 We're going to talk today about competition and monopoly. But first, how about that huge psychological psychic profit from yesterday's lecture? Come on, let's hear it. OK, thank you. Thank you, Conor. Yeah, so economists of all stripes talk about the importance of competition and how we benefit as a society from having a competitive market economy. We want policies to avoid monopoly. We think monopoly is a concern. Monopoly causes reductions in overall well-being and so forth. Almost everyone agrees that competition is desirable and that monopoly is something to be avoided. But what do these terms mean? I mean, what is competition? What is monopoly? Well, monopoly has been in the news quite a lot lately, as you've already heard in some other lectures, because we're told by the smart set that monopoly is one of the major factors, if not the most important factor driving the increase in consumer prices to where price inflation is now the highest it's been in more than three decades. So the Biden administration tells us that one of the big problems is overly concentrated markets, too much monopoly power, the exploitation of the consumer by entrenched monopolists. That is what is responsible for price increases. Even Biden's Council of Economic Advisers has gotten into the act with a lot of reports about particular industries, in this case, meatpacking, saying, look, what's really explaining prices. It's not an increase in the money supply, as some of us might think, but it's greed, corporate greed. Why greed has suddenly gone up, and then greed apparently has gone down a little bit in the last two weeks, has never really explained. Senator Warren graciously includes Putin as well as another source of inflation, but it's mostly corporate monopolies. The website Socialist Appeal asks provocatively, who's to blame for inflation, workers' wages or corporate profits? Gosh, I wonder which way they're gonna come down on that. Okay, so if monopoly is this bad thing that's causing price increases, I mean, what is it? And if it's bad, what would we do to stop it or rein it in? Well, I mean, if you talk to the average economics professor or economist, talking head types on TV, what they mean by monopolist or monopoly is typically a firm that has a large share of the market, that has a large share of a particular industry or to be more technical. If a firm has a market share above X, then that firm has monopoly power or alternatively that firm is a monopolist or alternatively this market is monopolized and therefore action needs to be taken. Well, what exactly is X? I mean, you might think, oh, X has got to be 100, right? But I mean, no, it's hard to identify any industries or sectors defined in conventional ways where you have market shares of 100%, right? Think about web search, right? Google search engine has about 90% of the global search market. Okay, so 90% market share seems pretty big. You know, if you went, oh, Google's got a monopoly on search. Okay, well, maybe that's not technically correct, but it doesn't seem all that outlandish acclaim. Well, I mean, what about Amazon? So most recent data give Amazon about a 56% share of global retail sales. I mean, that's pretty big for one company, 56%, right? Sorry, that's 56% of global online sales, not brick and mortar sales as well. So 56% of the online marketplace, that seems pretty big. I mean, is Amazon a monopolist in online retail? I mean, it doesn't seem like it. There's lots of other retailers from whom you can buy online. You can buy from small companies direct. You can buy on eBay. If you're in other parts of the world, you can buy on many other platforms that are rivals to Amazon. So it's a big market share, but it doesn't seem like, you know, I don't know, would that qualify for the monopoly label? You might say, but wait a minute, Amazon's primary revenue earning business is, I'll talk about this a little bit more tomorrow. It's not actually retail sales. It's cloud, you know, Amazon web services, cloud hosting. So Amazon's a market share in cloud hosting services is about 33%, okay? So is Amazon a monopolist of the cloud? Is it a monopolist of online retail? I mean, no matter what example readily comes to mind of what conventionally is called a monopolist, whatever that market share is, it's not totally clear if it meets some sort of magic number. I mean, a cynical person would almost think that politicians and interventionists choose the X to give them the answer that they want when they're condemning a particular firm, but of course I would never suggest that publicly. A more technical way to think about this in the language of sort of mainstream microeconomic theory is to claim that a firm has monopoly power, maybe it's not a monopolist, but it has some monopoly power if it has the ability to raise price above marginal cost. In other words, any firm that can charge a higher price than what it cost that firm to produce a unit of a good or service, you know, according to the one theory can only do so if it has some kind of control over the market, it can manipulate consumers somehow, it can jack up the price over what, you know, the price should be in a more competitive situation. Related to this is the claim that well, any firm that is earning a positive economic profit, any firm that earns revenues in excess of its costs can only be doing so because of some kind of nefarious monopoly power. Now, we already had some conversation yesterday about the role played by uncertainty in the generation of profit and loss. So of course, a model like this doesn't make any sense