Showing posts with label antitrust. Show all posts
Showing posts with label antitrust. Show all posts

Wednesday, September 18, 2013

The "Coase Theorem" and Big Business

Copyright, The New York Times Company

Big businesses, especially those with large shares of the markets in which they sell, are sometimes thought to harm the economy because they sell to customers with little fear of competition from other sellers. Big businesses charge too much, the argument goes, and all customers can do in response is to purchase less. (The seller understands that customers respond to high prices by purchasing less, but the high profit margins are thought to more than compensate for the lower volume.)

If the industry had more sellers, or the customers themselves were in charge of production, prices would be lower, consumers would buy more and in aggregate the industry’s sellers would produce more and need more employees.

This “monopoly view” is that dominant businesses result in less industry production and employment than would emerge in a competitive marketplace.

Consistent with the monopoly theory of big business, the federal government, especially the antitrust division of the Department of Justice, is authorized to punish businesses that are thought to be too large for the efficient operation of their marketplace, and in some instances to break them apart.

In the labor market, unions can sometimes be a dominant seller, and on that front there are opposing “monopoly” and “bargaining” theories, as I noted in last week’s post. The bargaining theory of labor unions suggests that they limit the economic damage that they do.

The same sort of bargaining theory is present in the antitrust field. A big business should not be satisfied with a high-price/low-volume outcome, even if it yields more profits than a low-price/high-volume outcome, because a price above marginal cost of production is inefficient: there may be ways that the buyer can be given a better deal and enhance the seller’s profits.

Profs. Kevin Murphy, Edward Snyder and Robert Topel of the University of Chicago have written about some of the results of bargaining between big businesses and their customers. Big businesses often offer volume discounts, quote nonlinear prices and give loyalty incentives to customers. All these policies can encourage customers to purchase more, perhaps in a quantity similar to what they would buy in a many-seller market with lower prices. If the bargaining view of monopolies is correct, then the monopoly view of big business has exaggerated the degree to which dominant sellers harm the economy.

While one point of view is that federal antitrust policy is not vigorous enough, Professor Coase reminds us that it is easy to exaggerate the economic problems created by dominant sellers.

Wednesday, September 11, 2013

The "Coase Theorem" and Labor Unions

Copyright, The New York Times Company

Labor unions are organizations of workers through which workers collectively bargain with their employer(s) over wages, fringe benefits, working conditions and other ingredients of employment contracts.

Labor unions tend to support candidates from the Democratic Party more than they support Republicans, and “liberals” are thought to be the ones who would acknowledge socially productive activities by unions.

A supposedly conservative view is that, with the help of special legal exemptions from antitrust laws and their ability to put workers on strike, labor unions harm economic efficiency by restraining competition in the labor market. From this perspective, unions are harmful because, among other things, they interrupt production with strikes, waste resources with “featherbedding” rules that require employers to hire employees for useless or nonexistent tasks and ultimately reduce employment by forcing employers to pay high wages.

Professor Coase, who died on Labor Day at age 102, explained how the legal assignment of property rights might not be that important for determining how resources are used in the economy. His idea became known as “The Coase Theorem,” and he received the Nobel Memorial Prize in Economic Science in 1991.

Although Professor Coase was supposedly conservative (he resisted this label, but the University of Virginia urged him and other economists they deemed to be conservative to leave), his conclusions arguably support many of the liberal views of unions.

Professor Coase’s property rights logic suggests that reassignment of ownership of some production processes and decisions from owners and management to workers – as is often the case under union-negotiated contracts – should not significantly change how businesses are run. That means that unions should avoid strikes and oppose featherbedding and for the same economic reasons that union-free shops do. Union wage demands would not reduce employment, at least in the short run.

In this “bargaining” view, unions would achieve efficient outcomes by bargaining over many aspects of the employment relationship, and not just salaries. A bargaining union would not accept featherbedding, for example, but instead would offer to give up featherbedding in exchange for something else (perhaps cash, or the creation of an additional productive position), because the featherbedding costs the employer more than it benefits the union members. If unions do too much to shrink the size of the economic pie, it’s difficult for them to enhance the lives of their members. Indeed, reasoning like Professor Coase’s had, in the union context, already been examined by labor economists like Wassily Leontief at Harvard.

The important difference between economic approaches to labor unions is not liberal versus conservative but “monopoly” versus “bargaining.” Milton Friedman took the monopoly view when he looked at the American Medical Association, which he understood as a union of medical doctors that restrains competition. Robert Barro took the bargaining view in his argument against Keynesian interpretations of wage rigidities.

Although it does not mention the Coase Theorem, “What Do Unions Do?” by Prof. Richard Freeman and Prof. James Medoff offers the most vivid explanations of the productivity consequences of unions. Strikes and featherbedding are rare in unionized industries. More typically, they said, unions enhance productivity by, among other things, reducing turnover and supporting training programs that make workers more productive.

One can argue whether it makes sense to give special legal protection to labor unions, but Ronald Coase’s results remind us that it is easy to exaggerate the consequences of those provisions.

Wednesday, June 20, 2012

What Happened to Microsoft's Monopoly?

Copyright, The New York Times Company

As Apple introduces a range of new products, it is worth remembering that there is no such thing as a monopoly in the computer industry.

