Monopolization World

Unlearning Trade

First we thought the inherent superiority of our political system would defeat the Chinese Communist Party. Now that we’re coming to terms with the fact that it didn’t, we seem to think that the inherent superiority of free markets will defeat China instead.

Clearly, we’re not taking learning in account.

But I don’t mean that we haven’t learned from our mistaken view that China would become more democratic as it became wealthier.

I mean that in assuming that China’s embrace of a new closed door policy will cause its technological competitiveness to wither, we are literally failing to take the relationship between learning and output into account.

The Wall Street Journal argues that by picking fights with the West, and getting itself banned from engaging in semiconductor trade with the US as a result, China has put itself in the deeply wasteful position of having to recreate a native semiconductor industry from scratch. If the moonshot fails, Chinese high tech firms will lag, and the country’s race to global dominance will be lost.

It would have been much better, argues the Journal, for China to have continued to make nice with the West and enjoy the benefits of trade, not least of which is the ability to leverage what others do best—like making semiconductors—to enable China to do what it does best—like making smartphones and 5G infrastructure.

The Achilles heel of this and all free trade arguments is that they don’t take innovation into account, and specifically that most valuable of all forms of innovation: learning by doing.

The fact that China is not an efficient producer of semiconductors today, and would be better off trading with those who are, does not mean that China cannot learn to be an efficient producer of semiconductors tomorrow.

And if China is able to learn, then the money it pours into starting more or less from scratch now won’t be wasted.

Instead, it will be the most important investment China has ever made, because it will buy not only a valuable skill, but something more valuable still: independence and a shot at world domination. The future belongs to high tech, the hardest thing to do in high tech is chips, and so if you’ve got the best chips, you will win eventually.

The key to learning is doing: the more you make, the better you get at making, which is why semiconductors have a downward sloping learning curve. As production volumes increase, cost falls and falls and falls.

That in turn means that if you want to produce the difficult-to-make things that render countries rich and powerful, the opposite of free trade dogma is required: you must shut out foreign competition, freeing up domestic demand for your native industries, so that those industries can ramp up supply and start marching down the learning curve.

If you don’t do that, then your domestic market will buy from foreign producers, helping them learn, not you.

Of course, too much protection can also be a problem. If your domestic industries are not subject to competitive pressures, they won’t have an incentive to learn. That can particularly vex small countries whose internal demand can only support one or two firms in a given market. But for a country the size of China, that’s not a problem. (Indeed, it’s no accident that free trade ideology has roots in Western Europe, home to lots of small- and medium-sized countries.)

So by picking fights with the West at a moment in its development when it has plenty of domestic demand for semiconductors (think Huawei) China is really just binding itself to the mast: committing its domestic market to its native semiconductor operations. It is forcing itself to learn.

And China does know how to learn. America installed the first solar panel in 1956, on the Vanguard I satellite. But at that time a single panel cost the equivalent of $500,000 today, meaning that we weren’t very good at applying the technology. As we made more solar panels, however, we got much better, as the solar learning curve below shows. But by the early 2000s learning had stagnated at around $5 per module.

Then China, which is energy poor but for coal—a mature technology that promises few gains from innovation—embraced solar, installing panels across its vast peripheral deserts.

By doing, China learned to do better, driving price south of 50 cents per module by 2019, making solar power the cheapest in the world today, more so even than coal or gas, and coming to dominate the global solar industry.

Will China walk just as quickly down the semiconductor learning curve? You can bet on it. And the country’s leadership in the new technology of quantum computing—the future of chips—means that it is not starting all that far behind its global competitors.

So when the Wall Street Journal says things like this:

Beijing is essentially now engaged in a massive, long-shot attempt to build from the ground up an advanced semiconductor manufacturing capability that doesn’t depend on foreign suppliers—churning through gargantuan amounts of the Chinese people’s money in the process. Rather than trying to reinvent the wheel, a better economic strategy would be to mend its relations with the West and reform China’s dysfunctional credit system—then import chips and let Chinese markets and Chinese companies decide what China is really good at.