in a world where future revenues to the entrepreneur are uncertain at the time the entrepreneur has to make investment by purchasing factors of production, combining resources and so forth. But the sort of standard, mostly static models that you get in mainstream economics texts do not include any role for uncertainty in those models. I just wanna note at the outset, and you know this if you've read Murray Rothbard's writings on competition and monopoly, that these definitions are very different from the sort of classical common law notion of monopoly. What was the definition of monopoly until the early to mid 20th century is a monopoly was a special privilege granted by the sovereign, granted by the king or granted by the state. This is the, some of you may recognize that symbol, that was a symbol of the Dutch East India Company. When we say the Dutch East India Company had a monopoly on trade between the Netherlands and Indonesia and the other islands of the Far East in the 17th century, 18th century. We don't mean the Dutch East India Company had a 33% market share. What we mean is it was illegal for anyone else to engage in long distance trade between the Dutch Republic and the Far East. You would go to jail if you were caught, you might be shot by the Dutch Navy and had your ship would be sunk, your cargo would be confiscated because the king has said, the state has said only this company may engage in that activity. So you sometimes see these old European companies that will advertise in the old days, by order of his majesty, we were the official provider of XYZ in the UK or wherever. That's what it meant to have a monopoly. The state says only you can engage in this activity. So now we speak about the postal monopoly. Well, people like us talk about the postal monopoly. Now there are many ways that you can engage in communication with other people, but it is illegal for anyone other than an employee of the United States Postal Service to put a piece of paper into your officially licensed postal mailbox. Maybe you live in a city or a town where there's only one electricity provider or one water company or maybe even only one internet, one broadband provider in your neighborhood because only one company has been given the legal privilege to operate in that industry. So why the definition, how and why the definition of monopoly changed from a privilege granted by the state to success in the marketplace through any means is an interesting story and we'll have something to say about that a little bit later. Now I'm gonna talk about some of the views of Austrian economists on these questions and there is some variety of opinion among Austrian scholars, writers and thinkers in the Austrian tradition about how to think about monopoly, what are some things that might be done to address monopoly and there are many issues within the Austrian tradition where while all practitioners share a commitment to a certain set of foundational principles that define the Austrian approach, they don't agree on all of the details and this is one of these issues. So it's probably useful for us to start by thinking about monopoly in contrast to not monopoly, i.e. competition, right? So both Austrians and mainstream economists understand monopoly as the absence of competition or a state of affairs that's not competitive. So it's useful to start by thinking about what we mean by competition, right? Well, in everyday language, right? What we mean by competition is some kind of a contest or there's some sort of rivalry like in sports, Auburn University is trying to beat the University of Alabama, it's arch rival in football, in a football competition. This is a picture of a legendary chess match that took place at the Mises Institute some years ago between Tom Woods who's slightly standing up and Walter Block. Both are very skilled chess players and I won't tell you what happened. You'll have to ask Tom Woods or Walter Block but we talk about I'm entering a competition in sports or my school has a very, this is a very competitive school, it's hard to get in or it's hard to graduate from the school because it's highly competitive. So a situation of competition is one in which different parties are competing and we also sometimes use competition in an adjective form, you know, more competitive or less competitive. The competition is more intense somehow or more tough than it would be if it's less competitive. And as I mentioned before, in the common law tradition competition exists where the state has not granted a special exclusive privilege to one producer, one firm, one entrepreneur. Once we get to 20th century mainstream economics, I guess these ideas were introduced in the latter part of the 19th century and became fairly standard by the 1920s, 1930s, certainly by World War II in the English-speaking world, the notion of competition was changed to mean something else, right? So neoclassical economists have developed a particular sort of theoretical model or analytical model for understanding how markets work that is said to describe a certain kind of competition, a pure or perfect kind of competition. Talk about this construct of perfect competition as well as imperfect competition just a moment. As I said before, the hallmark of perfect competition is or a competitive market in this model is a market in which firms do not have the ability to charge prices that they want, right? They can only get prices for the goods and services that they sell that are given to them by sort of anonymous market forces. They can't earn any profits because they