Antitrust Inframarginalism Regulation

The Price Helix in Inframarginal Perspective

Is the current inflation caused by corporate greed?

The answer is very likely yes.

But is it caused by monopoly?

The answer is very likely no.

The difference between these two answers tells us a great deal about why progressives should take an inframarginalist approach to political economy rather than an antimonopoly approach.

That is, it tells us why focusing on who gets the surplus generated by production is more helpful for progressives than obsessing about market concentration.

To see why the present inflation is likely about greed but not monopoly, we need to spend some time thinking about the concept of inflation, and, in particular, distinguishing between the inflationary spiral itself and the triggers of that spiral.

The Inflationary Spiral

As Olivier Blanchard pointed out a few months ago, inflation itself is a spiral, or a tug of war, bred of a conflict over the distribution of wealth.

In inframarginalist terms, it is a conflict over the distribution of surplus.

When a firm produces a good at a cost of $3 and sells it to a consumer who is willing to pay at most $7 for it, production generates a surplus of $4. The price the consumer pays divides that surplus between buyer and seller. If the price is $6, for example, then the seller gets $3 of the surplus (which we call “profit” in the economic sense) and the buyer gets $1 of the surplus.

The price suppliers charge the firm divides the firm’s share of surplus (i.e., divides the firm’s profit) between suppliers and the firm. If a supplier raises its price by $1, then the firm’s costs increase from $3 to $4, and its profits fall from $3 to $2. By raising its price, the supplier has redistributed one dollar of surplus from the firm to itself.

In an inflation, suppliers and the firm battle over the division of profits—they fight over price—but the battle gets out of hand because the battle isn’t just between one firm and its suppliers but between many firms and many suppliers. As a result, price increases by suppliers feed back into the willingness of consumers to pay the firm for its products, and that enables the firm to increase its own prices and profit levels in response to changes in supply prices.

Indeed, the economy is a great feedback loop. Rarely do a particular firm’s suppliers find themselves buying all of their own inputs from supply chains leading back to that firm. Firms sell to other firms’ suppliers and other firms sell to their suppliers.

But when we consider a large enough cross section of firms, it is the case that those firms ultimately sell to their own suppliers as a group. The economy is a tangled web, and although individual strands rarely loop back on themselves, the web as a whole does loop back.

As we learned in Econ 101, the economy is a great feedback loop. Choose a proper cross section of firms and you will find that if you follow the chain long enough, the firms actually indirectly supply themselves. Note that workers are one kind of supplier.

Consider that $1 supplier price increase again. The firm might not be happy to lose $1 of profit. In order to make up for the loss of that dollar to suppliers, the firm might, in response, raise the price it charges to consumers. That would allow the firm to appropriate an additional dollar from consumers as a substitute for the dollar of profit that the firm lost to the supplier price increase. The firm might therefore raise price from $6 to $7, reducing consumers’ surplus from $1 to $0 (recall that the maximum consumers were willing to pay for the firm’s output was $7).

If the supply price increase is limited to this one market, and this one firm responds by increasing its own price, then the analysis ends here. Consumers will be made worse off; suppliers will be made better off; and the firm’s fortunes will remain unchanged.

But if many suppliers have increased their prices, and many firms have responded by increasing their own, then the firms’ price increase will feed back through the tangled web of supply chains that is the economy—back to the suppliers from which the firms buy.

Suppliers will find that the price of the inputs they need to buy to create the products that they supply to firms has increased. In our example, after the firm increases price from $6 to $7, the firm’s suppliers will now find that their own costs have increased by $1. The consumers who purchased goods from the firm for $7 instead of $6 will have increased the prices they in turn charge for the goods and services that they supply to others. And those others will in turn have increased their prices, and the price increase will have propagated through the tangled, looping web until it at last reached the firm’s own suppliers, who will experience it as an increase in the price of the inputs they purchase to make the things that they supply to the firm. Their input costs will increase by $1. (In reality, the a $1 increase in a supply price is unlikely to feed back into a $1 increase in costs, but a one-for-one feedback loop will do for a simple numerical example such as this.)

The $1 in extra input costs that the firm’s suppliers now incur will eat up the extra dollar of surplus they appropriated via their initial supply price increase. The extra dollar they charged to the firm will have turned out to be an extra dollar charged to themselves.

If suppliers want to preserve the extra dollar of surplus that they initially gained from the supply price increase, they will need to raise the supply price they charge to the firm again by another dollar. So suppliers raise price by an extra dollar. That price increase in turn redistributes to suppliers the additional dollar of surplus that the firm had appropriated from consumers by raising the firm’s price to $7 from $6. The firm now pays a supply price of $5 (the initial supply price was $3 and suppliers have now twice raised price by a $1) and once again takes only $2 of the surplus.

If the firm wishes again to make up for this reduction in profits, the firm must again raise its own price to consumers. But isn’t that impossible, because price is already $7 and the maximum that consumers are willing to pay is $7?

The answer is no. The willingness of consumers to pay has now risen from $7 to $8. Why? Because when consumers passed the firm’s original price increase of $1 on to suppliers, they effectively generated an additional dollar of income for themselves when they responded by raising the prices they charged to others. That additional dollar of income made it possible for them to pay an additional dollar for the firm’s product. Their willingness to pay went up.

(Note that consumers here can be individual persons, for whom the good is an input into their production of labor services. Or they can be other firms that produce other goods or services that eventually serve as inputs into the production of the supplies that the firm needs to make its own good. So when I say that consumers responded to the firm’s price increase by raising the prices they charge to others, I mean that they either demanded higher wages (in the case of consumers who are workers) or charged higher prices for the goods or services that they produce (in the case of “consumers” that themselves are firms).)

The firm therefore has leeway to raise price to $8 and the firm will do that if it wishes to restore its erstwhile profit level of $3. So altogether we have seen that an initial price increase of $1 by suppliers triggered a $1 price increase by the firm, which then triggered a subsequent $1 price increase by suppliers, which then triggered a subsequent $1 price increase by the firm. This cycle of price increases can continue for a long time.

That is the inflationary spiral.

Photo: Robert E. Mates.

In other words, the lines in Blanchard’s struggle over the distribution of surplus are drawn as follows.

On one side, you have a firm’s suppliers seeking to obtain a greater share of the surplus generated by the firm.

On the other side, you have the firm itself seeking to obtain a greater share of the surplus that it generates.

Firms and their suppliers can’t both obtain a greater share of the surplus. Suppliers raise prices, reducing firms’ share of the surplus. Firms then raise prices, seeking to recoup what they have lost.

As a result, the higher prices that firms charge eventually raise the costs of the firms’ suppliers, reducing their share of the surplus and leading them again to raise the prices they charge to firms. Firms respond by raising their prices again, and so prices rise and rise.

The Triggers of That Spiral


Photo: William H. Short.

Inflation spirals when suppliers and firms disagree over the proper division of the surplus. If there were no disagreement, the spiral would not get under way. Suppliers would raise prices to the point at which they would achieve the agreed surplus and firms would not respond, because they would be in agreement with suppliers that the resulting distribution of surplus is fair.

If the firm in our example were satisfied with $2 of profit, the firm would not respond to the supplier’s initial $1 price increase by raising its own prices by a dollar. The firm would eat the loss. And if all firms were to respond in this manner, then inflation would not ensue.

But, by the same token, because the heart of the spiral is a disagreement regarding what a fair distribution of surplus should be, an inflationary spiral can, in principle, develop at any time. And it can develop for what an economist might be surprised to discover are purely intellectual—indeed, even ideological—reasons.

If some cross section of America’s businessmen were to wake up one morning feeling that they are not getting a fair share of the surplus, and if they were to raise prices accordingly, and if their suppliers were to be unwilling to accept the smaller share of the surplus allocated to them by those higher prices, and if their suppliers were therefore to raise prices themselves, then we would be off to the inflation races.

This rarely happens, however, because the feedback loop only appears in the aggregate. Many minds would need to change at the same time. So if one supplier were to wake up and want more, that is not likely to lead to an inflationary spiral.

Indeed, if the supplier operates in a competitive market, the supplier might not even be able to raise prices, as competitors would simply take the supplier’s market share and the supplier would not be able to sell at all at higher prices. But if many suppliers were to wake up and want more, inflation would follow—if firms decide to contest this change by raising prices themselves.

Note that the distinction I have been drawing between a firm and its suppliers is arbitrary, because an economy is a feedback loop. At whatever level of a supply chain one wishes to focus—at whatever point along the loop—the focal point contains the firms of interest and the firms and workers that sell to them are the firms’ suppliers.

Given that mass shifts in views regarding the proper distribution of wealth are not common, and that the current inflation does not seem to be driven by one, we need to look for this inflation’s causes elsewhere.


Photo: William H. Short.

Inflation that isn’t triggered by an ideological shift must be triggered by a structural change in the economy—a change that is broad enough in effect to cause many firms to raise their prices at the same time. Something must have happened to markets that gave one side of the conflict—suppliers or firms—the opportunity to take a larger share of the surplus, and the other side must have fought back by raising prices itself, leading to a tug of war.