Fourteen years ago, the Justice Department accused Microsoft of maintaining a monopoly in personal-computer operating systems and expressed concern that Microsoft would extend that monopoly.

At the time, 90 to 95 percent of personal computers powered by Intel processors were running a Microsoft operating system. Some analysts said that this left PC owners little choice, and that Microsoft was preventing the marketplace from functioning well. Others suggested that the market was functioning quite well and that so many PCs ran a Microsoft operating system because of the combination of low price, desirable features and networking advantages.

Two years later, a federal district judge agreed with Department of Justice and ordered Microsoft to be broken into several technology companies – a ruling later vacated by a higher court.

Watching Apple introduce some amazing products last week, including laptops (which have been running Intel processors for several years now) and operating systems for mobile and desktop devices, it is difficult to imagine that the Justice Department once thought that, without government intervention, consumer choices would be significantly limited by Microsoft.

Interestingly, on Tuesday, Microsoft announced that it was introducing a tablet, the Surface, that will compete in the strong and growing market dominated by Apple’s iPad. Market forces are clearly working to give consumers choices in the market.

The first chart below shows Apple’s share price as a ratio of Microsoft’s, both on a monthly basis and adjusted for dividends and splits. The ratio is normalized to one in June 1998, when Justice filed its antitrust suit. I have indicated some of the interesting market events that began a significant movement of customers away from Microsoft and toward Apple: the introduction of a Windows-compatible iPod, the opening of the iTunes store and the introduction of the iPhone (both a phone and a pocket-sized personal computer, running an operating system written by Apple).

Now, relative to Microsoft’s share value, Apple share values have increased almost 60 times, largely because of Apple’s new products and the market’s anticipation of its future products. This next chart from shows some of that history by quantifying the number of number of personal computers shipped in each year since 1975.

The Rise and Fall of Personal Computing

Growth of computing platforms, in thousands of units shipped per year. Scale at left is logarithmic.Asymco.comGrowth of computing platforms, in thousands of units shipped per year. Scale at left is logarithmic.

The chart shows PCs (which here means I.B.M.-compatible lineage, primarily running a Microsoft operating system) overtaking other personal-computing machines in the mid-1980s. However, in the mid-2000s Macintosh and iPhone shipments took off, soon followed by iPads and Androids. By 2011, PCs were less than half of all shipments.

In the computer industry at least, current market shares are no guarantee of future success. What might appear to be monopolies are frequently and decisively broken by innovative competitors rather than antitrust regulators.

Tuesday, June 2, 2009

More on Obama's Possible Impact on Competition

Earlier I suggested that, even if the Obama Administration was significantly more anti-merger than Bush's, the impact on efficiency and the consumer might be minimal because mergers are substitutable across time.

This intertemporal substitution effect operates less regarding DOJ regulation of business' pricing and marketing policies.

Professor Priest in today's WSJ suggested another reason Obama might have little impact on anti-trust policy: (he claims) anti-trust law is ultimately determined by the Supreme Court, and (even with a couple of Obama appointments) the Supreme Court will not completely overturn its precedents.

Of course (assuming again that the Obama Administration makes a genuine change), businesses will have to spend more on legal fees and economic experts to continue pursue some of the practices they did under Bush. Some of those businesses will decide not to fight DOJ (due to the legal expense) and instead just change their practices. Other business will fight, or credibly threaten to fight, DOJ all the way to the Supreme Court.

Presumably the former cases would involve practices that are less valuable in terms of enhancing efficiency or stifling competition (that's why they are outweighed by legal fees) whereas the latter cases involve the practices that matter the most. This kind of selection bias suggests that the most valuable practices disapproved by the Obama Administration but approved by the Supreme Court will survive.

Commenters -- what do you think -- is anti-trust really in for a big change?

Wednesday, May 13, 2009

Antitrust Overblown -- At Least the Merger Part

This week the Obama administration announced that they would strengthen antitrust rules, as compared to the Bush Administration. I am always skeptical when one party claims to have dramatically different policy than the other, but maybe this promise is credible. So what?

The Obama years would have fewer mergers. Obama will leave office eventually, at which point there would be many more mergers. Presumably a bunch of mergers occurred at the end of the Bush Administration in anticipation of tougher enforcement by Obama.

I do not think that team Obama will go so far as to break up companies that were merged under Bush, so its really only a question of how much it matters that two corporations have to operate separately for a while (waiting for Obama to leave) or that two corporations were merged prematurely as the Bush administration ended.

In case you think the typical merger would enhance efficiency: is it a big deal to postpone the efficiency gain for a few years? What about the efficiency gains that happened early as a result of mergers rushed through before Bush was done?

In case you think that the typical merger would be anti-competitive: how much does the consumer gain if the anti-competitive effect is postponed a few years? What about the anti-competitive mergers that happened early in a rush before Bush was done?

Timing is probably not so crucial to mergers. The interesting thing about the Obama anti-trust announcement is what it reveals about his plans to differentiate HIS (political) product and extract rents from HIS consumers (the citizens) ;).

[NOTE: Other aspects of anti-trust policy, such as the regulation of marketing practices, are another story because many of the prohibited practices create on-going efficiency benefits and/or anti-competitive costs]