can't charge prices above their marginal costs. And we'll look at some Austrian differences in opinion or criticism of this as well. So how many of you have seen a picture like this from your undergrad econ class or econ textbook? It's sort of a graphical representation of a perfectly competitive firm. And so the idea with this firm is there's so many firms, let's say it's wheat, it's the wheat farmer, proverbial wheat farmer, right? He has a little plot of land and he harvests some wheat and he takes his wheat to the wheat market and sells it. And he's just one of many producers, right? So there are no big producers that exercise a lot of influence in this market. It's kind of anonymous, right? So, you know, this farmer has a, so there's quantity on the horizontal axis, prices on the vertical axis. The idea is he's got an upward sloping, marginal cost curve like any producer and he has a U-shaped average cost curve. Again, like you would find in the typical case, what's unique for this firm is because it's just one little tiny drop in the bucket of this giant market. This farmer, you know, he sort of goes to market every day and he finds out that the price of wheat that day is so many dollars per bushel and then he can sell as much wheat as he wants at that price without it affecting that price. It's not the case that if he sells like a, you know, if he doubles his wheat production, that's gonna somehow drive down the market price because he's so teeny tiny compared to the market, he doesn't have any influence on the market, right? Likewise, if he decides to withhold his production from the market, reducing the supply, total supply of wheat, he's so small relative to the market that doesn't have any influence, that doesn't, you know, drive up the price, okay? It's a little bit like, and he said, well, then where does the price come from? Well, you know, there's an, you know, there's like an industry or market level supply and demand diagram out there somewhere, which is determining the market price of wheat, but the point is each producer is so small that changing their quantity doesn't have any discernible impact on the total supply of wheat in the market. It's a little bit like, you know, the old paradox of voting, right? I mean, what determines who wins the election will have ever gotten the most votes, but if Anton decides not to vote, it has no effect on the outcome. You know, Anton's vote, because he's won out of hundreds, thousands, tens of thousands voting, same person's gonna win no matter what Anton does and the same thing's gonna happen no matter what Connor does and no matter what I do. It's either, well, wait a minute, but if no individual voter's vote has an effect on the outcome, then where does the outcome come from? Well, it's everybody's vote. It's like, oh gosh, that's like a brain teaser. Okay, it's the same sort of idea here. Each producer is so small that none can influence the market because the market is so large. Therefore, the demand curve facing the producer is not the conventional downward-slipping demand curve. It's rather a horizontal or perfectly elastic demand curve. The farmer can sell as much wheat as he wants at the going price without affecting that price. Therefore, the marginal revenue received by the farmer for each unit sold is just the same as the market price. I sell one, you know, market price is $10 a bushel. I sell one bushel, I get 10 bucks. I sell a second bushel, I get 10 bucks for that one. I sell a third bushel, I get 10 bucks for that one. As opposed to the more conventional case of a downward-slipping marginal revenue curve. You know, the more I sell, to sell more, I've got to drop the price. So I get less per unit and I get a lower marginal revenue for each unit that I sell. That doesn't apply for this person, for this producer, because the market is quote unquote perfectly competitive. So the farmer chooses, what's my laser on here? Oh, sorry. Whoops, didn't mean to do that. Yeah, so the farmer, you know, chooses the quantity where a marginal revenue, which is this horizontal line, is equal to marginal cost. Here's the competitive market price, PPC, that's determined by the market external to the farmer. And the farmer chooses to produce this quantity, the perfectly competitive quantity. With a little bit more diagrammatic if we add a little more to our diagram, we can show that this farmer's total revenue is exactly equal to his total cost. So there's no profit, zero profit, nothing left over. All this happens in the short run. The theory says that in the longer run, you know, suppose that the demand for wheat should fall. Everybody decides to go gluten-free or whatever. And you know, consumers don't like wheat anymore. So that shifts the demand curve in the wheat market to the left. And so the market price of wheat will fall. So this number will go down and the farmer will see that horizontal demand curve fall. So in the short run, that would cause him to earn an economic loss because now his total revenues fall short of his total cost. But then farmers would start to exit the market because they're making a loss and the exit of farmers would eventually move the supply curve back for the industry back to the left until we return to this zero profit kind of long run equilibrium. That's the story in a nutshell. And the neoclassical economists say, wow, isn't this great? This is so efficient. It's so welfare maximizing, right? I mean, the market gets as much wheat as the market, you know, can possibly consume. Nobody, producers don't earn profit and profits are bad. We