Here is where the conflict between inframarginalism and antimonopolism comes into play.

The Antimonopoly Story: Crises Desensitized Consumers to Price Increases

Antimonopolists want to say that monopolies triggered the present inflation by using their monopoly power to raise prices.

If we imagine that the firm in our example is a monopoly, then antimonopolists want to argue that in 2021, when the present inflation started, this firm took the initiative to raise price from $6 to $7. Assuming that many other monopolies raised their prices as well, a feedback loop would have followed. Consumers would have passed the cost of the price increase on through the supply chain to the monopolists’ suppliers, which would in turn have raised prices by a $1, and then the monopolies would have responded by raising prices again by a dollar in order to hang on to the gains from their initial price increase. Consumers would have been able to pay that additional dollar because of the extra income they generated from passing on the original price increase. The inflationary spiral that appears to still be running today would have followed.

But this argument falls victim to the venerable question: why now? Antimonopolists themselves have argued that markets have been growing more concentrated for decades. They date the commencement of the trend toward concentration to the importation of Chicago School thinking into antitrust during the Carter and Reagan Administrations. If markets have been concentrating for decades, why would firms have waited until 2021 to raise prices and trigger an inflation?

Antimonopolists’ answer has been to argue that firms could not exploit market concentration to raise prices until the pandemic and the Ukraine war created the circumstances that would allow them to do so. To understand their argument, a trip through the mainstream economic account of the present inflation is required.

Mainstream economists argue that the present inflation was triggered by two structural factors: first, supply chain disruption triggered by the pandemic and the Ukraine war, which caused supply to fall below demand; second, pandemic stimulus checks, which caused demand to exceed supply.

According to the mainstream account, the first factor drove up firms’ costs, leading them to raise prices. The second factor enabled firms to raise prices even further. This fed back into further increases in costs for suppliers, and thence to further increases in prices by firms, leading to an inflationary spiral.

Antimonopolists accept that supply chain snarls and stimulus-driven demand increases provided the initial inflationary impetus. But they insist that this alone was not enough to get the spiral going. They argue that all that this did was to create the psychological prerequisites for an inflationary spiral.

At this point, they argue, market concentration stepped in to create the inflation. Specifically, they argue that once consumers had experienced an initial increase in prices due to the pandemic and later the Ukraine war, they became psychologically primed to attribute price increases to forces majeures of this kind. Antimonopolists argue that this created an opportunity for big firms tacitly to collude to raise prices further.

Market concentration matters here because tacit collusion is possible only when the number of players in a market is small. But according to antimonopolists, concentration alone was not sufficient for tacit collusion to take place until consumers were primed by crises to accept higher prices.

Big firms could tacitly collude to raise prices because consumers, believing that price increases were an inevitable result of the global crises, were willing to pay those higher prices. Consumers would not recoil in righteous indignation, punishing firms by buying less, but instead would continue to buy at the higher prices.

In economic terms, consumer willingness to pay increased by more than the extra money they received from stimulus checks justified. That extra demand created an opportunity for firms tacitly to collude to increase prices.

The Inframarginalist Story: Firms Rationed with Price

The antimonopoly account of inflation doesn’t actually withstand scrutiny on its own terms. But I will get to that later.

What’s important to notice now is that the argument is more complex and overdetermined than it needs to be when it comes to making a progressive, moral case against business behavior during this inflation.

Progressives seem to think that they need to tell a story about market concentration, collusion, or monopoly, in order to blame firms for the present inflation.

They don’t.

All the elements they need to make a moral case are right there in the mainstream account. No collusion or monopolization is required.

That’s because when supply chains snarled and demand surged, firms had a choice. They could have responded by rationing their inventories based on a rule of first-come-first-served or some other principle of distributive justice.

Instead, they chose to ration with price.

That is, when supply chains snarled and stimulus checks caused demand to outstrip supply, firms could have kept their prices where they were and just let their goods to sell out. That amounts to rationing based on a rule of first-come-first-served. Instead, they chose to raise prices.

In the short run—which is all that matters when it comes to getting an inflationary spiral started—raising prices doesn’t increase supply. It takes time to ramp up output, especially when ports are clogged or sanctions against Russia foreclose sources of supply.

But raising prices does ration output to those who can afford to pay the highest prices, which usually means the rich. It also has the rather nice attribute, from the perspective of firms, of increasing profits. In the short run, the inventory that firms have on hand has been acquired at low, pre-crisis costs. Every additional dollar that firms charge for that inventory is profit. It is a redistribution of surplus from consumers to firms.

It therefore follows directly from the mainstream economic account of the current inflation that the root cause of the inflation was corporate greed—specifically, the choice of businesses to ration with price instead of based on some other metric.


In partial equilibrium terms, we have something like this. We start with a competitive market for the firm’s product.

Then there’s a supply disruption or a demand surge that restricts output in relation to demand. Graphically, the supply curve kinks upward rather steeply. The firm then has the option to charge a low price at which the good sells out or to charge a high price that rations access to those with the highest willingness to pay. The high price also generates extra profit.

If the firm chooses the ration price, buyers pass the price increase along through the tangled loop of supply chains that is the economy. Buyers’ ability to pass the increase along effectively increases their willingness to pay for the good, so the demand line rises. The passing-along of the price increase travels through that tangled loop until it increases sellers’ costs, which is reflected in an increase in the supply line. This increase in the supply line reduces firm profits at the current price (the area below the original “greedy, inflationary price” and the higher supply line). The firm moves to restore those profits by increases its price in turn. We are off to the inflationary races thanks to the firm’s initial decision to ration with price instead of letting goods sell out in response to the shortfall of supply relative to demand.

There Is No Efficiency Justification for Rationing with Price

Economists used to argue that rationing with price is necessary, notwithstanding its ugly distributive effects, because it is efficient. Keeping prices low and letting goods sell out forces people to wait on interminable lines, wasting time that could be spent doing more productive things.

As I’ve argued elsewhere, in the information age that’s no longer true. It takes the time required to open up a webpage to reserve a place on line—or to know whether a good has sold out.

Economists also argue that non-price rationing leads to wasteful attempts to subvert the rationing system. People invest in bots, for example, designed to subvert digital lines. But, as I’ve also argued elsewhere, that argument is an example of the Nirvana fallacy. It ignores that people already waste lots of resources attempting to subvert the price system. People expend great effort on wasteful attempts to acquire the money they need in order to be able to pay the prices that firms use to ration access to their products. Theft and corruption are examples.

Indeed, the vast infrastructure of the criminal law and its administration, as it relates to financial crimes, is a monument to the waste associated with operating a price system.

Economists also sometimes argue that rationing with price allocates goods to those who value them the most. But few really believe that. Economists have known for a long time that willingness to pay is a poor proxy for utility because the rich are often willing to pay more than others for things that they value less than others do. As I’ve argued elsewhere, it’s unclear that place in line is a less accurate proxy for value than willingness to pay.

All of which is to say that a firm’s decision to ration with price is not necessarily efficient.

But, as we have seen, it is profitable.

And indeed a firm’s decision to ration with price is inefficient to the extent that it can trigger an inflationary spiral. The reason inflation is inefficient is that it makes it difficult for buyers to plan; prices start to change so fast that they don’t know what their money will buy tomorrow. That shuts down economic activity.

The Greed of Firms Both Small and Large Will Trigger Inflation in Response to Supply or Demand Shocks

It’s important to understand that monopoly or even market concentration is not required to tell a story about greedy price-rationing.

Whether a firm is a monopoly, or a big player in a concentrated market characterized by tacit collusion, or a bit player in a highly competitive market, the firm will have the option to raise price in response to supply or demand shocks—so long as the shocks cause industry demand to exceed industry supply in the short run.

To see why this is true in competitive markets having lots of small sellers, consider what happens when industry supply falls below industry demand.

Some group of buyers won’t be able to find sellers who are willing to sell to them. That’s what it means for demand to exceed supply. We can imagine these buyers going from seller to seller begging for access to goods. Each seller, no matter how large or how small, will face a choice: the seller can either say “sorry, I’ve already promised by stock to someone else.” Or the seller can say “I’ll redirect my stock to you if you pay me a more than the other guy.”

That is, every seller, no matter how big or small, faces the choice whether to ration based on a rule of first-come-first-served (or some other basis apart from price), or to ration with price. When prices rise in competitive markets in response to supply or demand shocks, that’s because each tiny market participant is choosing to ration with price.

Each is choosing to exploit the crisis to make an extra buck.

What is true of competitive markets is true of concentrated markets as well. Supply and demand shocks can drive up the profit maximizing price in the market, but the big firms that have the preexisting power to charge such prices don’t actually have to adjust their prices upward in response. They can continue to charge their legacy, pre-crisis prices.

When they choose instead to raise prices, they are exploiting the crisis to make an extra buck.