Nathaniel Taplin, China’s State Capitalism Collides With Its Technological Ambitions, Wall St. J. (Jan. 2, 2021).

I have to wonder at its lack of learning.

And as I have pointed out elsewhere, the really funny thing about this mode of thought—the notion that a country is better off not trying to do the things that it is not right now good at doing—is that those who love it most also tend to be those who, when they turn their gaze to domestic markets, talk most about innovation and learning, and the need to protect firms from too much competition in order to promote them.

They argue in favor of monopoly and against regulation at home on the ground that shelter from competition is a necessary reward for innovation, that though big firms may destroy “static competition”—competition over price by firms with fixed levels of technical skill—doing so actually enables “dynamic competition”—competition to learn and innovate that eventually leads to far greater benefits for society.

So they ought to know better than to assume that a new Chinese closed door policy will save America from China.

Indeed, the Journal’s faith in free trade reminds me a bit of Ah Q, the eponymous antihero of The True Story of Ah Q, by the great early 20th century Chinese writer Lu Xun.

Ah Q’s talent, you see, was convincing himself he was the winner whenever he lost a fight.

To be sure, Ah Q was a metaphor for the much-oppressed China of a century ago, whereas America is still on top today.

But mentality is fate.

Antitrust Monopolization

The Assault on the Printed Page

When the New York Journal cabled Mark Twain in London on June 2, 1897 to inquire whether he was gravely ill, Twain famously replied that the reports of his death were greatly exaggerated.

William Randolph Hearst, the Journal’s publisher, could have saved his scoop by having Twain shot on the spot. Fortunately, he didn’t, and we got another 13 years and “Captain Stormfield’s Visit to Heaven” out of the great humorist.

Publishers of university textbooks wouldn’t have been so patient.

Reports of the demise of the printed page, popular since the dawn of the Internet, have turned out to be greatly exaggerated: sales of print books are surging.

So textbook publishers have decided to kill the printed page themselves.

According to a recent antitrust class action brought by university students, all the big names in textbook publishing have been working together to funnel cash to universities in exchange for commitments to assign online-only textbooks to students instead of print books.

It’s working: more than 1,000 universities have agreed to assign publishers’ online-only editions, millions of students have already been forced to purchase them, and publishers are preparing to phase out print textbooks entirely.

Studies show that students, like most readers, prefer the printed page, and textbook companies have seemingly had no problem jacking prices up to astronomical levels in recent years, with the average price of textbook in a core undergraduate course like statistics retailing for more than $300 dollars. So what do publishers have to gain from their assault on the printed page?

A lot, it turns out.

The Rise and Fall of the Internet Used Textbook Market

Eliminating print allows publishers to wipe out competitors that have depressed sales for years.

Before the Internet, textbook publishers had little to fear from the used book market, apart from an occasional copy with a yellow “Used” sticker on the spine that would make its way onto the shelf of a university bookstore.

The Internet changed that, by creating a national–indeed, international–market for used textbooks. Sales volumes of new textbooks plummeted, as students could now pass books along to each other from semester to semester through the medium of online booksellers.

For years, publishers more than offset their losses by jacking up new book prices, but it turns out that there is a limit even to what students with no-questions-asked access to loans are willing to spend for a new textbook.

Indeed, just excessive tax increases can reduce tax revenues, excessive textbook price increases reduce profits as students start locating bootleg copies on the Internet or shaming their professors into distributing textbook pdfs in violation of copyright rules.

Publishers tried to stem the tide by accelerating the rate at which they put out new textbook editions, even–and rather humorously–in such timeless subjects as basic physics, in order to drive used books to obsolescence and force students to come back to the market for new books.

It didn’t work, which is not to say that it put the major textbook publishers in jeopardy of closing up shop. Textbooks remain the most profitable books in publishing. But publishers preferred to go back to minting money at the old rate. And that’s where online-only books come in.

