Cruise and forcing him to work on whatever projects and however many projects we as a society want to be more efficient. No, we recognize that Tom Cruise has the perfect, from a normative point of view, he has the right, and from a social welfare point of view, it makes sense that he would be able to be in control of his own labor. So why would it make sense that Microsoft should somehow be compelled to produce more units than it wants to produce because someone else claims that would make them better off? Well, that would make the owners of Microsoft worse off even without being able to perform interpersonal utility comparisons. How can we say that that's sort of social welfare enhancing? Okay, another point is that we say that, well, some demand curves are more elastic than others. And if the demand curve facing the firm is less elastic, that gives it more market power. And this is somehow reducing consumer welfare because it allows for monopoly pricing and so forth. Elasticity of demand is endogenous. What is elasticity of demand? Well, that reflects consumers' willingness to buy certain quantities at certain prices. You all know what elasticity is. Reflects the sensitivity of quantity demanded to price. But consumers are free to choose whatever elasticity they want. The elasticity of demand is something that comes from the voluntary decisions to buy or not to buy by all the consumers in the market. So consumers have chosen, they've given that firm an inelastic demand curve. So how can we say that a firm that then acts in its interest according to this, according to the elasticity of demand is somehow violating consumer sovereignty or taking advantage of the consumers? I mean, that's where the elasticity of demand comes from is the consumers. Okay? So what is then a more reasonable way to think about monopoly? Well, I mean, the traditional understanding of monopoly in Western legal thought, up until very recent times, up until the early 20th century, early to mid-20th century, was that a monopoly is an exclusive license that is granted by the sovereign, by the state. Okay? You know, the British East India Company had a monopoly on legal trade between UK and the East Indies. I mean, there were smugglers who also engaged in that kind of trade, but if you were caught, you would be arrested or killed. By law, only one company could engage in that kind of trade. Just as by law, only one company can provide water and sewer services in Auburn, Alabama. Okay? So a patent is a kind of a monopoly, right? It's a temporary monopoly, a 17-year privilege granted by the state in the US, 17 years. Nobody else can produce a product that, you know, meets certain characteristics because you have a patent. You know, an exclusive grant or charter from the king, some kind of a license. Tariffs and quotas can also be a form of monopoly privilege as well. But the one is that monopoly is something that is granted, monopoly power or monopoly privilege is something that is granted to a firm by the state. It's not something that can emerge by itself on the market. As long as there is no legal restriction on people entering the market and trying to compete with each other, then monopoly is absent. Okay? By the way, there are less obvious sources of state monopoly privilege. Some people have argued that progressive taxation grants a form of monopoly privilege because it makes it harder for individuals, families, companies to accumulate capital to compete with incumbent firms. Right? So if I already have a large amount of capital, if my family already has, you know, lots of operations and we own a lot, have big capital stock and so forth, then I might favor laws to make it harder for other people to accumulate enough capital to compete with me. Right? Taxing it away would be one way to do that. You know, some kind of market interventions, labor, environmental restrictions and so forth, can make it, some of you may be familiar with the Bruce Yandle's famous bootlegger and Baptist analogy. Right? That, you know, environmental restrictions make it costly for new firms to enter the market. So they tend to be a de facto form of protection for incumbent firms. Same thing with a lot of health and safety regulation, advertising regulation and so forth. So any kind of government intervention that protects incumbents against competition is granting a degree of monopoly privilege to those incumbents. So, you know, in the mainstream perspective, right, what do you do if you encounter a market in which some firms do have monopoly power? You know, in which there are some downward-sloping demand curves? Well, there are two options. One is price regulation or quantity regulation. Right? We say, oh well, if I draw this diagram, it proves that the competitive price would be $10 per unit, but you're actually charging $15 a unit, which is a monopoly price. Therefore, by law or by statute, you must charge $10 for your product. Okay? So the regulator could just force a firm to behave as if it were a perfectly competitive firm. Of course, if you think about it even for five seconds, doesn't sound like a very good idea. I mean, how would the regulator know what the perfectly competitive price and quantity is? Right? It's sort of a wild guess. You don't even need to invoke sophisticated, Hayekian arguments about tacit knowledge to realize that it would be practically impossible to know whether the price regulation is going in the right direction, whether you're anywhere close to what some imaginary ideal price would be. There's also this sort of comparative institutional