The progressive case that corporate greed lies at the heart of the present inflation does not, therefore, require an antimonopoly story. All it requires is the basic recognition that, when firms raise prices in the short run in response to supply or demand shocks, they are engaged in one thing only—exploiting a crisis to redistribute wealth to themselves, and thereby triggering an inflation that could make everyone worse off.

Why This Is an Inframarginalist Story

The inframargin is the category of market transactions in which surplus is generated and distributed. In a competitive market, the marginal buyer and seller place the same value on the good and so their exchange generates no surplus.

The greedy price-rationing story is an inframarginalist story because it emerges from a laser focus on the way prices distribute surplus in markets.

When the inframarginalist sees prices rising, the inframarginalist asks whether the price increases are necessary to cover costs. If not, then the price increases are redistributing surplus—and posing the question whether that redistribution is desirable.

It’s thanks to this process of thought that the inframarginalist perceives that short run price increases during a crisis are not driven by costs. Output adjustments, even costly ones, take time, and until they have been undertaken, firms are selling their legacy, low-cost inventory.

It follows that short-run price increases are elective. They are effectively a policy decision on the part of firms to take advantage of a shortage to redistribute surplus to themselves.

Antimonopolists miss all of this because they spend their time looking for market concentration. For them, redistribution is an afterthought—the stylized consequence of monopolization or collusion.

Implications for Inframarginalism in Relation to Antimonopolism

As I suggested above, the inframarginalist story is a better story for progressives to tell than the antimonopoly story because it is simpler and broader. All you need is evidence that demand exceeds supply. You don’t need market concentration and you don’t need claims about the psychology of consumers or the social behavior of firms.

To be sure, the inframarginalist story does require claims regarding the efficiency of price increases during a crisis that are not needed to make the antimonopoly case. But the notion that willingness to pay is not a particularly good proxy for value, or that in the digital age we don’t spend much time waiting on physical lines anymore, are hardly controversial. Claims regarding consumer psychology and firms’ capacity for tacit collusion are.

The inframarginalist story is also a better story because it represents a more fundamental critique of the economic system. It points to a structural flaw in markets as such, rather than to a market imperfection.

The inframarginalist story basically says: in a crisis, prices in every market—perfect or imperfect, competitive or monopolized, concentrated or unconcentrated—are going to rise even though efficiency does not require that they do, so long as firms remain greedy, profit-seeking entities. There’s nothing that can be done to restructure markets in ways that will prevent this from happening. The only solutions are government regulation of price, taxation of profits, or a reorientation of executives’ legal duty of care away from profit maximization.

The antimonopoly story says: during a crisis, prices are going to rise primarily in concentrated markets, and the solution is to deconcentrate them. There’s no problem with markets as such, and, as a result, greed is for the most part good—it leads to competition in markets and ultimately to efficient outcomes. The problem we face today is merely a problem of market imperfection. If we solve it, then government can go away.

Progressives’ current romance with antimonopolism in the inflation context has been particularly painful to watch because it has lately swept in a scholar who really knows better, and caused her to shoot herself in the foot. Isabella Weber made a splash last year arguing that that the Biden Administration should consider price controls as a solution to the present inflation.

But then last winter she released a paper arguing that tacit collusion explains the inflation. Although I suspect that Weber continues to support price controls as an inflation remedy, the implication of her paper is that price controls may not be the solution after all. Instead, an economy-wide campaign of deconcentration might do the trick.

The inframarginalist account of the present inflation provides stronger support for price controls because it applies regardless of the level of concentration in markets.

The Antimonopoly Account Is Also Incoherent

As I suggested above, the antimonopoly story is not just too complex and too narrow, it also does not withstand scrutiny on its own terms.

That’s because consumer desensitization to price increases will drive up prices in all markets, regardless of the level of competition and regardless whether firms in concentrated markets are tacitly colluding or not. Concentration and tacit collusion therefore aren’t actually required for the story that antimonopolists wish to tell.

If consumers become desensitized to price increases, prices will rise in competitive, unconcentrated markets. Imagine a perfectly competitive market consisting of numerous small sellers. If consumers become desensitized to price increases because pandemics and wars suggest to them that increases are inevitable, then firms that once could not sell to consumers in the market, because their costs, and hence the minimum prices they were willing to charge, were too high, will now be able to sell to consumers in the market. Other firms in the market that have lower costs will observe this and will raise their prices to match those of the high-cost firm. For if consumers can now afford to pay that firm’s prices, they can now afford to pay that price to any firm. As a result, the market price will increase.

The analysis does not change for markets that are concentrated but also competitive. The increase in demand will bring a higher-cost competitive fringe in the market, and the higher prices that fringe needs to charge in order to enter the market will enable all firms in the market to increase their prices.

Prices will also rise in concentrated markets in which firms are already engaged in tacit collusion, so long as the increase in demand also increases the profit-maximizing industry price. Perceiving that demand has increased, big firms will collude further to raise their prices. But they won’t do this because the increase in demand facilitates collusion, but rather because they are already colluding to charge the profit-maximizing price and the profit-maximizing price has increased.

It is possible that firms in concentrated markets might find it easier to initiate tacit collusion when consumers expect price increases. If each firm knows that the others expect consumer demand to rise, creating opportunities to increase prices, each firm may be more confident that a price increase will be matched by other firms.

But against a backdrop in which firms would raise prices in both concentrated and unconcentrated markets and whether they have been colluding or not, it is not clear what any additional price increases due to greater ease of collusion contribute to the inflation story. For the story to work, antimonopolists would need to show that price increases absent the additional collusion would have been insufficient to trigger the inflation. This antimonopolists have not begun to do. Without it, consumer desensitization tells an inflation story without the need for concentration or collusion.

Indeed, consumer desensitization to price increases is a demand story and not a concentration story. And as a demand story, it just puts us back at the basic structural fact of this inflation, which is that it was triggered by an excess of demand over supply that firms big and small chose voluntarily to exploit.

Weber and her coauthor seem to have been led to think otherwise by listening to a bunch of earnings calls in which representatives of firms in concentrated markets suggested that they were raising prices because they were confident that competitors would not try to undercut them.

But to the extent that executives can be assumed to understand what they are doing—which is not a foregone conclusion by any means—all this shows is that, when firms engaged in tacit collusion encounter demand increases, they raise prices. It does not establish that they started tacitly colluding for the first time due to the demand increases. And it does not establish that firms in unconcentrated markets encountering the same demand increases are not raising prices as well.

The antimonopoly argument turns out to be based on a snapshot of how big firms in concentrated markets behave. But if you only look at behavior in those markets you are not going to be able to perceive whether their performance is unique to them or not.

* * *

Progressives want to tell a story about greed and inflation. To tell it with the greatest possible generality and power, they should ditch the antimonopoly blinders.

Photo: Marnia Lazreg.
Inframarginalism Regulation Tax

Congestion Pricing Is Class Warfare. Here’s a Better Idea

Plans are afoot to charge drivers to enter Manhattan. But we need a fairer way to reduce traffic.

[I published this opinion piece in the ill-fated OZY in 2019. As the OZY website appears to be gone, and with it this piece, I’m reposting it here.]

March 31, 2019

By Ramsi Woodcock

Henry Ford’s dream was to democratize transportation by selling cars so cheaply that every American could own one. His shareholders sued him for it, but Ford eventually succeeded, and we owe today’s driver-friendly America in part to Ford’s insistence that the automobile be a mass-market item. While climate change has taught us that the car was the wrong route to transport democracy, it has done nothing to undermine the principle that there should be no class divide in American transportation.

But one of the most progressive states in the union, New York, is about to write such a class divide into law, in the form of congestion pricing for access to Manhattan. If the plan goes forward, drivers will be charged more than $10 to enter the island, and other major U.S. cities may follow the Big Apple’s lead.

Congestion pricing taxes car commuters. Advocates, including New York Gov. Andrew Cuomo, public transport groups and even a once reluctant Mayor Bill de Blasio, argue that the tax would reduce rush-hour traffic and raise billions of dollars to invest in improving the city’s decrepit subways, which in turn would increase subway ridership, further reducing traffic.

Congestion pricing isn’t really reserving the city’s streets for those who need them most; it’s reserving them for the rich.

All that is true, but congestion pricing does something else: It puts the burden of decongesting the city entirely on the backs of poor and middle-class drivers, by politely but effectively making it impossible for some to drive into the city because they simply can’t afford the tax.

If there were no other way to reduce traffic, then, of course, New York should ask the poor and the middle class to shoulder this burden. But my research shows that there are other ways to reduce traffic that won’t write a class divide into law.

The Limits of the Price System

The premise of congestion pricing is that the best way to prevent overuse of an important resource is by charging for access to it. Those who value the resource more, the theory goes, will be willing to pay more for it, and so those who actually end up paying the price and using the resource will be those who value it the most. Those who decide not to pay—and therefore shoulder the burden of eliminating overuse of the resource—will be those who needed the resource the least.

In reality, however, willingness to pay is an imperfect indicator of need. A dollar, after all, is worth much less to a rich person than to a poor or middle-class person. So congestion pricing isn’t really reserving the city’s streets for those who need them most; it’s reserving them for the rich.

