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Competitive Output

Output of a Typical Good (tons)

portion of price (that is, the measure of monopoly power developed earlier). And the monopoly output is 1.0 X monopoly output as a percentage of competitive output. So the area of the rectangle is the product of the differences between the two. The typical marginal cost might be 90% of price. The typical elasticity of demand would be calculated by averaging the high elasticities facing the many competitive firms in the economy with the low elasticities facing the monopolistic nopoly, if the typical ratio of marginal cost to price were 0.90, then the elasticity on average would be 10, a not unreasonable figure. If the corresponding fall in output were as much as 30%, the size of the shaded area would be ±(0.30)(0.10) = $0,015. The whole national income earned in this typical industry is the price times the quantity, or ($1)(0.70 tons), or $0.70. In other words, the typical efficiency loss from monopoly is small, a mere $0.015/$0.700 = 2.1% of national income.

firms. According to the fundamental equation of mo-

Arguments such as this persuade many economists that the efficiency losses from monopoly (or, indeed, from other distortions, such as excessive regulation of trucking or taxes on food) are small.

Why Appearances The many economists, however, are mistaken. They are also mistaken, for the Are Deceiving same reason, when they assert that perfectly discriminatory monopoly has no efficiency costs. The mistake is the familiar one of supposing that the competitive or monopolistic structure of markets does not itself have market causes, that it simply falls on the community like rain. The point is that monopoly of any sort earns supernormal returns. Therefore people will seek these returns. And in seeking them they may spend resources, wasting resources in addition to and quite possibly much larger than any little triangle of efficiency loss. That is, the seeking of monopolies is itself an industry, and it might well use up resources.4

The argument is identical to the argument about the waste from queuing. If seekers of a monopoly of import licenses for oil or offshore drilling leases simply bribe the relevant officials with cash, there is in the first instance no additional (deadweight) loss. But if they hire lawyers, offices, restaurants, secretaries, and so forth, all employable elsewhere in the economy in some useful purposes, then additional loss is possible. It could be as high as the whole excess of marginal earnings of resources in the monopoly over their marginal cost, that is, as high as the whole amount of profit. In terms of the Figure 19.5 just used, the whole excess is $0.10 at the margin, or the rectangle of profit over rent, namely, (0.10)(0.70), or $0.07 out of a total national income earned in the typical industry of $0.70. The 10% loss is in this extreme case almost five times the loss calculated as a triangle of inefficiency.

Consider the following, which is a good example of the importance of viewing monopoly as behavior instead of structure.

Q: Edwin Land was the first to invent an instant camera. He and his Polaroid Corporation continued to improve it, taking out over a thousand separate patents as they did so. Kodak wished to muscle in on this territory. To do so, however, it had to invent another sort of instant camera, different enough in its principles to avoid infringing the Polaroid patents. What was the social loss of Polaroid's monopoly? What single accessible figure would you want to have to measure it?

A: The social loss and the single figure you would want to have to measure it is the entire, enormous cost of developing a new type of instant camera. Little or nothing is gained socially by having two types. But the existence of a monopoly profit exploited by Polaroid gave the incentive to spend millions seeking it.

Summary The defenses of monopoly are as varied as are the monopolists. The more subtle of the defenses are not easy to overcome: Monopoly might indeed, for example, be a spur to invention. On a theoretical level all that can be said in reply is that it might not be, too. What can be said with confidence is that simple monopoly reduces output and, more deeply, that it leaves unexploited opportunities for exchange between the monopoly and its victims. Even the simple monopoly is worse off than it might be. Note the word "simple" in "simple monopoly." It means "single price" or "unable to discriminate by way of charging different prices to different consumers." By the same Edgeworth box that shows that simple monopoly is inefficient, one can show that perfectly discriminatory monopoly is efficient; that is, it arrives at a point with no unexploited opportunities for mutually advantageous exchange. The notion that discrimination tends to efficiency has some practical use. For example, it rebuts the natural but erroneous opinion that because monopoly is bad more and stronger monopoly must be worse. A multipart tariff for electricity may therefore be better than a single-price electric company charging one, high, clumsy price to all.

4 Gordon Tullock, "The Welfare Costs of Tariffs, Monopolies, and Theft," Western Economic Journal 5 (June 1967): 224-232; and Richard A. Posner, "The Welfare Costs of Monopoly and Regulation," Journal of Political Economy 83 (August 1975): 807-828.

The main use of the notion, however, is theoretical. It alerts the economist once again, for example, to the great split between equity and efficiency in economic thinking. An inequitable society filled with fee takers may well be efficient, or an efficient society may be equitable, or any other pairing. And the logic of extreme monopoly reminds him that the inefficiency from less extreme monopoly comes from the transactions costs of making further deals between monopolist and victim. The amount of the inefficiencies (the triangle of social loss) is in a sense a measure of the transactions cost. More than they realize, perhaps, Marxists and other critics of capitalism are correct to view monopoly returns as a measure of the importance of friction in the system. The triangle turns out in fact to be small. But this does not end the argument between defenders and critics of the efficacy of markets. The triangle of social loss is a great underestimate of the whole social loss. The loss from the pursuit of monopoly profits, as distinct from the loss from exercising the monopoly power once attained, can be very large. Its size depends on how monopolies come to be monopolies, the subject of the next chapter.

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