point. Even if you thought it were theoretically possible for a regulator to know the correct price and to force the firm to produce and to charge that correct price. I mean, now you've set up a big government bureaucracy with lots of power to enforce this kind of anti-monopoly regulation. Well, that might be a cure that's worse than the disease, right? Because now you've got a big government agency that consumes resources. It could be corrupt. Officials could be bribed. It just could make a lot of errors. I mean, you might be introducing a lot more distortion into the market than the distortion that you're allegedly trying to correct by, you know, forcing the... by compelling certain prices or other behaviors. So partly recognizing that price regulation is practically not feasible, many economists have argued instead that, well, what the law should do is try to prevent monopolies from being formed. But of course, that kind of policy, so-called antitrust policy, only makes sense if you think that monopoly is a large market share, right? If you believe in the common law notion of monopoly as something that is granted by the state, then you don't need more state policy to break up those monopolies. All you need to do is not grant them in the first place, okay? But if you believe that monopoly just sort of naturally emerges and then you get companies like Google that people use because their product's so good, then the government needs to do something about that. It needs to split Google up until, you know, Google East and Google West, or, you know, Search Engine Google and, you know, Google Maps needs to be a separate product and it can't be part of the same parent and so forth, right? So, you know, most... I mean, every sort of developed country has some kind of competition policy or competition laws they call it, something similar to the antitrust laws. I'll use the U.S. as an example because it's the best known case, but the Sherman Act from 1890, you know, this is an act of Congress, right? Which outlaws what are called restraints on trade through monopolistic practices, meaning a firm or a group of firms that decides to offer less product on the market than some diagram on the blackboard would say could be offered. Well, that's an illegal restraint of trade, okay? There are other later parts of the legislative package that outlaw so-called vertical restrictions, like a wholesaler agreeing to supply to a retailer only on the condition that the retailer charge certain prices or not deal with other wholesalers or something like that. A bunch of laws about so-called predatory pricing, allegedly charging below your costs in order to effect another competitor. So, you know, practical problems with this sort of this approach to using government policy to break out monopolies, right? So, I mean, first of all, as we said before, large market share is typically the consequence rather than the cause of superior financial performance which calls into question the rationale of the exercise. The problem is, you know, and I trust law kicks in, typically kicks in when a firm or a group of firms, you know, has, you know, has beyond a certain level of sales in the market. You know, you have to have a high share of the market to be considered to have monopoly power. But I mean, you know, aside from the problem of defining the magic number, is a 50% market share enough to be a monopolist? Does that have to be 51%? 60%? 70%? Aside from that, there's also the problem of defining the relevant market. Okay? So, I mean, Google has a very high percent of the market for internet search, but is the product under consideration typing stuff into a search box on your computer or on your phone, or is the relevant product acquiring information? Okay? Have you ever been, you know, somewhere in town and like you're lost and you can't find your way to the place you're supposed to go, but like your phone died, your battery's dead, and so you can't do a Google search and use GPS to find the place you're going to. Does that mean you just totally shut down and just curl up into a little ball and start crying? Are there any other options? If you're in a city or, you know, a town where there's other people around, what could you do to find a restaurant? You get asked, say, hey, does anybody know where the pizza place is? Yeah, it's around the corner. I mean, that's a substitute for typing into a Google search box. Okay, so even if you say that Google, I don't know what the number is, even if you say Google has a 95 percent share of the market for web, text-based web search, that doesn't mean Google has 95 percent of the market for getting information about stuff. They're like libraries, you know, with books. There are other people you can ask, you know, using your own memory to find something as opposed to Googling it can be a substitute in certain cases. Okay, so again, with Google Maps is the market electronic maps, GPS-enabled maps. Does a paper map count as competition to Google Maps? Do step-by-step instructions that you find someplace other than a map application? Does that count as a substitute? Right, so what product is an alternative to what other product is something that is subjective and in the mind of the consumer, right? That's not something that can be objectively determined by a court or by a regulator, okay? Third problem is that, again, a practical problem is that in most countries, there are two ways for an antitrust suit to be... I mean, they're typically lawsuits. It's a judicial proceeding for antitrust suits to be started. One