Ration with Tech, Not Price

But there is a way to reduce traffic in Manhattan without excluding the middle class or the poor: allocate access based on the rule of first come, first served. Instead of charging for access, simply close the island (or the parts of the island that are the focus of the current plan) once it has filled up.

First come, first served, like congestion pricing, strives to grant access based on need—the more you want to enter the city, the earlier you will line up—but unlike congestion pricing, it would be far harder for the rich to use their wealth to short-circuit the sorting mechanism. Sure, the wealthy could pay people to line up in their place, but New York could ban the practice, whereas under congestion pricing the city could never prohibit the rich from buying access when they don’t really need it.

First come, first served evokes visions of lines of vehicles stretching off into the distance along the approaches to the city, and 10 years ago that would have been true. But the internet has taken the effort out of waiting by allowing us to join virtual lines from the comfort of home, which means the first-come, first-served model is now a viable alternative to the price system.

Imagine that instead of congestion pricing, city leaders were to create a city access app. The app would know your location and how long it would take you to drive into the city, and therefore could inform you before you depart whether you will be granted entrance. Even better, the app could measure your need to drive, allowing those who live far from public transport to drive during rush hour but requiring those with public transport options to use them during busy periods. Either way, no physical line would be necessary.

Sure, it’s a bit more cumbersome than just driving into the city and having the tax deducted automatically from your bank account. But that’s only for those lucky enough to be able to afford congestion pricing. For those who would be priced out of the city, and thus their jobs, by congestion pricing, an app-based first-come-first-served approach would be a big improvement.

Some have suggested that New York’s congestion pricing plan should include an exemption for the poor, but any proposal to make the plan truly affordable is doomed to failure, because if everyone can still afford to drive into the city under the plan, then the plan won’t stop congestion. The proposal to exempt the poor should be seen for what it is: an attempt to obscure congestion pricing’s classist reality, at the expense of the middle
class, which would not be exempt.

Tax Incomes, Not Drivers

First-come-first-served might be a more democratic way of rationing access to the city’s streets, but what about all the tax revenue congestion pricing will generate to fund the subways? First-come-first-served can’t generate that revenue, because it keeps city access free. Nor should it.

Economists have long argued that the best way to soak the rich is directly — through taxes on high incomes and capital gains, like the state’s Millionaire’s Tax and a proposed exaction on second homes — not by taxing behaviors. Behaviors, such as commuting, often cut across class lines, and you end up taxing the rest along with the rich.

America has a long tradition of preferring market-based solutions to public problems, which is what congestion pricing represents, but America also has a longstanding hatred of class privilege — epitomized by Ford’s desire to put a car in every garage. That may explain why a still-class-bound London, and authoritarian Singapore, have embraced congestion pricing, but American cities have not.

And shouldn’t.

Ramsi Woodcock is a law professor at the University of Kentucky.

Inframarginalism Monopolization Regulation

Confusing Scarcity with Monopoly: 1803 Edition

Proposed regulations would read New York’s law against price gouging to police gouging by small firms less strictly than gouging by big firms. I’ve argued that this confuses scarcity with monopoly.

Price gouging is the exploitation of natural scarcity to charge higher prices. Monopoly is the creation of artificial scarcity in order to charge higher prices. Big firms have the power to create artificial scarcity. But all firms can equally take advantage of natural scarcity to rip the public off. So there’s no good reason to apply a more lenient price gouging standard to small firms.

It turns out that New York Attorney General Letitia James is not the first person to get the distinction between natural and artificial scarcity wrong.

Hapsburg Austria did too.

According to a book by David J. Gerber, an 1803 statute invalidated cartel agreements “to prevent merchants from profiting from shortages caused by the Napoleonic wars, particularly in necessities such as food” (p. 53).

The law’s authors don’t seem to have reflected that the point of a cartel is to agree on output reductions and thereby to create an artificial shortage. If the Napoleonic wars have created the shortage for you, then you don’t need to form a cartel to create one.

You just raise prices.

An anti-cartel law is therefore not going to be effective at keeping prices down in wartime. Or anytime prices are driven up by natural scarcity.

It is an amazing but true fact that antimonopoly policy won’t solve every economic problem. But it does seem to have the notable property of enabling us to remake every economic mistake.

Inframarginalism Monopolization Regulation

The Counterproductive Antimonopolism in New York’s Proposed Price Gouging Rules

In the modern age, we have trouble taking ideas seriously. We prefer to think in terms of dumb mechanism. We need oil for energy. It is in limited supply. Therefore we fight over it. Therefore we have conflict in the Middle East, which has a lot of oil. We apply this sort of economic logic to everything.

The view that ideas determine social behavior seems, by contrast, wishy washy. Does anyone need an idea in the way he needs energy and hence oil to live? Why would two groups that are otherwise well fed and well clothed fight over a figment of the mind?

To the extent that we credit ideas with power, we do so only by seeing them as snare and delusion—weapons in our quest for physical resources. Ideas are spin. They are the Viceroy butterfly’s colors, which mimic those of the bitter-tasting Monarch, warding off predators. Ideas are psyops, nothing more.

The ancients didn’t have this problem. Ideas, for them, were quite obviously everything, which is why people got worked up about religious dogma, as when the greens and the blues came to blows over the question whether Jesus was mostly human or mostly god. (We still do occasionally get violent over religion today, but we see that as a shame and a throwback.)

As I have argued before, the irony of our modern disdain for the power of ideas is that one of our greatest modern inventions—the computer—is an object lesson in the importance of ideas relative to physical mechanisms. No one questions the importance of software. No one questions its influence over the behavior of our machines.

And yet we are somehow certain that our own software—ideas—is mere epiphenomenon.

Antimonopolism as Mere Idea

So it is that when I point out to progressives that antimonopolism is bad for the movement because it leads, ultimately, to a vindication of the justice of the free market, I am told not to worry because antimonopolism is just good progressive psyops. Yes, I am told, free markets are themselves engines of inequality, but being an antimonopolist isn’t the same thing as being a free marketer.

Instead, I am told, antimonopolism is a way of affirming that business interests are the enemy. It’s a way of marshaling support for government intervention. And that is all. Once progressives have ridden a wave of antimonopoly sentiment into power, I am told, they will be free to achieve progressive goals however they want, and that may or may not include more markets and more competition.

This view of antimonopoly as psyops has been most on display in progressive calls to use antitrust to fight inflation. So far as I know, a century of progressive economics had never taken the position that inflation is caused by monopolization or that antitrust might be a useful remedy.

Keynes, for example, thought inflation’s flip side—deflation—had little to do with market structure. He thought Roosevelt’s first New Deal, which was about using cartelization of markets to fight deflation, was a mistake. He invented macroeconomics because microeconomics—tinkering with market structure—was a dead end. It stands to reason that, if he thought deflation wasn’t a problem of market structure, he didn’t think inflation was either.

Progressive economists no doubt understand that the link between inflation and monopolization is tenuous at best. And yet here, for example, was Paul Krugman writing a year ago when this debate was flaring:

Give Biden and his people a break on their antitrust crusade. It won’t do any harm. It won’t get in the way of the big stuff, which is mostly outside Biden’s control in any case. At worst, administration officials will be using inflation as an excuse to do things they should be doing in any case. And they might even have a marginal impact on inflation itself.

Paul Krugman, Why Are Progressives Hating on Antitrust?, N.Y. Times (Jan. 18, 2022).

In other words, arguing that inflation is an antitrust problem is good psyops, allowing progressives to leverage concern about inflation to achieve an unrelated agenda.

Well, there are costs to this kind of instrumental use of ideas—costs that arise because, at the end of the day, ideas aren’t just weapons for striking the other side. They are the software that governs the behavior of those who harbor them. If you hold onto ideas when they’re no good, you are going to do the wrong thing.

When you run bad software, the computer does bad things.

The New York Price Gouging Regulations

The peril of harboring bad ideas is reflected in the rather peculiar interpretation of New York’s new price gouging law proposed by New York Attorney General Letitia James.

The law itself is a good one. It prohibits “unconscionably excessive” pricing during any “abnormal disruption” of a market for a good or service that is “vital and necessary for the . . . welfare of consumers”.

The language is capacious enough to allow New York to institute generalized price controls to reign in supply-chain-driven inflation, including today’s inflation. After all, a supply chain disruption is an “abnormal” disruption. And all goods are, by definition, necessary to the “welfare of consumers.”

But only if the Attorney General interprets the law that way. And here is where the power of bad ideas rears its head.

As the Attorney General acknowledges, half a dozen states—including such conservative climes as Georgia, Mississippi, and Louisiana—consider any increase in the price of covered necessities during a time of emergency to be presumptive price gouging. The price of gas can go up by a penny or ten dollars—either way, the burden is on the seller to prove that it is not price gouging.

