2023-02-22

Good news on anti-trust?

It’s really not intuitively obvious to anyone why a firm which has a large market share should be problematic. Exactly what ‘market share’ and ‘market’ are hard to define. They certainly depend on what people regard as substitute goods. Some people consider tofu an acceptable substitute for cheese, others not so much. Most people probably just think “if I can get stuff I need for a reasonable cost, why is there a problem.”

An economy with lots of atomic entities (individuals) privately contracting with each other for the provision of services would be chaotic and not very productive. In practice, most of us work for larger entities (‘firms’) where we do have an employment contract, but one which is vague in the extreme about exactly what we are expected to deliver for our wages. The difference is so large that there is a totally different type of taxation of income derived from a ‘contract of service’ (i.e. employment) and from a ‘contract for service’ (aka ‘self-employment’, e.g. cutting someone’s hair for a fixed payment). Given that we mostly work for large firms, it doesn’t seem unnatural that we all get our electronic goods from Amazon.

J D Rockerfeller, once the richest person on the planet, was highly religious, and saw it as his mission to get rid of the wasteful competition of hundreds of oil exploration and production companies that were forever undercutting each other swinging from underproduction to massive overproduction, with consequent bankruptcy and destruction of capital. By ‘coordinating’ the transport of oil, he stabilized the market and incidentally made quite a bit of cash for himself. What he did was perfectly legal, under the legal code of the time, and it was not until the US Congress passed new laws that monopolistic behaviour like his became illegal. Even when Standard Oil, his company, was broken up, the extent of real competition was, shall we say, muted.

Anti-trust enforcement seems to have operated reasonably effectively until the 1950s and maybe a bit beyond. This was a golden age for the US middle class, maybe not so coincidentally. At some point in the 1970s, Robert Bork wrote The Antitrust Paradox. This argued that stopping firms getting big was hurting consumers, or at least not harming them. It’s hard to argue that we as consumers suffer from runaway price inflation of the sort of items we buy from Amazon, or Tesco, come to that. And when it comes to Google, which gives away most of its products to end consumers, how can it be argued that consumers are harmed?1

The conventional wisdom is that the production function of firms shows declining returns to scale (or something that sounds like that). The idea is that after a factory, or firm, gets beyond a certain, modest size (dependent on the industry) unit costs start to rise. Well, it’s not obvious that this is a good model of how most modern firms operate. A lot of sectors, from aircraft manufacturing to distribution of soft drinks have become dominated by a handful of firms. I think that the combination of improvements in communications technology, and the increasing cost of arms-length contracting between independent legal entities, have resulted in big firms getting big because they really can make things cheaper.

Whether firms are getting bigger because they have found a way of nullifying the diseconomies of scale or because they acquire pricing power through monopoly (or, more commonly, oligopoly) is slightly beside the point. In both cases some legislative action is needed, either to break them up, or to limit their return on capital. This is an uncontroversial position. Utilities (electricity distribution companies etc.) have been regulated as monopolies for decades. It’s time to do this for Google: many people see it as a sort of utility, certainly something they’d find difficulty in doing without.

Notes

1

The post that got me thinking.

2

The term ‘antitrust’ derives from the fact that Rockerfeller held shares in many different companies in trust, paying the beneficial owners all their dividends and other distributions that ownership entitled to together with some modest additional incentive but retaining voting rights through which he exercised control of a much larger part of production than would have been possible by simply buying shares in the open market. Daniel Yergin’s book ‘The Prize’ gives a fascinating account of this.

While I’m musing on this, I find it very odd that modern finance hasn’t found a way to separate voting rights from the shares they start off as attached to so they can be traded separately.

3

Ronald Coase understood that offsetting diseconomies of scale was the scope to economize on contracting costs, when a firm is vertically integrated in all factors of production, especially labour.