is the government regulator in the U.S., the Antitrust Division of the Department of Justice or the Federal Trade Commission initiates an antitrust proceeding. The other way it can happen is another firm can sue your firm for violating the antitrust laws, right? Which sets up an obvious incentive for disgruntled competitors to use antitrust law as a way of getting back at their more efficient rivals, okay? The history of antitrust law is littered with these kinds of cases. In fact, the origin of antitrust law, there's a good article by De Lorenzo and Don Boudreau on this. You know, the industries that were initially targeted by the Sherman Act were the industries in which output had been growing the fastest and prices falling the most rapidly. Who was providing the legislative, the sort of political support for antitrust law? It was less efficient firms who were being put out of business by these more efficient, you know, like Standard Oil, for example. Standard Oil was fantastically efficient at lowering, was terrific at lowering costs, increasing output, increasing consumer welfare by leaps and bounds, but less efficient companies were growing out of business because they couldn't compete. So they pressured legislators to pass the Sherman Act as a way of restricting the companies they couldn't compete with in the market, okay? There are other problems with, you know, sort of how antitrust suits typically work. They can often last a very long time. They're judicial proceedings, after all. There's some very famous cases in the technology sector where big antitrust cases basically fell apart because the technology, under consideration, had like disappeared. There's a famous case in the 1960s and 1970s where IBM, which was then the dominant producer of computers in the United States, was sued by the Justice Department for violating antitrust law. The lawsuit went on for more than 10 years and eventually the people litigating it realized, oh, mainframe computers don't exist anymore. We might as well just pack up and go home, right? So the market that IBM was alleged to have monopolized was outcompeted by personal computers, which makes you think, gosh, if they had a monopoly, why couldn't they just force people to keep buying their product? Well, because that's not what monopoly is, right? They didn't have a legal monopoly. They just had a large market share. But then with technological innovation, the market went in a different direction. They were sunk, okay? Remember like the talk I gave yesterday, Blackberry, Nokia, they had, between the two of them, almost 100% of the handset market. When the iPhone was introduced, right? They didn't have a legal monopoly, so they basically went bust, okay? There's a great book on this, by the way, called Folded, Spindled, and Mutilated by Frank Fisher about the IBM case. Microsoft in the 90s is another example. Some of you old timers may remember, well, that's called Microsoft Edge, but Microsoft's browser, Internet Explorer, right? In the 90s, it was said that Microsoft was using its market power in the desktop computer market to force everybody to use Internet Explorer, and rival browsers couldn't compete, okay? Nobody uses Internet Explorer in the universe, I think. Some government agency, maybe, okay? Theoretically, of course, we have the problem that we've been discussing before, that there is no scientific means of distinguishing in an actual market, right? Monopoly prices from competitive prices. Absent government-granted monopoly privilege, right? In a free market where there's freedom of entry and exit, there are no legal restrictions on entry and exit, prices are market prices, and that's all we can say. The prices that emerge on the market are market prices. Are they competitive prices? Are they monopoly prices? There's no scientific means of making those kinds of distinctions. There's also sort of the legal problem, this is the thing for you to ask the judge, right? That, you know, antitrust laws, you know, unlike other parts of the, you know, Western legal tradition and most legal traditions, where to be at just law, you know, it has to be possible to state the law, articulate the law, and understand the law before you act so you know whether your action is legal or not, right? But antitrust laws are written in such a way that it is impossible to know before a business engages in any particular business practice, whether that practice will be judged ex-post to be in violation of antitrust law. There's a great article by, of all people, Alan Greenspan, back in the 1960s, it was in one of the Ein-Ran newsletters about the Alice in Wonderland character of antitrust law, that it's impossible to define an antitrust violation ex-ante. You can only know if you've committed one because you're in jail, right? You can't know ahead of time, so there's sort of ex-post facto laws. There's a funny little, it's kind of like a cartoon book, have you guys ever heard of this? We may have it outside. It's called Tom Smith and His Incredible Bread Machine. It's a comic book, or, sorry, what they would nowadays call a graphic novel, about this entrepreneur who invents this new device and then the government basically shuts him down and it's a story that some of you can sort of relate to, but there's this great scene where some antitrust lawyer, government bureaucrat is telling this entrepreneur what you can and cannot do, and he says, it's written in verse, right? He says, you're gouging on your prices if you charge more than the rest. Okay, so charging higher prices than other firms