The New York Attorney General decided, however, to take a different tack. Instead of applying the presumption to any amount of price increase by any firm, the Attorney General decided to apply it only to any amount of price increase by firms having either a 30% market share or competing in a market with five or fewer “significant competitors.” In all other cases, only a price increase in excess of 10% will trigger the presumption of price gouging.

That’s right, New York’s price gouging presumption is actually going to be narrower than Mississippi’s, because it only applies to big firms.

What gives?

Answer: bad software.

Whether they genuinely believe in antimonopolism, or think it is mere psyops, progressives have antimonopolism on the brain. Every economic problem appears to them to be a problem of monopoly. And every solution appears to them again to be a solution to a monopoly problem.

They do not see a statute that prohibits the charging of high prices as an opportunity to redistribute wealth in areas of economic life that antimonopoly policy cannot touch. Instead, they see it as an invitation to extend antimonopoly ideology into new areas.

In their minds, making such a connection actually broadens the statute, by tying it to what they are sure is the root cause of all economic injustice.

Except it isn’t. And they end up narrowing the statute instead.

So they take a statute that could be interpreted presumptively to ban all above-cost pricing attributable to supply chain disruption and use it instead presumptively to ban only above-cost pricing by big firms.

Price Gouging Is about Scarcity, Not Monopoly (and Yes, Those Are Two Different Things)

The pity of using a market concentration requirement to limit a great price gouging law is that price gouging really has zilch do to with monopoly.

Price gouging is, instead, about scarcity. Or one might say that monopoly is about artificial scarcity whereas price gouging is about the exploitation of natural scarcity.

We fear the monopolist because, in the absence of competition, the monopolist can restrict output and raise price without losing market share.

By contrast, we hate price gouging because it involves taking advantage of an involuntary restriction in supply.

When demand for food spikes before a hurricane, the public knows that supermarkets don’t have the inventory to meet demand. But the public also knows that the supermarkets originally expected to sell the inventory that they do have at normal prices. Those eggs were already on the shelves before the impending hurricane was announced. When the supermarkets raise prices, it is therefore obvious to the public that the surcharge is pure profit. That’s what makes the public mad and gives rise to price gouging laws. The manufacturing of a voluntary shortage plays no role here. No one thinks the supermarket is holding back eggs—or choosing not to order more.

Monopoly is famine while grain rots in silos. Price gouging is your neighbor demanding your house in exchange for a slice of bread—after lightning striking the silos.

That’s why price gouging statutes kick into gear only during an emergency—or, as in the case of New York’s law, during a period of “abnormal disruption” of markets. A monopolist’s decision voluntarily to restrict output and jack up prices is plenty evil, but one thing it isn’t is the sort of supply chain disruption that triggers a price gouging statute.

Confusing Scarcity with Monopoly

So what is a market concentration requirement doing in regulations implementing a price gouging statute?

The Attorney General relies on a passage in the price gouging law that identifies “an exercise of unfair leverage” as a factor in determining whether a firms has engaged in price gouging. But the phrase “unfair leverage” could just as easily refer to (natural) scarcity power as it could to monopoly power.

The Attorney General’s comments shed more light on her rationale. They explain that “firms in concentrated markets pose a special risk of price gouging because they can use their pricing power in conjunction with an abnormal market disruption to unfairly raise prices.”

This seems to articulate a category mistake. She has confused scarcity power with monopoly power.

The pricing power upon which price gouging is based is scarcity power. It is the power that arises because an act of god has eliminated part of the supply that would otherwise exist in the market. The pricing power enjoyed by “firms in concentrated markets” is not (natural) scarcity power. It’s monopoly power (artificial scarcity)—the power voluntarily to restrict supply.

A firm in a concentrated market can use its monopoly power whenever it wants, including during an “abnormal market disruption.” But whenever the firm chooses to use it, the firm isn’t using (natural) scarcity power to raise prices. It’s using monopoly power to raise prices.

If, thanks to the abnormal market disruption, the firm is able to raise prices higher than the firm otherwise might, then that extra increment is price gouging due to (natural) scarcity power. But any price increase that the firm would be able to bring about without the aid of the market disruption is due to an artificial restriction in supply and remains an exercise of monopoly power.

So it makes little sense to say that firms with monopoly power pose a “special risk” during periods of market disruption because they can use their monopoly power “in conjunction” with their scarcity power to raise prices. Firms with monopoly power pose the same risk that all firms pose during periods of disruption: the risk that they will use the additional power conferred on them by disruption-triggered scarcity further to raise prices.

If we worry that (natural) scarcity is going to tempt a monopolist to raise prices we should be equally worried that it will tempt a non-monopolist to raise prices: (natural) scarcity gives both firms the exact same kind of power—the power to exploit scarcity to raise prices.

Non-Monopoly Price Gougers Probably Do More Harm

Indeed, one would expect that the harm that a firm that lacks monopoly power can do by exploiting scarcity would generally be greater than the harm that a monopolist can do by exploiting (natural) scarcity because, before the disruption, the monopolist will already have artificially restricted output to try to raise prices to the most profitable extent.

If a monopolist has already artificially restricted supply to the most profitable extent, any additional involuntary restriction caused by the disruption may be unprofitable for the monopolist and the monopolist may, therefore, choose not to exploit it by raising prices further.

As some have long suggested, the first increase in price above costs is always the most harmful to consumers, precisely because when price equals cost, output is at a maximum and consumers reap the greatest benefit from production. They therefore have the most to lose. Subsequent price increases play out over progressively lower sales volumes, inflicting smaller and smaller amounts of harm.

But what kind of firms are induced by an abnormal market disruption to make a first increase in price above costs?

Answer: non-monopolists.

Firms in hypercompetitive markets start out with prices at or near costs before an abnormal market disruption gives them power to price gouge.

Monopolists facing abnormal disruptions have already raised their prices above costs long ago, when they first acquired their monopoly position. To the extent that they increase prices due to a market disruption, that will be far from the first increase in their prices above costs.

Disruptions Operate at the Level of Markets, Not Individual Firms, So Price Gouging Is Not Worse In Concentrated Markets

The Attorney General seems to think that because a monopolist has a large market share relative to a non-monopolist, any price increase by the monopolist will tend to cause more harm because it will apply to a higher volume of sales. She writes that large firms “have an outsized role in price setting.”

This is the sort of mistake that comes from thinking in terms of firms instead of markets.

A market disruption does not enable price gouging by striking a single firm. If a single firm’s output is restricted but no restriction is placed on the market as a whole, other firms in the market will bring more inventory to market to offset the loss of the firm’s output and no firm will have the opportunity to raise prices.

Instead, a market disruption enables price gouging by striking the entire market. If the output of the market as a whole is restricted, then restrictions on the output of some firms won’t be made up by increased sales by other firms. As a result—and this is key—all firms in the market, and not just the firms that have suffered a restriction in output, will be able to raise prices.

That’s because the higher prices are a rationing mechanism: they allocate the restricted market supply to the consumers who have the highest willingness to pay for it.

If any firm in the market doesn’t raise prices, consumers will all try to buy from that one firm. But because there isn’t enough supply in the market to satisfy them all, that one firm won’t have enough to satisfy them all either. The firm will sell the same volume as the firm would have sold at the higher prices. But the firm will earn less profit. So the firm will prefer to just charge the higher prices.

That’s why only market-level disruptions enable price gouging.

What this means is that a supply disruption that is concentrated in a large firm doesn’t affect more consumers than a supply disruption that hits smaller firms instead. Regardless where the disruption is felt, all prices, charged by all firms in the market, rise—so long, that is, as the disruption is a market-level event in the sense that other participants in the market are unable instantaneously to make up for the reduction in the firm’s supply.

And, as I pointed out above, in markets with large numbers of small, hypercompetitive firms, those price increases are likely to be more harmful precisely because prices are likely to start out lower than in concentrated markets.

One must, therefore, scratch one’s head at the Attorney General’s further observation that “the profit maximizing choice for a smaller competitor in an industry with [a larger] seller will often be to match the larger company’s price,” as if that establishes that price gouging is more severe in markets that have larger competitors.

When industry supply is restricted, the profit maximizing choice for a smaller competitor will be to raise price to match smaller competitors’ price increases, as well. All firms, regardless of size, will find it profit-maximizing to raise price in order to ration the industry’s limited output.

The point of a rule against price gouging is to prevent the market from using high prices to ration access to goods in short supply. The rule effectively requires the market to ration based on the principle of first-come-first-served instead.

Price gouging enforcers target only a small subset of firms in any given market for enforcement. But the goal of the a rule against price gouging is not, ultimately, to regulate the conduct of individual firms but rather to get the market price down to cost. Enforcement against individual firms is meant to have a deterrent effect on the pricing behavior of all firms in the market.

While targeting the biggest firms for enforcement might send a stronger warning to the market than targeting a smaller firm, prosecutors do not need a regulation making it easier to bring cases against big firms in order to pursue such a strategy. Indeed, such a regulation makes it harder for them to bring cases in markets in which there are no big firms.

Does Plenty Really Make Firms More Likely to Collude?

