Felix Salmon Discovers The Contestable Monopoly

Felix Salmon has managed – if he realises it – to discover the concept of the contestable monopoly. He’s thinking about the newspapers of old but the thought and example has application far beyond that declining industry. It’s vital in fact when looking at monopoly in any field – most especially the tech one right now. For we’re all aware of that groundswell about how Google, Facebook, Amazon perhaps, are monopolies and must either be broken up or regulated.

What Salmon is pointing out is that a monopoly can in fact be of benefit to consumers. But it does depend – it depends upon whether the monopoly is contestable. If it is then the mere threat of that competition will act – or at least can act – as if the competition is really happening. At which point we’re already getting the benefits to consumers of the competition and thus we don’t need to do anything about the fact that the competition doesn’t actually exist.

Another way to put this is that to justify action on monopoly it’s not sufficient to show that the monopoly exists. It is necessary to show that it’s not contestable and also that it is harming consumers.

It’s surely true that, on some level, the publishers enjoyed the social cachet that came with their papers and liked being complimented on their quality. But their decision to keep employing all those journalists made perfect sense on a financial level as well. That’s because their profits weren’t really a function of their journalism; instead, they were a function of their local monopolies. When you have a monopoly, you have enormous pricing power and can make huge profits. As a result, every monopolist’s worst nightmare is competition, and all monopolists spend a lot of time strategizing about how to ensure there isn’t any.

One extremely effective way of preventing competition is to build an impregnable “moat,” or barrier to entry—to make it clear that the upfront costs of attempting to compete would be so enormous that even successful entrants would never recoup their initial investments. And that’s exactly what local newspapers across America did during their heyday. If you wanted to compete with the Chicago Tribune or the Miami Herald or the Washington Post or the Los Angeles Times, then you would need to publish a product of comparable breadth and quality—otherwise, why would anybody switch? But all those newspapers boasted high salaries, multiple foreign bureaus, extensive investigative operations, and generally the kind of cost structure that no startup could compete with. And so no startup did. Alt weeklies had their day but never really constituted a competitive threat to the big monopolies; their product was a supplement to the daily paper rather than a replacement for it. And so each of the big papers had their enormous markets to themselves, or at worst were part of a comfy duopoly.

Spending more than they needed to on journalism, then, was less an altruistic act than a strategic imperative—a way to keep all those juicy revenues for themselves, instead of having to share them with a competitor.

The threat of competition arising if the product wasn’t excellent led to the product being excellent. That mere thought that the monopoly was contestable meant that consumers were already getting the benefit as if the competition actually existed.

It’s entirely true that there’s not much competition around for Google’s advertising or search products, Facebook’s social media ones. But there’s an entire Venture Capital industry out there (Amazon, Microsoft and others as well) willing and able to fund anyone who can provide viable competition. This we’re already getting that investment in making those products ever better as the monopolies are contestable.

If it applies to newspapers then it really does apply to search engines and social media. Unless, of course – and in common with near every journalist on the planet – we’re to argue that there’s something very special about newspapers. Which there even might be but the business models underlying them not so much.