The Supreme Court has held as recently as 2013 that publishers cannot prohibit students from reselling their textbooks. But it is a staple of Internet law that online publishers can prohibit users from reselling access codes for online material. By killing the printed page, publishers kill the used book market.

The Antitrust Case against the Publishers

There was just one wrinkle that publishers couldn’t iron out on their own: getting universities to assign online-only books. To achieve that, publishers had to buy off the universities, and violate the antitrust laws.

Paying someone to deny your competitors an essential input is called “exclusive dealing” in antitrust lingo, and it’s illegal if the perpetrators have market power and the denial does not help them improve their own products.

But that’s just what publishers do when they pay universities to assign online-only books.

A university’s textbook choices are an essential input into the used book business. If schools don’t assign print books, used book sellers have no textbooks to resell in competition with publishers’ new books.

With used book sellers frozen out of the market, publishers end up with 100% of the textbook market, far in excess of the market shares generally required by the courts to establish market power.

And students end up blinking into the glare of an inferior product.

So this should be an easy antitrust case. But before an increasingly pro-business judiciary, it is anyone’s guess whether the courts will actually get this one right.

From Bad to Worse in the Information Age

The rise of the Internet used book market twenty years ago was itself a disaster for those who love books.

Back in the 1990s, biblioagnostics–those who were indifferent to studying off a new book or a used book–subsidized the bibliophiles who much preferred new books, because the ‘agnostics had to buy new books they didn’t want for lack of a robust used book market. Sales to ‘agnostics kept prices down, enabling bibliophiles to buy new books they could not otherwise afford.

In freeing ‘agnostics to save their money and buy used books instead, the Internet put an end to that subsidy, forcing bibliophiles who could not afford $300 for a new edition to put up with tattered, highlighter-marred tomes.

But if publishers now succeed at killing the printed page, everyone will suffer, not just bibliophiles. For the other thing publishers have to gain from the move to online is the demise of the university itself.

The Assault on the Printed Page Is an Assault on the University

Publishers sell more than just online textbooks. They sell everything a school needs for online learning, offering tests, quizzes, lecture notes, and PowerPoint slides to go along with the textbooks they peddle. And they hire university faculty members to teach instructors how to teach their materials.

When universities accept cash from the publishers in exchange for moving books online, and allow their faculties to indulge in the teaching aids that publishers offer as a perk to make the switch, schools effectively outsource instruction to publishers.

It is not hard to imagine publishers one day cutting out the middleman by offering courses and degrees directly to students. That would wipe out virtually all academic scholarship, save for the sponsored research common in the hard sciences.

Tuition covers about half the cost of instruction at universities, with the difference coming from subsidies. But faculty spend up to half of their putative instructional time producing scholarship, which means that student tuition dollars mostly pay for research, not teaching.

The publishers, however, won’t get any subsidies if they take over the instructional function, so the fees they will charge students will go entirely to instruction. But unless universities are able to make a strong case for conducting scholarship without teaching, which seems unlikely, the subsidies will dry up, and so there will be no money, either tuition or subsidies, left for scholarship.

Universities have been able to force students to pay for scholarship because university education is an oligopoly: brand loyalty–universities call it reputation–makes entry into the market by startups almost impossible, allowing schools to choose their prices without fear of competition.

But it is a virtuous oligopoly that subsidizes a public service, much the way the local advertising monopolies enjoyed by newspapers for most of the 20th century subsidized investigative reporting that was not strictly necessary to attract readers (tabloid headlines suffice for that).

The Internet has already come for newspapers, which lack the extreme brand loyalty enjoyed by universities, but one day it will come for universities too.

If their complicity in the assault on the printed page is any indication, they won’t know what hit them.

(I thank Chris Bradley for comments on a draft of this post.)