The Attorney General’s theory seems to be that market disruptions enhance monopoly power, enabling a monopoly to leverage scarcity to increase prices in response to a market disruption to a greater extent than could a non-monopolist.

The Attorney General seems to have in mind that market disruptions facilitate collusion. “[I]t may be easier for big actors to coordinate price hikes during an inflationary period, even without direct communication,” she writes.

One would, of course, expect that firms in concentrated markets that are prone to tacit collusion would be able to raise prices after a market disruption. The disruption by definition reduces the amount of output in the industry in the short term, as discussed above.

That allows the firms in the market to raise prices. But such price increases are due to the increased scarcity of output, not to the collusion.

In order for the collusion to be responsible for the price increase, output would have to fall further. The firms would need to engage in collusion that enables them voluntarily to restrict supply above and beyond both the involuntary restrictions created by the market disruption and any voluntary restrictions that the firms were capable of impose absent the disruption.

Presumably the argument is that the impetus to raise prices independently that is created by the supply disruption puts firms in the frame of mind required for them further to restrict supply and raise prices in tacit collusion with other firms.

That’s a pretty slim psychological reed upon which to hang a theory of harm. And one can easily imagine alternative psychologies.

Plenty tends to make us self-involved and egomaniacal. Hardship, if not too great, makes us generous and cooperative. It would seem to follow that the profit opportunities created by a market disruption should undermine cooperation between firms, rather than promote it.

I don’t know if this story is any more likely to be true than the one that the Attorney General seems to favor. The point is that psychological arguments of this sort do not provide a strong basis for carving out special treatment for large firms under a price gouging rule.

More Confusion of Scarcity with Monopoly

The only other argument the Attorney General makes for special treatment reprises the Attorney General’s confusion of scarcity and monopoly power.

The Attorney General argues that

the risk of firms taking advantage of an abnormal disruption may be greater where certain market characteristics reduce the likelihood of new entry—for example, where supply chains are disrupted or key inputs are scarce or where high concentration makes investment less attractive in a particular market. . . . Incumbents are insulated from the credible threat of new competition to discipline prices during abnormal market disruptions.

The Attorney General seems not to understand what a “disruption” is. It is, well, a disruption. Supply is destroyed. Or, equivalently, it is insufficient to meet a surging demand. By definition, there can be no entry. If there were entry by other firms into the market, then supply would not be insufficient anymore!

It follows that the extent to which before the disruption the market is already protected against entry due to the deterrent effect created by high concentration is irrelevant.

If such a deterrent existed before the disruption, and firms took advantage of it, then output would already have been artificially restricted in advance of the disruption. The disruption may destroy additional supply, and firms may raise prices in response, but that destruction won’t be due to market concentration but instead to the disruption.

To be sure, if the market were less concentrated and there were no concommitant entry deterrent, then prices in the market would be lower over the period of the disruption. And, moreover, the extent of the price increase created by the disruption might be different—either greater or lesser depending on the shape of the demand curve.

But that increase would still be attributable to scarcity and not to monopoly. And the ability of firms to enter the market to eliminate the scarcity would be controlled by the nature of the disruption and not any deterrent power wielded by incumbent firms.

The disruption destroys production that already existed notwithstanding the incumbents’ monopoly power. It follows that this output could not otherwise have been precluded through incumbent firms’ deterrent power—otherwise it would not have been there to be destroyed by the disruption.

Anyway, Small Amounts of Harm Are Small Amounts of Harm, Whether the Perpetrator Could Do More Harm or Not

But suppose the Attorney General were right that monopolists cause more harm through price gouging. Would it make sense to treat any price increase by a monopolist as presumptively unlawful but only increases by non-monopolists in excess of 10% as presumptively unlawful?

Of course not.

That’s like saying that it should be battery if a semi bends your fender but it should not be battery if a Prius bends your fender.

Harm is harm whether it’s inflicted by someone who could have done you a lot more harm or by someone who could only have done you a little more harm. A 5% increase in price above cost is a harm to consumers, whether that 5% markup is charged by a firm that could have, under some circumstances, charged you $100 more or only a dollar more.

A Lesson in the Perils of Antimonopolism

Antimonopoly framing may appeal to progressives because they are pushing back against two generations of market fetishism in economics. The framing lets progressives assert that markets aren’t free without having to go to the trouble of rejecting markets in the abstract.

That might feel like a powerful move.

First, it’s true: there’s a lot of monopolization in the economy.

Second, it means progressives don’t need to get into theoretical battles about the virtue of markets in the abstract.

But because antimonopolism sidesteps the theoretical problem of the market, it’s a compromise, not a power play. And a bad play at that.

In order to score points on means antimonopolists concede ends. To curry support for government intervention in business they concede that the end of intervention should be (truly) free markets.

But progressives have known for more than a century that the free market is the problem, not just in practice but in its abstract, idealized form. There’s no guarantee that really, truly, perfectly competitive markets will distribute wealth fairly. Instead, they arbitrarily distribute wealth to those who happen to own relatively productive resources or who happen to place a relatively high value on what they consume.

As David Ricardo pointed out, if you happen to own land having relatively good soil, you will earn a profit, because the price of agricultural produce needs to be high enough to cover the higher cost of tilling less fertile land. Your costs—including any reward needed to induce you to make your land more fertile—are lower, so you will generate revenues in excess of costs. That excess isn’t necessary to keep you in the market or to fertilize your soil. It’s a pure distribution of wealth based on the arbitrary fact that someone else in the market doesn’t have costs as low as your own.

Indeed, as Thomas Piketty has pointed out, the source of the explosion of inequality in recent decades has nothing to do with “market imperfection[s]” like monopolization. It has to do with markets.

There’s no way to divorce the gains progressives make on the means from the losses they suffer on the ends. If you succeed at convincing Americans that every market is monopolized, then Americans’ response is going to be: deconcentrate markets.

It’s not going to be to use every means available, including tax and transfer and price regulation, to redistribute wealth.

But, more importantly in the context of the New York price gouging law, the habit of proving market concentration in order to appease conservative priors regarding the benefits of markets can take on a life of its own.

It makes progressives forget that market concentration is far from the only source of inequality. And they end up casting aside or hamstringing policies aimed at those other sources.

That’s what may have happened here.

Antitrust Inframarginalism Monopolization Regulation

Competition Trumps Information

Scholarly interest in personalized pricing is growing, and with it confusion about what, exactly, empowers a firm to personalize prices to its customers. You might think that the key is information. So long as you know enough about your customers, you can tailor prices to each. That is, however, incorrect.

No matter how much you happen to know about your customers—indeed, even were you to have a god’s total information awareness regarding each of them—you would not be able to charge personalized prices if you were to operate in a perfectly competitive market. Competition trumps information.

That is because in a perfectly competitive market there are always other sellers available who are willing to charge a price just sufficient to make the marginal buyer in the market willing to stay in the market and make a purchase. If there weren’t, then there would be a chance that the marginal buyer would not be able to find a price that he is willing to pay, and so would not buy, and then the market would no longer be perfectly competitive. For the perfectly competitive market is one in which competition leads to a price at which the marginal buyer and seller are willing to transact.

And so any attempt you may make to personalize a higher price to your inframarginal customers—the ones who are in principle willing to pay a higher price than the marginal buyer—will be met with scorn. Your customers will find those other sellers offering prices keyed to the willingness to pay of the marginal buyer and will purchase from those sellers instead at that marginal-buyer-tailored price.

Thanks to this effect, all buyers will transact at the same, marginal-buyer-tailored price, and so we can conclude that in a perfectly competitive market, price will always be uniform—and uniformly equal to the price at which the marginal buyer and seller transact. (More here.)

It follows that while information is a necessary condition for the personalizing of prices, it is not a sufficient condition.

You also need a departure from perfect competition, which is to say, you need: monopoly. Or at least a hint thereof.

I have argued that personalized pricing is one way to break the iron link between redistribution and inefficiency. When you personalize prices, you can personalize one price to the marginal buyer, ensuring that he stays in the market and the market is efficient, and whatever other prices you wish (within limits) to inframarginal buyers, enabling the redistribution of wealth. But it is important to remember that information on buyers is not alone enough to make this possible. The seller must be a monopolist, too.

Thus the use of personalized pricing as a tool of social justice directly conflicts with the mindless “big is bad” rhetoric that one finds today in certain corners of the progressive movement.

To redistribute wealth at the market level you need to start with big.

And then discipline big’s pricing behavior.

Inframarginalism Miscellany Monopolization

Notes on the Frysian Theory of the NFT

My colleague Brian Frye has been busy reducing the non-fungible token to theory. Herein some thoughts inspired by Brian’s work.

But first, a definition. An NFT is a ledger entry in a blockchain that (1) indicates a purchase and (2) describes the subject of the purchase, often just with a url link to a picture of the subject. As an approximate matter, when someone posts a digital photo on the Internet and you purchase the NFT to that photo, you obtain a ledger entry in a blockchain that indicates that you made a purchase and describes that purchase using a url link to the photo.

Now for those thoughts.

