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Playing with Monopoly

imageWith the recent challenges to Google’s purchase of Doubleclick, Microsoft’s endless courtship of Yahoo, and the filing of more papers in the upcoming Intel/AMD case, the question of “why should the government break up monopolies?” becomes much more relevant.

This is a question that very few people ask, even though it is oftentimes taken for granted that the government should indeed engage in anti-trust activity.

The logic behind modern anti-trust efforts goes back to the era of the railroad, steel, and oil trusts of the Gilded Age, when massive and abusive firms engaged in collusion and anti-competitive behavior to fix prices and prevent new entrants from entering into the marketplace. As any economist will be quick to point out, one of the secrets to the success behind a market economy is competition – whether it be workers competing with workers to be more productive or firms competing with firms to deliver better and cheaper products to their customers. When you remove competition, there is no longer any pressing reason to guarantee quality or cost.

So – we should regulate all monopolies, right? Unfortunately, it’s not that simple. The logic that competition is always good is greatly oversimplified, as it glosses over 2 key things:

  1. It’s very difficult to determine what is a monopoly and what isn’t.
  2. Technology-driven industries oftentimes require large players to deliver value to the customer.

What’s a Monopoly?

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While we would all love monopolies to have clear and distinguishable characteristics – maybe an evil looking man dressed in all black laughing sinisterly as his diabolic plans destroy a pre-school? – the fact of the matter is that it is very difficult for an economist/businessperson to really tell what counts as a monopoly and what doesn’t, for four key reasons:

  1. Many of the complaints and lawsuits brought against “monopolies” are brought on by competitors. Who is trying to sue Intel? AMD. Who complained loudly about Microsoft’s bundling of Internet Explorer into Windows? Netscape.
  2. “Market share” has no meaning. In a sense, there are a lot of monopolies out there. Orson Scott Card has a 100% market share in books pertaining to the Ender’s Game series. McDonald’s has a 100% market share in Big Macs. This may seem like I’m just playing with semantics, but this is actually a fairly serious problem in the business world. I would even venture that a majority of growth strategy consulting projects are due to the client being unable to correctly define the relevant market and relevant market share.
  3. What’s “monopoly-like” may just be good business. Some have argued that Microsoft and Intel are monopolies in that they are bullies to their customers, aggressively pushing PC manufacturers to only purchase from them. But, what is harder to discern is how this is any different from a company that offers aggressive volume discounts? Or that hires the best-trained negotiators? Or that knows how to produce the best products and demands a high price for them? Sure, Google is probably “forcing” its customers to pay more to advertise on Google, but if Google’s services and reach are the best, what’s wrong with that?
  4. “Victims” of monopolies may just be lousy at managing their business. AMD may argue that Intel’s monopoly power is hurting their bottom line, but at the end of the day, Intel isn’t directly to blame for AMD’s product roadmap mishaps, or its disastrous acquisition of ATI. Google isn’t directly to blame for Microsoft’s inability to compete online.

Big can be good?

This may come as a shock, but there are certain cases where large monolithic entities are actually good for the consumer. Most of these lie around technological innovation. Here are a few examples:

  • Semiconductors – The digital revolution would not have been possible without the fast, power-efficient, and tiny chips which act as their brains. What is not oftentimes understood, however, is the immense cost and time required to build new chips. It takes massive companies with huge budgets to build tomorrow’s chips. It’s for this reason that most chip companies don’t run their own manufacturing centers and are steadily slowing down their R&D/product roadmaps as it becomes increasingly costly to design and build out chips.
  • Pharmaceuticals – Just as with semiconductors, it is very costly, time-consuming, and risky to do drug development. Few of today’s biotech startups can actually even bring a drug to market — oftentimes hoping to stay alive just long enough to partner with or be bought by a larger company with the money and experience to jump through the necessary hoops to take a drug from benchside to bedside.
  • Software platforms – Everybody has a bone to pick with Microsoft’s shoddy Windows product line. But what few people recognize is how much the software industry benefited from the role that Microsoft played early on in the computer revolution. By quickly becoming the dominant operating system, Microsoft’s products made it easier for software companies to reach wide audiences. Instead of designing 20 versions of every application/game to run on 20 OS’s, Microsoft made it easy to only have to design one. This, of course, isn’t saying that we need a OS monopoly right now to build a software industry, but it is fair to say that Microsoft’s early “monopoly” was a boon to the technology industry.

The problem with today’s anti-trust rules and regulations is that they are legal rules and regulations, not economic ones. In that way, while they may protect against many of the abuses of the Gilded Age (by preventing firms from getting 64.585% market share and preventing them from monopolistic action 1 through 27), they also unfortunately act as deterrents to innovation and good business practice.

Instead, regulators need to try to take a broader, more holistic view of anti-trust. Instead of market share litmus tests and paying attention to sob stories from the Netscapes of the world, regulators need to really focus on first, determining if the offender in question is acting harmfully anticompetitive at all, and second if there is credible economic value in the institutions they seek to regulate.

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