don't want greedy profiteers to make money, right? So the farmers just barely break even. They don't earn any income. Consumers pay the lowest possible prices for the goods and services that they consume. Everything's perfectly efficient. Consumer welfare is maximized. Okay. Now you might think, well, this is sort of an interesting intellectual exercise, but what does this have to do with wheat in the real world? I mean, the answer is very little, right? Because no actual market could possibly have these characteristics, right? No matter how small you are as a producer relative to the market, your actions do have some impact, albeit potentially small, on what happens in that market. It's not the case, as it is assumed here, that every producer's output is identical to the consumer to every other producer's output. That's why when I was in school, they always used the wheat market as the example of, well, okay, it's not literally perfectly competitive, but it's kind of close, because it's just wheat. Well, if you know anything about food or agriculture or even if you've ever been to a restaurant or a grocery store, I mean, there's tons of different kinds of wheat. There's organic wheat and there's non-organic wheat and there's winter wheat and red wheat number two. There's like dozens of different grades and qualities of wheat. There's GMO free wheat and there's wheat laden with chemicals and there's all different kinds of wheat that you could buy. And in fact, now one of the big issues in agriculture, you might have heard of what they call traceability, is when you buy a loaf of bread in the store, you want some system where you can find out exactly which farm the grain came from and it's a big problem for the food system because it's not really designed that way. You dump all the wheat into a big bin and then you ship it off to the next stage. But the point is even the wheat market doesn't in any way resemble the assumptions of perfect competition. So why do we care about this? Well, because according to this theory, there's another kind of scenario you could imagine in which the market is not perfectly competitive in which in fact some firms or maybe all firms have what they call market power or monopoly power. What does market power mean? It's not the Rothbardian notion of coercion. It's not coercive power. It's like price setting power, whatever that means exactly. So the idea here is imagine a firm, say it's Google, it's the only producer of the thing that it produces. Actually, let's not use Google because we don't actually buy Google services. We get them for free. Let's say the De Beers Diamond Company, let's assume it owns all the diamonds in the world. Well, it's the only producer of diamonds. So the market for diamonds of De Beers, according to this assumption, is the same as the global market for diamonds because it's the only diamond producer in the world, let's say. Okay, therefore, if this is the demand for diamonds, that's also the demand for De Beers output because De Beers is the only diamond company. So unlike the perfectly competitive wheat farmer who has this perfectly elastic horizontal demand curve for his product, the evil diamond monopolist has a downward sloping demand for its product and a downward sloping marginal revenue curve that is more steeply sloped and lies below the demand curve. You can look up why if you've forgotten. So this producer also chooses the quantity where marginal revenue is equal to marginal cost. So here's the marginal cost curve and the marginal revenue curve is this green line. So where marginal cost and marginal revenue intersect is this quantity QM. So that's the monopolist's profit maximizing quantity but wait, okay, this monopolist exercising its nefarious power, right, does not price the product right here. This is, oh, well, wait a minute. This is the quantity I wanna produce. I'm gonna charge the most the market will bear which means I'm gonna jump right all the way up to where that quantity lies on the demand curve. Scoot to the left and look right here. Here's the monopoly price. So the monopolist produces this much QM and charges this price PM. Well, wait a minute, what does that mean? That means that there's this whole area under the curve, this sort of purplish blue area which is extra revenue that goes to the producer, IE profit, that's the so-called monopoly profit. If you have seen this before, you know that there's another little piece here where they say, well, there's this area here that they call consumer surplus. That's like the difference between what consumers would have been willing to pay and what they actually had to pay because this is the price they have to pay. So the consumers get this as some kind of utility gain. I know it's silly. The producers, the sellers get this as profit but wait a minute, there's this little yellow triangle. That's like utility or benefit that somebody could have gotten but nobody gets. It just like disappears into the ether and this is said to be an efficiency loss. Gosh, because if we could somehow get, if we had a competitive market for diamonds, then the quantity would be where marginal cost curve hits the demand curve like we had in the previous graph and that would be here. So a perfectly competitive industry would produce this much and this is the price that would be charged. But under monopoly, we get a smaller quantity produced and the prices paid by consumers are higher and there's this mysterious yellow triangle that disappears into the ether. Okay, you can go back to your mainstream textbook and look