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The Problem With Modern Monopoly Theory – It’s About Monopsony

Noah Smith treats us to an overview of modern thinking – for which read progressives who just are darned well going to do something about large companies – on monopoly and antitrust. They’re beginning to come at this sideways, to insist that dominant companies are dominant in labour markets, therefore let’s break up Amazon and Facebook right now. There is a certain error to this argument. That error being that dominance in one market does not mean dominance in another. Standard Oil presented no threat to grocery retailing for example, AT&T none at all to car manufacture. So, why should, or even would, dominance in social media lead to dominance in hiring computer programmers? They’re just entirely different markets thus a conflation of the two is going to get things wrong more often than not:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The big story at the annual American Economic Association meeting in Atlanta earlier this month was about the economics profession dealing with its gender problem. But after that, the second-most-interesting debate in economics right now is over antitrust and monopoly power. Two things have pushed the antitrust issue to the fore — economists have started to cite excessive market power as a drag on growth and wages, while energized activists are rising up to challenge lax regulation that allowed a wave of mergers in the past few decades. [/perfectpullquote]

It’s certainly possible that excessive power in the labour market could lead to profit at the expense of labour. Why do you think that all American sports leagues are cartels without promotion and regulation? So as to hand market power to the people who own those franchises, to enable them to be monopsonist purchasers of the players’ labor, that’s why.

So, yes, it can definitely happen:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]One of the most interesting papers presented in Atlanta was by the University of Pennsylvania’s Ioana Marinescu, an economist who has done a lot of recent research on market concentration and market power. Writing with law professor Herbert Hovenkamp on the effect of mergers on labor markets, the authors proposed a new approach to antitrust. Whereas defenders of the traditional approach focus on consumer welfare as the benchmark of market power, Marinescu and Hovenkamp recommend that courts and regulators also consider the degree to which mergers give companies more power to suppress wages.[/perfectpullquote]

Well, if that’s true then great, don’t allow the merger. But that’s not a problem with monopoly, that’s a problem with monopsony. That Facebook dominates social media doesn’t mean they’re the price setting buyer of programmer wages. Thus their power over wages is an irrelevance to their social media monopoly. Equally, their dominance in social media is an irrelevance to the labour market.

Yes, we know, those big bad companies, we’ve got to find some reason why they’re Bad ‘coz they’re certainly Big. But this isn’t a valid argument. If they are or will become monopsonist purchasers of labor then great, deal with that as and when it happens. But dominance in production in some sector of the market just isn’t the same thing at all. Thus fears of the first can’t be usefully used to indicate the second, so shouldn’t be used as a means or signal of regulation.

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Jonathan Harston
Jonathan Harston
2 years ago

Big is bad? Monopsony purchaser is bad? Demolish the NHS! 😀

2 years ago

Yes, I smell a circular argument there.

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