  1. As a legal matter, the NFT is nothing special. It can be one of two things. It can either be a legally-valid transfer of title to the underlying subject. Or it can be a legally-valid purchase of the service of updating the blockchain ledger to reflect a “purchase” of the underlying subject (without that purchase being legally valid in any way with respect to the underlying subject).

    In other words, the buyer of an NFT clearly pays for the service of having the blockchain ledger updated to reflect a purchase. If the seller’s act of indicating a purchase can be considered a legally-valid expression of intention to transfer title to the subject, then the NFT buyer also gets title to the subject. Otherwise, the NFT buyer just gets a hollow incantation on the blockchain, and nothing more.

    The NFT is a digital version of Berry taking a piece of paper, going up to Apple, and saying to him: “I’ll indicate on this piece of paper that I’ve sold you my Y, if you pay me X”. Apple pays the money. Berry writes on the paper: “sold to you one Y.” Has Apple purchased Berry’s service of writing “sold to you one Y” on the piece of paper or has Apple purchased Y?

    As a general matter, a manifestation of a present intention to transfer title will transfer that title (which is why when someone says, “it’s for you,” you can legally keep the gift). But the law imposes all sorts of qualifications on this rule that are designed to make sure that the intention really was there.

    Does the blockchain-equivalent of shouting “sold” and tendering a url link manifest a present intention to transfer title to the link alone (which is generally not owned by the NFT seller, but rather the platform upon which the NFT is sold, in which case there can be no sale)? If the link leads to a digital photo, does shouting “sold” and tendering the link manifest a present intention to transfer title to the thing depicted in the photo? Or does it manifest a present intention to transfer the seller’s intellectual property rights in the photo itself? If so, which rights? Does the buyer get the right to make a copy of the photo, or does the buyer get the entire copyright?

    Judges will decide these questions.

    If the answer is “no” to all of them, then all that we can say is that purchase of an NFT gets you the service of having a ledger entry placed in the blockchain indicating that you have made a purchase and describing the subject of that purchase. But not title to the subject itself, whatever that may be.

    (Technical note: The foregoing considers the simplest possible form of an NFT transaction, one that is not complicated by any advance written agreement between the parties providing further detail about the character of the transaction. The seller simply makes a promise, expressly or implicitly, to indicate, on a blockchain, sale of some description of a subject if the buyer pays a certain price. This is a unilateral contract offer. The buyer then pays the price and the seller is legally bound to carry out his promise to make the ledger entry in the blockchain. The key question is whether the carrying out of that promise manifests a present intention to transfer title to something, or not.)
  2. If it turns out that the NFT does not transfer title to anything, and instead represents the purchase of the mere service of indicating a sale on a digital ledger, then the NFT is rather interesting as a social matter. Because in that case the market for these things—tens of millions have changed hands for individual NFTs—is a market to buy and sell ledger entries, nothing more. It is for this reason that Brian calls the NFT “the ownership of ownership.”

    In this case, we have in the NFT a further step in the familiar human chain by which a practice that starts out as necessary for survival is progressively abstracted until it persists only as ritual or play. First, men hunted to survive. Then they hunted for fun, though they did not need the meat. Then they played paintball, and took home no meat. First men bought and sold things they needed to survive. Then they bought and sold things that served no practical or spiritual purpose (contemporary art). Then they bought and sold NFTs.

    Nietzsche saw this coming, in a way:

Commerce and Nobility.—Buying and selling is now regarded as something ordinary, like the art of reading and writing; everyone is now trained to it even when he is not a tradesman exercising himself daily in the art; precisely as formerly in the period of uncivilised humanity, everyone was a hunter and exercised himself day by day in the art of hunting. Hunting was then something common: but just as this finally became a privilege of the powerful and noble, and thereby lost the character of the commonplace and the ordinary—by ceasing to be necessary and by becoming an affair of fancy and luxury,—so it might become the same some day with buying and selling. Conditions of society are imaginable in which there will be no selling and buying, and in which the necessity for this art will become quite lost; perhaps it may then happen that individuals who are less subjected to the law of the prevailing condition of things will indulge in buying and selling as a luxury of sentiment. It is then only that commerce would acquire nobility, and the noble would then perhaps occupy themselves just as readily with commerce as they have done hitherto with war and politics . . . .

Friedrich Nietzsche, The Gay Science: With a Prelude in Rhymes and an Appendix of Songs (Walter Kaufmann trans., 2010).

The same information age powers that have given rise to the NFT—making possible a publicly-accessible and (mostly) immutable global ledger system—are also swiftly rendering markets—buying and selling—obsolete.

One day, perhaps sooner than we think, firms and governments will know enough about what we want in order for firms and governments to be able to make allocation decisions for us that are better than we could obtain by bidding for products in markets. And when that happens, we will enthusiastically embrace central planning and forsake markets.

Where today that last seat on the flight is allocated based on ability to pay—a very imperfect method of determining who places the highest value on the seat—tomorrow the airline (or the government agency regulating the airline) will know, based on reams of data about all those who want the seat and that for which they want to use it, that you (yes, you) actually value the seat the most, even though you wouldn’t be able to bid the highest price for it. And so you will get the seat.

In such a world, most of us will cease to buy and sell as a matter of daily life. But perhaps we will continue to play the buying and selling game, just as some of us continue to hunt.

The NFT will be that game.

(Nietzsche didn’t foresee that America would succeed at democratizing and commercializing all things noble, including the hunt, and so he didn’t foresee, either, that the NFT could be more than just the pastime of an aristocracy.)

  1. Brian argues that the NFT could be a solution to the inefficiency of copyright. It is not completely clear to me how this might be so. But there are some possibilities.

    The problem with copyright is that the only efficient way to sell intellectual property is through personalized pricing. That’s because the marginal cost of copying intellectual property is zero—it costs nothing to make a digital copy of an image, for example—and so there are gains from trade to be realized from distributing copies to everyone who places a non-zero value on the work. If you think it’s worth something, you should get access to it. That doesn’t mean that you should not have to pay for the work, or that the work has no cost of production. It means only that those costs are “overhead costs”—they’re the costs of making the work, not of distributing it—and each purchaser should be charged a price no higher than the purchaser’s willingness to pay, for a higher price would prevent the sale and so destroy potential gains from trade.

    Thus the pricing of intellectual property should always be personalized to ensure that it prices no one out of the market. Everyone who cares should be able to buy Steal This Book, but only those who can afford to pay should be charged a price for it, and that price should be no higher, for each, than what he can afford. But those who actually steal it should go to jail, for otherwise there would be no book to steal.

    The problem with copyright is that copyright holders often do not know what their customers are willing to pay and so they do not personalize the prices they charge to licensees. Instead, they impose one-size-fits all prices that prevent some people who place a non-zero value on the work from getting access to it. The price of the paperback is written on the cover. If you can’t afford it, you go home empty handed. Both you and the copyrightholder would be better off if the holder gave you a discount. But the holder thinks (mistakenly) that you’re lying when you claim you can’t afford the official price, so no deal gets done.

    How can NFTs solve this problem?

    Suppose that purchase of an NFT buys only the right to a ledger entry. The buyer does not obtain a general right to the work, or even a license to use a copy of it. If buyers nevertheless continue to love playing the buying and selling game, they may direct sufficient cash to artists to cover the overhead cost of production of their works, and in so doing eliminate the need for copyright protection. That is, if the NFT craze proves long-lived, and spreads enough cash across the creative industries, then we may no longer need to use copyright to fund the arts. Artists could give copies of their works away for free to anyone who wants them, and make a living selling NFTs to fans of the buying game.

    Of course, it might be the case that NFT buyers have less taste than copyright licensees, in which case this new approach to funding would push the arts in unfortunate directions. But the reverse might be equally true, and we might end up with better art. Or, most likely, there would be no change in quality.

    Suppose instead that the purchase of an NFT buys a license to a particular copy of the work. It buys you access to a copy of the Kaufman translation of Nietzsche’s The Gay Science, for example, though not the full copyright to that work. In this case, the NFT format of the sale doesn’t do anything special relative to any other form of digital sale of a copy of a work.

    But the fact that NFT sales are often structured as auctions—buyers bid for the NFT—pushes the pricing of copies in the right direction from the perspective of efficiency. For auction pricing means personalized pricing. If you require no minimum price in your auctions, and keep selling copies ad infinitum, then you will price no buyers out of the market and will end up selling copies at a range of prices personalized to the willingness to pay of buyers.

    Of course, savvy buyers will take advantage of this format to pay you little or nothing (if you know an infinite number of copies are going to be sold, why bid more than zero for any copy?), but we are at least on the right track. (Or not, if you end up getting paid so little that you give up on producing art in future.) The next step would be to use more complex auction structures designed to force buyers to reveal their willingness to pay, or to acquire data on buyers that would enable accurate dictation of personalized prices to them. But none of this, again, requires NFTs. Indeed, one can expect that, regardless whether NFTs persist or not, the information age is going to make it easier for copyright holders to personalize their prices and so much of the inefficiency of copyright will eventually disappear.