up the details if you've forgotten but the point is that this is supposed to be harmful to consumers. Consumers are worse off than they would be under competition and it's like even worse for everybody because of this inefficient dead weight loss. So according to economists who think this is a useful way of describing reality, we gotta do whatever we can to make this world look more like this one. How do we do it? Well, we use antitrust to break up the diamond company and force it to be five diamond companies although how that would be perfectly competitive is left to the imagination. Right or we need the government to regulate the price and force the price to be down here and there's all kinds of different things under the guise of so-called competition policy that are meant to try to force an actual market to look more like the hypothetical perfectly competitive market. I mean, there are a lot of problems with this model, a lot of problems with this way of thinking about the world. So Rothbard emphasized this point that I hinted at earlier that in a real market, every seller contributes some quantity to the total market output. These mathematical models are using sort of smooth and continuous curves where everything's twice differentiable and so forth, meaning they're thinking sort of infinitesimally small units. Rothbard says, no, but in the actual real world of human action, we only work with discrete units of goods and services that make sense to the human mind, actions that could conceivably be taken, not mathematical abstractions. There's another point too that is not always appreciated in the mainstream literature. I mean, if you really think about what anti-monopoly or competition policy as it's understood by mainstream scholars is meant to do, they're saying that that diamond company, it's only producing this many diamonds per year. If the market were perfectly competitive, it would be producing this higher quantity of diamonds. It's withholding diamonds from the market that the market needs, wants, deserves. I mean, if you think about it, it's kind of like, well, but why should a producer be required to sell some particular quantity? I mean, all producers limit their output in some sense relative to some theoretical maximum because they don't work 24-7. They take coffee breaks and bathroom breaks. I mean, I like to use an example from the movies. If you think about my doppelganger, George Clooney, let's say he makes, I don't know, five movies per year. In the old days, in the old studio system, the golden age of Hollywood in the 1930s, 1940s, actors would make 20 or 30 films a year. Let's say George Clooney makes five films a year. And somebody like that, I mean, he's pretty choosy about what he does. He doesn't take every role that's offered to him. He picks a few roles that are good for his image or that he thinks will be blockbuster films or he wants to do an art house film or whatever. But he's not working 24-7. I mean, according to the tabloids, he's got many nice houses and nice cars and he's hanging out by the pool a lot, okay? Also like me. So if you take the sort of anti-monopoly language and concept seriously, you think, well, it would be more efficient if we could somehow compel George Clooney to make more movies. Oh, okay, well, let's say we allow him eight hours of sleep per day. I mean, 16 hours a day, he should be making films. And if he only makes films 15 hours a day, he's withholding some of his output from society. And he's lowering consumer welfare. And we should legally compel him to produce as much as he can. Well, that seems silly. That sounds like slavery. That sounds like compulsion, but okay. But then why do we say that Amazon, Amazon is producing a monopoly quantity rather than the competitive quantity. Therefore the state needs to compel Amazon to increase its quantity of whatever. How's that really different from compelling George Clooney to make more movies? It doesn't seem to make a lot of sense. Another thing to point out is that things like elasticity of demand, right? The fact that the demand curve for diamonds is downward sloping, and maybe it's a highly inelastic demand, which gives the producer a lot of ability to increase price without decreasing the quantity. I mean, is that bad? Is that wrong? Is that inefficient? Well, in a free market, right? Consumers can choose voluntarily, what to buy, what not to buy. And even something like elasticity of demand, the existence of substitutes and so forth is the result of voluntary human choice, right? So the results of preference. In other words, you say, well, the reason that De Beers has so much price setting power is because diamonds are unique. If you forget about the industrial use of diamonds for a moment, just focus on their use in jewelry. Well, there's no substitute for a diamond. That's what the ads tell me, right? That there are other jewels, but they're just not as shiny and pretty. They don't mean the same thing. For an engagement ring, it's gotta be a diamond, blah, blah, blah. Okay, well, but I mean, that's because consumers have made that choice, right? Consumers could decide that a fake diamond is just as good as a real diamond or an emerald or a ruby is just as good as a diamond. Or if I wanna propose to my fiance, I can give her a little rubber band to put around her finger. That should be just as good. The fact that she says that's not acceptable, right? It doesn't constitute market failure in some sense, in any sense, right? I mean, that's just a preference of the market. And it's impossible for us as value-free