Will Hutton Really Doesn’t Understand Economics, Does He?

This weekend’s Willy Rant was about how America is becoming ever more concentrated in its economy. Monopoly not just thrives but expands and the economic rents from that explain all that ails the colonial cousins.

The problem with this being that there’s not an ounce of truth to it:

Except the latest research demonstrates the reverse is true. Britain is about to make a vast mistake. In the recently published The Great Reversal, leading economist Thomas Philippon of New York University and member of the advisory panel of the New York Federal Reserve, mounts a devastating attack on the conventional wisdom, so perfectly embodied by the witless Boris Johnson. The news is that over the last 20 years per capita EU incomes have grown by 25% while the US’s have grown 21%, with the US growth rate decelerating while Europe’s has held steady – indeed accelerating in parts of Europe. What is going on?

Philippon’s answer is simple. The US economy is becoming increasingly harmed by ever less competition, with fewer and fewer companies dominating sector after sector – from airlines to mobile phones. Market power is the most important concept in economics, he says. When firms dominate a sector, they invest and innovate less, they peg or raise prices, and they make super-normal profits by just existing (what economists call “economic rent”). So it is that mobile phone bills in the US are on average $100 a month, twice that of France and Germany, with the same story in broadband. Profits per passenger airline mile in the US are twice those in Europe. US healthcare is impossibly expensive, with drug companies fixing prices twice as high or even higher than those in Europe; health spending is 18% of GDP. Google, Amazon and Facebook have been allowed to become supermonopolies, buying up smaller challengers with no obstruction.

This analysis is looking a the number of competitors across the national economy. Yet that’s not where competition is, nor is it where it counts. Competition matters only in the face of the consumer. Recall all that stuff about how the UK supermarkets were an oligopoly? How did we try to measure that? By looking not at national shares of the market because that’s an irrelevance. Instead we looked at how many supermarkets did any one – or set of – households have to choose from. Geography matters that is.

So, when we look at competition of monopoly in an economy we want to be looking at the choices – or the monopolies – that apply to groups of people, not the nation as a whole. And what has recent decades done? Vastly increased the competition to service any one household.

Think of Amazon, just for a moment. OK, so it has some vast percentage of the national ecommerce market. Is that the important thing? Or that every household now can choose from the local mall, the one a bit further away and also however many squillion sellers there are on the Amazon Marketplace. Oh, and, also, e-Bay, Target, Walmart and everyone else trying to sell online?

Competition for the business of any particular household has risen, not fallen. Thus a claim about increased monopolisation of the American economy fails, doesn’t it?

But then if Willy Hutton knew any economics he’d not be Willy Hutton, would he?

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Spike
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Spike

Remember that Microsoft had a monopoly over operating systems (running on PCs) (that were not running UNIX-based systems). If you set out to assert monopoly, there is always a way to slice-and-dice the data to do so.

Craig
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Craig

Well, it’s not just monopoly, per se, its market power. For sure, Microsoft may not have a complete monopoly in operating systems but they definitely torpedoed Netscape by bunding IE with Windows.

Spike
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Spike

That Netscape was torpedoed, we can agree on. But did Microsoft use its “market power” to (1) deny Netscape undocumented interfaces that IE could take advantage of? (2) set the price of IE to zero? (3) produce a superior browser? (4) relieve the customer of the need to shop for and install a browser? Little of that “market power” was amassed by coercing customers, all of it was at risk if Microsoft should bundle in shabby components, and some of the “power” means nothing except approval by the customers.

Craig
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Craig

Well in a market where users could first: choose their OS and then choose their browser, they spent, say, $200 on Windows and $50 on Netscape (Netscape had 90% of the market). Microsoft changed the price so that it was $250 for WIndows with IE. So now users had a choice: Windows with IE for $250 or Windows + IE + Netscape for $300 and of course that was the choice that put Netscape under. (The specific price numbers are CLOSE). As an aside, individual users could download either browser for free, the customers were the corporate clients who had… Read more »

Spike
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Spike

The numbers are close, but I don’t think the retail cost of Windows rose once IE was bundled. Microsoft giving away software that a start-up hoped to sell was a recurring Silicon Valley nightmare.

And you say Chrome/Firefox would prevail? I guess “market power” isn’t all it’s cracked up to be.

Craig
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Craig

It wasn’t about the browser, it was about protecting Windows!

Craig
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Craig

But Amazon isn’t very profitable in terms of net margin. They would be ridiculously easy to undercut on price. The problem is the low margin big boys can’t have that, so they make sure if people like me charge lower prices that our suppliers will stop selling to us. If you do, they have little bots crawling the internet and you will quickly get an email saying, “Amazon brought it to our attention that your website is not in compliance.”

Perfectly lawful in the US too, I might add.