    Personalized pricing won’t solve all problems associated with copyright, however, for copyright also creates a distributive problem associated with excessive pricing, and personalized pricing enables owners to extract the maximum possible value from buyers—value that may be far in excess of the cost of producing art. In that case personalized pricing would exacerbate the wealth distributive problem associated with copyright even as it eliminates the efficiency problem. NFTs, in either their fee-for-service guise or their fee-for-license guise can’t solve the distributive problem of copyright, because there’s always a chance that buyers will pay prices for their NFTs that more than cover the cost of producing the arts.

    But that’s a story for another day.
Inframarginalism Miscellany Monopolization Philoeconomica

Was Personalized Pricing the Epstein Grift?

The Times reports that pedophile Jeffrey Epstein earned more than $100 million from private equity magnate Leon Black in exchange for providing some “idea-generator”-type tax advice on a handful of Black’s family trusts, advice that Black still had to pay his own tax lawyers to implement.

Does that mean that Epstein, who was a college dropout, was a self-taught tax genius? Not likely.

But it does suggest that Epstein knew the value of personalized pricing. Here’s the key passage from the article:

Jack Blum, a Washington lawyer who has led corruption investigations for several Senate committees, said he was surprised by the size of the fees Mr. Epstein’s work commanded. “You could be the best lawyer in Manhattan working on the most complicated trusts and estates and it would never come anywhere close to that kind of money,” he said.

Matthew Goldstein & Steve Eder, What Jeffrey Epstein Did to Earn $158 Million From Leon Black, N.Y. Times (Jan. 26, 2021).

So what gives?

The answer is that tax lawyers price for the marginal consumer: the marginal client using their services. They not only serve magnates like Leon Black, but also the merely rich, like an executive mentioned in the Times article whom Epstein initially refused to take on as a client for being insufficiently wealthy.

The merely rich can’t afford $100 million, so, to get their business, tax lawyers must charge them lower fees. When the truly rich, like Leon Black, go looking for tax advice, they knock on these lawyers’ doors, and the lawyers charge them about the same price they charge everyone else.

They don’t try to charge higher fees to their wealthiest clients because tax law is a reasonably competitive industry. You need to be smart to work at the high end of the field, but tax is not a field in which “the best are easily ten times better than the average.”

And for the many who do have what it takes, the cost of entry into the market is relative low; all you need is a JD and an LLM, which cost a few hundred thousand dollars to obtain, about the amount needed to open a cleaners or a pizzeria (okay, there’s also the opportunity cost of time spent in school, but we are still probably only talking about the high six figures).

So if you start raising your fees above what the marginal client is willing to pay, your super-rich inframarginal clients will take their business to another tax lawyer who is still pricing for the marginal client. So you, too, continue to price for the marginal client.

But what if you could find a way to charge your richest clients prices personalized to them, and not have them jump ship to your competitor?

It looks like Epstein’s grift was figuring out how to do that.

The answer, as in so many other lines of business, was to make tax advice into a luxury product: to make the product exclusive.

The Times tells us that Epstein sold himself to clients as a genius who would only give tax advice to the richest of the rich. He cultivated the image of being, not some pathetic, overworked, upwardly-mobile professional, but one of them, a fellow member of the super-rich who was willing to cut other members in on secrets that only they could access because of who they were.

Exclusivity creates brand loyalty, and brand loyalty means that you stop shopping around; you are willing to pay a price determined by what you can afford, rather then what competitors are offering. You are willing to pay, in other words, a personalized price.

Graphically, the tax market may have looked like this:

Gerrit De Geest observes in Rents: How Marketing Causes Inequality, that in today’s economy, it’s not those who make who earn all the profits, or those who distribute who earn all the profits; it’s those who do the marketing. That’s where all the rents live. Competition drives profits to zero for all save those who beguile.

It seems somehow fitting that this economy would spawn a figure like Epstein, who sold tax advice but didn’t even bother to do his legal work in house. He didn’t really sell tax advice; he marketed it.

As the Times recounts, Epstein referred one acquaintance to outside tax lawyers, whom the acquaintance then paid for tax advice, and then Epstein, having never mentioned a fee to this acquaintance, sent him a bill for 10% of the purported tax savings that the lawyers, and not Epstein, had created.

That 10% was the price of enchantment, nothing more.

But you still have to wonder how a private equity guy like Black, whose business revolves around deals hammered out by armies of lawyers and shaped by tax considerations, could have thought he was getting something special from Epstein.

Did he really think tax was like music, and it was worth paying his Mozart to dream up a tune, even if Black still had to pay someone else to write all the notes down for him?

Maybe he didn’t, and there’s more left to tell in this story.

Or maybe we need a new razor: Never attribute to conspiracy what can otherwise be attributed to marketing.

Inframarginalism Miscellany Monopolization

Dynamic Pricing Meets Music Licensing?

Just when you thought the most toxic of information age innovations had already spread as widely as possible:

The big publishers — which are all divisions of the major record conglomerates — own far too much material to exploit it all properly, he says. Sony/ATV, for example, has nearly five million songs in its portfolio. . . . In its place, he posits a bold but somewhat vague plan called “song management,” in which leaner companies look after smaller collections of high-value hits, and each track is held to a profit-and-loss analysis to ensure its value is maximized.

Ben Sisario, This Man Is Betting $1.7 Billion on the Rights to Your Favorite Songs, N.Y. Times (Dec. 18, 2020).

The big publishers block-license their songs, which means that they don’t adjust the prices of individual songs based on shifts in the willingness of licensees to pay for them. It sounds like Mercuriadis wants to capture additional profits by pricing songs dynamically–jacking prices up during periods when buyers are willing to pay more–which is why he can afford to pay more for song rights himself. “Song management” is the tell: In hospitality, which pioneered the practice in the context of hotel rooms and airline tickets, they call it revenue management.

Antitrust Inframarginalism Monopolization

The Smallness of the Bigness Problem

The tendency to ascribe the problem of inequality that ails us to the bigness of firms is the great embarrassment of contemporary American progressivism. The notion that the solution to poverty is cartels for small business and the hammer for big business is so pre-modern, so mercantilist, that one wonders what poverty of intellect could have led American progressives into it.

Indeed, the contemporary progressive’s shame is all the greater because the original American progressives a century ago, whose name the contemporary progressive so freely appropriates, did not make the same mistake. The original progressives were more modern than progressives today, perhaps because the pre-modern age was not quite so distant from them. Robert Hale, the greatest lawyer-economist of the period, wrote that

[e]ven the classical economists realized . . . competition would not keep the price at a level with the cost of all the output, but would result in a price equal to the cost of the marginal portion of the output. Those who produce at lower costs because they own superior [capital] would reap a differential advantage which Ricardo, in his well-known analysis, designated “economic rent.”

Robert L. Hale, Freedom Through Law: Public Control of Private Governing Power 25-26 (1952).

I suspect that this is absolute Greek to the contemporary progressive. I will kindly explain it below.

But first, it should be noted that the American progressive’s failure to appreciate the smallness of the bigness problem is not shared by Piketty, whom American progressives celebrate without actually reading:

Yet pure and perfect competition cannot alter the inequality r > g, which is not the consequence of any market “imperfection.”

Thomas Piketty, Capital in the Twenty-First Century 573 (Arthur Goldhammer trans., 2017). (Italics mine.)

What does Piketty mean here?

He means what Hale meant, which is that the heart of inequality does not come from monopolists charging supracompetitive prices, however obnoxious we may feel that to be, but rather from the fact that the rich own assets that are more productive than the assets owned by the poor, and so they profit more than the poor even at efficient, competitive prices.

In other words, the rich get richer because their costs are lower and their costs are lower because they own all the best stuff.

No matter how competitive the market, prices will never be driven down to the lower costs faced by the rich, because other people own less-productive assets than do the rich and competition drives prices down to the level of the higher costs associated with producing things with less-productive assets.

(Why can’t price just keep going down, and simply drive the more expensive producers out of the market to the end of dissipating the profits of the less expensive producers? Because there is always a less expensive producer! Price can therefore never dissipate the profits of them all, and anyway demand puts a floor on price: consumers are always bidding prices up until supply satisfies demand.)

Graphically, American progressives have been sweating the “monopoly profit” box without seeming to realize that it’s tiny compared to what remains once you eliminate it, which is the “economic rent” box.

Picketty, the original American progressives, and kindergartners know the difference between big and small. Why don’t we?

Inframarginalism Miscellany

Ruskin on Personalized Pricing

There are few bargains in which the buyer can ascertain with anything like precision that the seller would have taken no less; — or the seller acquire more than a comfortable faith that the purchaser would have given no more. This impossibility of precise knowledge prevents neither from striving to attain the desired point of greatest vexation and injury to the other, nor from accepting it for a scientific principle that he is to buy for the least and sell for the most possible, though what the real least or most may be he cannot tell.

John Ruskin, Unto this Last, and Other Writings 197 (Clive Wilmer, ed. Penguin Classics 2005) (1862).