economists to say, well, that preference is inefficient. That preference is wrong. More elastic demand is better than any elastic demand. For consumers to believe that there are more substitutes for a product is better than for consumers to believe there are fewer substitutes. Why? Why would it be, okay? What does Mises say? So Mises has a very valuable discussion of monopoly in human action, but also in, there's an article that was published a few years ago in a new English translation in the QJEE on monopoly prices. First of all, note Mises, he doesn't refer to monopoly as like a state of affairs. He only refers to monopoly in the context of pricing. Mises says, there are some market conditions under which the prices that emerge are different from the prices that would emerge under other more competitive conditions. He says, we can't identify monopoly prices in theory. He says monopoly prices emerge only under special conditions. And those conditions are, you have a single seller of a good or service or a cartel of sellers selling that good or service. And an inelastic demand curve, a demand curve that is inelastic above the price that would have otherwise obtained had there been more sellers or multiple sellers of this good or service. And he argues that, well, under those conditions, consumers are not actually getting exactly what they would prefer to get. That there's sort of, you know, consumer sovereignty doesn't completely hold in this particular case. But he says, this is really just an issue of theoretical interest. Mises says, in reality, the conditions that would give rise to monopoly pricing are extremely rare. They just don't occur that much in history. You know, it's not really a big deal. It's not relevant for policy and so forth. I mean, for example, you know, again, this notion of what is or isn't a substitute is something that is not given to us by nature or technology. That's something that's given to us by subjective preference, right? So what does it mean? You're the only person selling X, well, is Y a good substitute for X? If so, then you're not the only person selling X and Y together, okay? So Mises says in practice, you know, this sort of theoretically interesting, but not practically relevant. So Rothbard offered, you know, for a long time was taken as sort of a critique of Mises, but I think it's better understood as like a refinement of Mises, a clarification of Mises' argument. Rothbard says, well, look, I mean, you know, all sellers face a downward sloping demand curve for reasons that we already mentioned. There are no horizontal, perfectly elastic demand curves. So all sellers try to get the highest price they think they can get for the goods and services that they're trying to sell. So in practice, there's no way for us to distinguish a particular price that emerges on the market. No way first to identify it as being a monopoly price in Mises sense or a competitive price in Mises sense. Again, assuming that there are no government restrictions on who can be in that market or who cannot. So Rothbard would say, yeah, I mean, if you have an exclusive grant from the state, then you do have, the prices that you charge are different from the prices that would have obtained. If you didn't have that special license or privilege from the state, but in the absence of state intervention, all we can say is that every producer tries to earn the highest profit that they can. And of course, remember, as we discussed yesterday, producers are making decisions about what to do, what resources to obtain, how to combine them in anticipation of prices that will prevail in the future when their stuff's ready for sale, right? And of course, they might be wrong about that. So Exante, they're making their production plans with the anticipation of earning the highest possible profit. Sometimes they're right, sometimes they're wrong, but the elasticity of demand and the number of producers in the market, absent legal restrictions, doesn't change that fundamental logic of what every producer is doing. And so analytically, there really isn't any way to separate them the way that Mises wants to do. Again, with the exception of government granted monopoly. An example that even mainstream economists would recognize as a government granted monopoly is a patent. If you have a patent on a technology or a product, then no one else is allowed legally to compete with your product or service for a specified time, you know, 17 years or whatever is the life of the patent. And of course, there's always some ambiguity over how the market or the technology is defined. That's why we spend hundreds of millions of dollars on patent lawsuits, right? Where people go to court to try to get the court to figure out what rights the patent actually protects, whether or not some other action is an infringement of the patent as well. Things like, you know, the Dutch East India Company licenses, grants, chargers, the local electric company, telephone monopoly, postal monopoly would be examples. But there are other instances of things that grant sort of monopoly privilege in this sense without being exactly the same as an exclusive license. Like a lot of other policies that restrict trade. You know, if you're a steel manufacturer in the US and as happened during the Trump administration, there's an increased tariff on imported steel, say from China, right? That reduces the number of firms competing for the American steel users patronage, right? Because now firms located outside the US are legally prohibited or are restricted. They have a cost