is price gouging, illegal. But it's unfair competition. If you think you can charge less, that would be predatory pricing, right? Pricing below your rivals is predatory pricing. A second point we would like to make to help avoid confusion. Don't try to charge the same amount. That would be collusion, okay? So basically whatever you do is illegal if we decide, if we decide it's illegal, it's illegal, but there's no way for you to know ahead of time whether it's legal or not. Okay, we have about five minutes left. I just wanted to briefly touch on an application. It might surprise you a little bit of monopoly theory that has to do with minimum wage laws. I don't know if you guys have been following this at all, but, you know, for until the late 1990s, around 2000, I mean, almost all economists, except for a few crazy Marxists or whatever, believe that minimum wage laws, you know, were not a very effective way of helping low wage workers, right? Probably a lot of you in one of your classes have seen some kind of a diagram like this. You have the standard argument against minimum wages that economists make is that, you know, well, if you have a supply and demand for labor, there's some kind of wage that's established on the free market. If the government sets a legal minimum that is higher than that market clearing wage, then the quantity supplied of labor exceeds the quantity demanded. You have an excess supply or surplus of labor, i.e. unemployment. So raising wages by law above their market clearing levels, it doesn't help workers as a group. It forces some workers into unemployment. You've probably all, you know, seen this kind of model many times before. So what almost all economists believed until in the 1990s, there was this famous study by David Card and Alan Kruger, and some economists came out with some empirical studies claiming that, well, in places where they raised the minimum wage, we did not see a big increase in unemployment. So, you know, something must be wrong with this model. There's a lot of debate going on back and forth. You might have seen just about a month ago, there was an NBER paper on the $15 minimum wage in Seattle. The research had been commissioned by the City Council of Seattle, and when these distinguished scholars, mainstream scholars came out with this analysis showing that employment had gone up in Seattle after they passed the $15 minimum wage, the City Council immediately denounced the report and looked around for somebody else to write a report supporting the $15 minimum wage. But the question is, you know, since most economists believe this, what's a possible economic rationale for minimum wage laws, among people who are sort of economically literate? Well, I actually, I mean, I struggled to answer that question myself because I talked to some of these economists who did these empirical studies, and they said, well, our data show that the minimum wage does not create unemployment. I said, well, don't you believe that the man-curve slopes down? Well, I mean, yeah, I guess kind of, but there must be something. They didn't have any theoretical explanation for why they were getting the results that they were getting other than they liked them, okay? But just in the last few years, we're starting to see a new kind of theoretical argument that has to do with monopoly or actually what the related concept of monopsony, you guys heard about monopsony before, right? Monopoly, according to the standard view, is the condition in which you have just a single seller of a good. Monopsony is kind of the inverse set of conditions where you have a single buyer, right? So you have market power on the buyer side rather than the supplier side. Monopsony analysis was developed in the 19th century, 20th century, looking at farmers, for example, who were selling their crops to like a big railroad. There's only one railroad that will buy the crops from the farmers and deliver it to the city to be processed or whatever. And because there's only one powerful buyer and the sellers have nowhere else to go to sell their stuff, they're forced to accept a lower price than they otherwise would if there were lots of buyers competing, right? So in the standard analysis, when you have a monopoly seller, you get prices that are higher than the market clearing than the competitive levels. In the monopsony story, if you have a single buyer, you get prices that are below the competitive levels and this harms the sellers. So it's kind of the inverse of monopoly. There's a diagram that depicts this kind of situation that is kind of analogous to the monopoly diagram but flipped around a little bit, right? You've got the sort of normal demand curve in place of the normal supply curve. You have an upward sloping marginal cost curve of the monopsony buyer which is more steeply sloped into the left of the supply curve. And so the point is in a competitive market, the city is a market for labor. So there's only one, there's factory town. There's only one employer in town. Every employee has no choice but to work for that employer. So the idea is to maximize profits. That employer is going to set the wage where sort of its marginal input cost is equal to the marginal revenue that's generated by that labor, marginal revenue product. And so under competition, according to this story, you would get equilibrium outcome of price W prime. The wage would be W prime and the quantity of labor hired would be L prime, right? That's where supply and demand intersect. It's supply and demand for labor. But so that's like the previous