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 Monopolization

Antitrust’s Long-Lived Japanese Business Paradox

One strand of the new antitrust is the notion that bigness is fragile: concentrate wealth and power in a single firm and you put all your eggs in one basket. If the firm fails, the economy is done. Better to break up your behemoths to give the economy resilience in the face of crises.

It turns out, however, that the lesson of Japan’s millenarian firms is quite the opposite: the best way to last a thousand years is to cultivate a monopoly position.

At least according to the Times, which reports that “the Japanese companies that have endured the longest have often been defined by . . . an accumulation of large cash reserves,” which economics teaches is only possible for firms that have market power, and consequently the ability to raise prices above costs and stash the difference.

Indeed, according to the Times, many long-lived firms “started during the 200-year period, beginning in the 17th century, when Japan largely sealed itself off from the outside world, providing a stable business environment.” Read: when the government limited competition.

But wait. Aren’t Japan’s old firms small businesses? Today’s antitrust movement is all for giving small businesses their own mini-monopolies. Possibly because when a small business fails the economy won’t come down with it. (But more likely because this isn’t really about antitrust, but about wealth redistribution.)

So doesn’t the longevity of Japan’s businesses actually support the view that small is resilient? It turns out no. Japan counts big companies like Nintendo among its long-lived firms.

But America doesn’t need medieval Japanese business wisdom to understand that it’s competition, and not monopoly, that’s fragile. We have Schumpeter, who made the resilience of the big the centerpiece of his theory of creative destruction.

He argued that in a world that is more like a stormy sea than the water cooler at the Chicago Board of Trade, the apparent excesses of monopoly are in fact mostly examples of redundancy, the mainmast’s apparently unnecessary girth useful when the big storm hits.

Schumpeter writes:

If for instance a war risk is insurable, nobody objects to a firm’s collecting the cost of this insurance from the buyers of its products. But that risk is no less an element in long-run costs, if there are no facilities for insuring against it, in which case a price strategy aiming at the same end will seem to involve unnecessary restriction and to be productive of excess profits. . . . In analyzing such business strategy ex visu for a given point of time, the investigating economist or government agent sees price policies that seem to him predatory and restrictions of output that seemed to him synonymous with loss of opportunities to produce. He does not see that restrictions of this type are, in the conditions of the perennial gale [of creative destruction], incidents, often unavoidable incidents, of a long-run process of expansion which they protect rather than impede.

Joseph A. Schumpeter, Capitalism, Socialism and Democracy 88 (Harper & Row 1975).

When the Times writes of Japan’s long-lived firms that “[l]arge enterprises in particular keep substantial reserves to ensure that they can continue issuing paychecks and meet their other financial obligations in the event of an economic downturn or a crisis,” it’s hard not to see these firms’ business philosophy as fundamentally Schumpeterian.

Of course, there’s a limit to this kind of thinking. Business longevity and economic growth are two different things. I really am glad we’re not still using fax machines. But although there are plenty of problems with monopoly, fragility is not one of them.

Antitrust Monopolization

The Decline in Monopolization Cases in One (More) Graph

DOJ, FTC, and Private Cases Filed under Section 2 of the Sherman Act
(Image license: CC BY-SA 4.0.)


  • The decline in cases brought by the Department of Justice since the 1970s is consistent with the story of Chicago School influence over antitrust. What is perhaps less well known, but clearly reflected in the data, is that the Chicago Revolution took place in the Ford, and especially the Carter, Administrations, not, as is sometimes supposed, in the Reagan Administration, although Reagan supplied the coup de grace.

    Indeed, we have only five monopolization cases filed by DOJ over the course of the entire Carter Administration, as compared with 58 filed during the part of the Nixon Administration and the Ford Administration covered by this data series. This is consistent with the broader influence of the Chicago School over regulation of business. It was also under Ford and Carter, not Reagan, that deregulation got underway, with partial deregulation of railroads (1976), near-complete deregulation of airlines (1978), and partial deregulation of trucking (1980) (more here).