disadvantage and makes it more difficult for them to compete with US producers. So a lot of things that are not explicitly monopoly granting privilege actually have the effect of reducing competition through state intervention the same way that a patent or an exclusive license or charter would do. Okay, so what then should we, you know, what does all this imply about what sort of policy towards monopoly there ought to be? Well, sort of among mainstream economists, there tends to be a view highlighted by the pictures that I showed you before. That what, you know, that because real world markets are not like the perfectly competitive market that we think is some sort of welfare benchmark or ideal, according to these thinkers. The, you know, the role of the government is to somehow fix that problem or force actual markets to be more like these hypothetical, imaginary, perfectly competitive markets. If you've heard your professor use the term market failure, right, monopoly or monopoly power is supposed to be a primary example of market failure and the job of the state in this view is to remedy the failure, right, to undo the market failure. Well, through antitrust, through regulation, restricting and not allowing two firms to merge to become a bigger firm, you know, forcing Amazon, for example, to spin off its web hosting services from its retail services, retail trade and spinning off Amazon Prime or whatever, right. So breaking up diversified firms into smaller units would be another example. But what is underlying all this is, you know, a view of the world that used to be called and should still be called the structure conduct performance paradigm, which is essentially the view in competition policy and competition theory that the structure of the market, you know, the number of firms competing, the market share of the biggest firms and so forth, determines the conduct of the market, whether those firms will charge competitive prices or these bad monopoly prices, and therefore that conduct determines the performance of the market from society's point of view. So a market with, you have a small number of big firms with price setting power, monopoly power leads to higher prices and lower quantities, which leads to a loss in efficiency and welfare. And therefore the state should start by changing the structure, you know, breaking up big firms and, you know, forcing somehow reducing entry barriers, getting more small firms into the market, whatever. The state could also try to impact the conduct with like price controls, setting a maximum price or something and not letting the monopolist, not letting the firm with monopoly power charge a higher price. You know, again, this is, it's sort of funny. I mean, this view in competition policy really emerged in the 1930s and became entrenched in the 1950s. And then it sort of got displaced by more sophisticated and theoretical models because it's not very sophisticated at all, right? And so, you know, game theory and computational models and fancy dynamic mathematical models were supposed to, at least I was told, you know, sort of move us beyond this old structure conduct performance thinking, but now it's back with a vengeance. The current generation of antitrust officials in the US and in Europe are really deeply wedded to this paradigm, which means basically all they do is look at market shares, market, you know, concentration measures that, okay, if this industry has too many, it's too highly concentrated. The biggest firms have more than X% of the market, therefore we need to break up, regulate, control, fix, because that's the wrong sort of market structure. I mean, even within the mainstream in the 1970s, 1980s, there were a lot of critiques of this view. The transaction cost critique associated with Oliver Williamson argued that there were, even within that paradigm, there are cost efficiencies from concentration that would have to be balanced against the purported harms in terms of higher prices and reduced consumer welfare. Chicago and UCLA economists pointed out that, well, look, large market share is typically the result of superior performance. Not the cost, it's not that firms have profits because they have a big market share. It's that firms that are good, that sell better products that consumers like that have lower costs are more efficient, become profitable, and they gain market share at the expense of firms that are less profitable, suggesting that the structure conduct performance model has the causation going the wrong way. So in the last five, 10 years, the sort of new movement, which is really a return to the old structure conduct performance movement, sometimes goes under the name Hipster Antitrust, or Neo Brandeisian Antitrust after their hero, the legal theorist, Lewis Brandeis, the current head of the FTC Antitrust Division, Lena Kahn, is the most well-known spokesperson for this particular view of antitrust. And again, it's a very simplistic, the purpose of competition policy, the role of the state is to break up monopolies. And monopoly means market share bigger than X, where X is the number that's convenient for whatever we're trying to do at the time. And so there's a lot of discussion recently about, is it really legit to do that? Is it okay to just, how do you measure the market share? I mean, there's different sort of, what they call concentration ratios. The CR4 is the combined market share of the four largest firms. Okay, why not the CR5 or the CR10 or the CR1? There's what they call the Herfindahl-Herschman Index is another way of computing the