diagram, right? But because you have a monopsony buyer, a monopsony employer, that's not what happens in this market. The employer restricts employment to level L and pushes the price down to W. So the monopsony buyer buys less than you would have in a competitive market and pays a lower price, you would get in a competitive market. This has now been embraced by the fight for 15 crowd, at least those who know anything about economics, right? The mainstream economists among the fight for 15 crowd, they say, well, this is what's going on. This is why it's okay to have minimum wage laws because in reality, in the market, it's not competitive. We don't have competitive labor markets. We have these big monopsony buyers of labor. We have large companies and they can pay workers whatever they want. You know, IE much less than what the late workers would get in a competitive situation. Therefore, with minimum wage laws, you're kind of pushing the wage closer to W prime. You're raising the wage to be closer to the competitive wage, just as monopoly regulation would lower the monopolist price closer to the competitive price, okay? If you look at the most recent edition of the Economic Report of the President, the 2017 January 2017 issue, there's a chapter on labor markets where the authors, who are all distinguished mainstream economists, embrace this monopsony argument for minimum wages. What's wrong with it? There's quite a few things that are weird about this argument. First, the monopsony argument is itself a little bit odd and it suffers from the same kinds of problems that we raised before about monopoly, right? I mean, all supply curves are upward sloping. There's no such thing as a perfectly elastic supply curve. So, just as we said with monopoly, that's a Rothbard point, you know, there are just output prices. We can't distinguish competitive prices from monopoly prices. Namely, in labor markets, absent government intervention, there are the market clearing wages. We can't say whether those are competitive wages or monopsynistic wages. There's no way to distinguish that in the market, right? So, the point is, if it's really true that there's a particular employer in town only offering less than the equilibrium, than the competitive wage of workers, then that should be an incentive for new firms to enter the market and bid those workers away, right? In other words, if a worker produces, you know, $15 an hour worth of output and an entrepreneur is only paying $12 an hour, well, that's making a nice profit for the entrepreneur. But then another entrepreneur would want to come in and offer these workers $13 an hour because you're still getting something worth $15 an hour and only paying $13 and you'd make some money in that deal. And then somebody else would come along and say, oh, I'm going to offer $14, right? So, the wages would be bid up to their competitive levels in the absence of legal restrictions on entry by potential employers. Okay. In fact, if you think about it practically, right, so we're not talking about the wages of, you know, skilled computer programmers. Minimum wage law applies to, you know, fast food workers and I mean, this is at the very bottom of the labor market. So, this is primarily unskilled labor. So, the argument that we're supposed to believe is that in a town, even in a little town like Auburn, Alabama, right, what are the sort of the minimum wage jobs? Well, walk down Magnolia Avenue and you'll pass by, what do you pass? Chick-fil-A, Chipotle, Domino's, Subway, McDonald's, all the way down to Tumor's Corner there. I mean, those are all those restaurants, all those fast food places pay the minimum wage. There's lots and lots of other occupations here in town that pay the minimum wage. But we're supposed to believe that either there's only one employer in Auburn that is interested in minimum wage labor, low wage labor, or that every single employer in town, they meet secretly in a private room and agree that nobody will pay more than $6 an hour. I mean, because, you know, low wage labor is very non-specific and you don't need a lot of training to perform most minimum wage jobs. So there's a huge amount of competition among employers for a minimum wage labor and it's simply not plausible to think that there's a monopoly, a monopsony or a cartel of employers all agreeing, you know, forcing the wage down below its competitive level. The model doesn't make any sense as an application to the labor market, okay? So I'm actually running a little bit over time here. So to summarize, what's the right way to think about competition? A process of rivalry among firms or among employees, right? Who are free to compete as they see fit within some sort of illegal framework. Now that might mean just a few firms or it might mean a lot of firms. It might mean large firms or small firms, highly profitable firms or firms that are not very profitable. You know, there might be a lot of entry and experimentation and growth or it might be a relatively stable market. All of those things are consistent with competition correctly understood as the absence of government interference in the process of rivalry among individuals and groups, okay? Government attempts to limit monopoly power cannot possibly improve overall well-being. What they do in fact is grant special monopoly privilege to particular individuals and groups. So the best government policy towards competition, right, is don't grant any monopoly privilege directly or indirectly and the result will be a competitive market. Okay, thanks. Sorry for running over.