    The timing suggests that the Chicago School’s victories were intellectual, rather than merely partisan. As Przemyslaw Palka has pointed out to me, Milton Friedman consciously pursued a strategy of intellectual, rather than political warfare, because he understood that victory on the intellectual plane is more complete and enduring (a nice discussion of this may be found here on pages 218-221). As these numbers suggest, Chicago prevailed by converting its adversaries, so that even when its adversaries were nominally in political power under Carter, they implemented Chicago’s own agenda.
  • To the extent that the early part of the FTC data series is reliable (more on that below), the story in the FTC case numbers is that of the six monopolization cases brought over the past five years, following a twenty-year period during which the FTC brought only three cases. With the exception of Google, which has just been filed, there has been no corresponding uptick in monopolization cases filed by the Department of Justice.
  • The private litigation data show that in some years (1998 and 2013), private litigation across the entire United States has produced fewer monopolization cases (against unique defendants) than did a single federal enforcer–the DOJ–in 1971. The private litigation numbers for 1997 to 2020 also show that, on average, about twenty defendants face new monopolization actions each year when federal enforcers are filing near-zero complaints. To the extent that the numbers for 1974 to 1983 are reliable (of which more below), they suggest that private cases have also declined markedly since the 1970s, although there was a lag of several years between the two effects, perhaps due to the tendency of private plaintiffs to file follow-on cases to government cases.
  • Altogether, one is left with the impression that corporate America has been awfully well-behaved since about 1975.

Notes on the Data:

  • The cases brought by the Department of Justice (DOJ) come from the Antitrust Division’s own workload statistics, so I assume the numbers are accurate. For DOJ cases investigated, as well as filed, see here.
  • The cases filed by private plaintiffs come from two sources. The first, for the years 1997 to 2020, is a search for Section 2 complaints in federal court dockets via Lexis CourtLink. I must thank Beau Steenken, Instructional Services Librarian & Associate Professor of Legal Research at University of Kentucky Rosenberg College of Law, for figuring out how to search CourtLink for Section 2 cases (no easy task, it turns out).

    These are only cases for which the plaintiff, in filing the complaint, indicated the cause of action as Section 2 of the Sherman Act in the court’s cover sheet. Apart from deleting a few cases in which DOJ was the plaintiff, and a few cases in which the case was filed by mistake (e.g., the case name reads: “error”), I did not examine these cases at all, other than to note that many of the defendants look plausible (e.g., Microsoft comes up a lot in the late 1990s or early 2000s).

    Finally, I counted only unique defendants in any given year. So for example, if there were ten cases filed against Microsoft in 2000, I counted that as only one case. The reason is that multiple consumers or competitors might be harmed by a single piece of anticompetitive conduct undertaken by a monopolist, and so one would expect multiple plaintiffs to sue the monopolist based on the same conduct. For those interested in using case counts to measure enforcement, all of those cases signal the same thing, that a particular anticompetitive practice has been challenged, and so all of the cases together really only represent a single instance of enforcement. I did not, however, check each complaint to make sure that the alleged conduct was the same across all complaints. I just assumed that multiple complaints filed in a given year against a single defendant relate to the same conduct. (I did not, however, count unique defendants across plaintiff types: the Justice Department case against Microsoft was counted toward DOJ cases and and any private cases filed against Microsoft in the same year count as a an additional single case in the private cases account.)

    According to CourtLink, some federal courts adopted online filing later than others, and CourtLink only has electronic dockets. I chose to use 1997 as the start year for this count, because by that year almost all jurisdictions were online and so presumably their dockets are part of the CourtLink database. According to CourtLink, several jurisdictions had not yet moved online by that year, however, and so the counts may be slightly skewed low in the first few years after 1997 because they miss cases filed in the jurisdictions that were still offline during that period. The jurisdictions that went online after January 1, 1997, and the year in which they went online, are District of New Mexico (1998), District of Nevada (1999), and District of Alaska (2004).