degree of concentration in the market. And there's a lot of discussion just in the last year or so. People trying to study the historical relationship between concentration as measured by these different kinds of measures and the prices that are charged to try to show that prices are going up because concentration is going up rather than monetary policy, as the Austrians would say. It's really hard to identify any kind of causal relationship between concentration measures and prices for the reasons that we've mentioned. I also want to mention, I want to remind you, remember that in the Austrian understanding of production, the Austrian understanding of entrepreneurship, the Austrian understanding of profit and loss, you hear a lot in this mainstream literature about the profit rate. The profit rate in this industry is 4%, and we think that's too high, it should be 3%. Well, remember, profit is not a rate. I mean, profit is an amount. It's total revenues minus total costs. And just because on average from 1985 to 2005 in the auto industry, the average profit level among all firms over all years was X dollars, and then we divide that by total sales or total capital invested to turn it into a percentage. That has nothing to do with what the profitability of a particular firm will be today. That's an average over time and over a lot of different firms. Firms earn high profits in one period and then they earn losses in another period. There's uncertainty, as we mentioned before. The whole concept of a profit rate really doesn't make any sense. The last thing I'll mention, just in the minute or two we have left, is there's another way that this conversation is coming into current debates is with the concerns about so-called monopsony. So monopsony is like monopoly, but on the input side rather than the output side. So a firm with monopsony power, so-called, is a firm that has market power like in the market for procuring inputs, in particular labor. So for years, economists said the minimum wage is not a good way to reduce unemployment. Your professor may have shown you a diagram like this that if the government sets a legal minimum wage above the wage that clears the market, this just means the quantity supplied of labor, people wanting to work, exceeds the quantity demanded for labor and we have this amount of surplus labor, i.e. unemployment. And therefore price controls, wage controls are not a good way to increase wages for the majority of workers. How many of you have seen a picture like this in class before? So now the argument has shifted to where advocates of the minimum wage say, well, yeah, but this assumes that the labor market is perfectly competitive. What if it's not? What if there are a few big firms? What if there's a Walmart in town that employs all the workers and therefore can pay them whatever wages it wants? Doesn't have to pay equal to their discounted marginal revenue product like we were discussing yesterday. So I mean, this is sort of like the inverse of the monopoly diagram where you have a firm, let's say this firm is the only buyer of labor, only renter of labor in a given town, then here's the market supply of labor, here's the marginal revenue product of labor, so the equilibrium in a competitive market should be this many workers are hired and they get this wage, but because this firm has market power in hiring labor, it only pays, it has this sort of marginal cost of hiring curve which is above and to the left of the supply curve for labor, so it actually only hires this many workers, it only pays them this much. So workers are not getting their full discounted marginal revenue product according to this critique because the hirers can do whatever they want in the market, okay? So this is the argument you hear in 2022 for minimum wages. A lot of problems with it, I mean the same arguments that Rothbard and others levied against monopoly would also apply for monopsony, but I mean also look, if you think about it, it doesn't make any sense. I mean, even in a small town like Auburn, you know, McDonald's, Burger King, Wendy's, they're all paying more than the state minimum legal wage, they can't hire enough workers. I mean even if there's an Amazon distribution center in your town, it doesn't employ 95% of all the workers, especially entry level low wage work, which is highly substitutable. It's just hard to imagine that monopsony power could actually play much of a role in wage determination if you really sort of think about it. Okay, so to summarize, we understand, it's better to understand competition or I should say Austrians understand competition as a process of rivalry among entrepreneurs who are free to compete in the classical sense of competition. Now that could result in a few large firms or a lot of small firms. It could result in firms that earn a lot of profits or firms that earn a lot of losses. There could be a lot of entry or not very much entry. There could be a lot of innovation. There could be very little innovation. Exante, we can't specify exactly what the behavior or what the outcome would be in that market only to say that this is the result of free and voluntary interaction among entrepreneurs, capitalists, factor owners, consumers and so on. So the best government policy from that point of view for restricting monopoly power is don't grant monopolies. Okay, don't give out special privilege. Don't restrict trade to give firms a form of monopoly privilege. Step aside, let entrepreneurs compete in the market and we'll get the best outcomes that we can potentially get. Thank you.