    The source of the data for the years 1974 to 1983 is Table 6 in this article. That table gives the yearly percentage of refusal to deal and predatory pricing cases in a sample of 2,357 cases from five courts, Southern District of New York, Northern District of Illinois, Northern District of California, Western District of Missouri, and Northern District of Georgia, as well as the total number of private antitrust cases filed per year. Because I suspect that my CourtLink data represents “pure” Section 2 cases–cases in which the Section 2 claim is the principal claim in the case–I adjusted these percentages using information from Table 1 in the paper about the share of those percentages that represent primary claims. Because the total yearly private cases given in the Article did not appear to be adjusted for multiple cases filed against the same defendant in a given year, as I adjusted the CourtLink data, I therefore further reduced the results in the same proportion as my CourtLink results were reduced when I eliminated multiple cases against the same defendant, a reduction of about 40%.
  • I collected the FTC data by searching for cases labeled “Single-Firm Conduct” in the FTC’s “cases and proceedings” database. The cases and proceedings database goes back to 1996, and so I labeled years for which there were no hits as years of zero cases going back to 1996. However, the FTC website does caution that some older cases are searchable only by name and year, and presumably not by case type, so it is possible that this data fails to count cases from early in the period (e.g., late 1990s). I also paged through the “Annual Antitrust Enforcement Activities Reports” issued by the FTC between 1996 and 2008 and found a couple of cases not returned by the search of the cases and proceedings database. Finally, I included the FTC’s case against Intel, filed in 2009. I counted both administrative complaints filed in the FTC’s own internal adjudication system and complaints filed by the FTC in federal court. The FTC cases are nominally brought under Section 5 of the FTC Act, through which the FTC enforces Section 2 of the Sherman Act.
Antitrust 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?


Chamberlin Against Trademark

The wastes of advertising, about which economists have so often complained, would be reduced, for no one could afford to build up goodwill by this means, only to see it vanish through the unimpeded entrance of competitors. There would be more nearly equal returns to all producers and the elimination of sustained monopoly profits. All in all, there would be a closer approach to those beneficent results ordinarily pictured as working themselves out under “free competition.”

Edward Hastings Chamberlin, The Theory of Monopolistic Competition: A Re-Orientation of the Theory of Value 274 (7th ed. 1956).

This view, by the father of the theory of monopolistic competition, is of course still radical today. The entirety of Appendix E of The Theory of Monopolistic Competition, which he devotes to this attack on trademark, did not deserve to be forgotten. You can read it all here.

Where I think I differ with Chamberlin on trademark is this passage:

The question is, where does identification leave off and differentiation begin? [Absent trademark, t]here would be mere identification, without further differentiation of product, in the case of two competing goods, identical in every respect, – as to color, shape and design, labels, marks and names, everything excepting only an inconspicuous identification mark or the name and address of the producer. Obviously “protection” which went no further than this would have no economic value to the producer, for it would mean no more to the buyer than does the slip found in a container (and which identifies perfectly), “Packed by No. 23.”

Edward Hastings Chamberlin, The Theory of Monopolistic Competition: A Re-Orientation of the Theory of Value 272 (7th ed. 1956).

Chamberlin’s claim that “Packed by No. 23” is all identification and no differentiation works intuitively for us because we know that the company that employs No. 23 already engages in a great deal of supervision of the quality of No. 23’s work. We have learned that within-brand product quality is pretty good (at least these days), and so we can ignore these little notes, which may be the legacy of an earlier stage in the industrial age in which within-firm quality standards were still something of a work in progress.

But I do think that we would be far more likely to pay attention to No. 23 were it used as a brand name, rather than an identifier of within-brand quality, for there is no great bureaucratic organization standing over all brands in our economy, making sure each meets quality requirements, and willing to “fire” any that shirks or underperforms. To analogize the Consumer Products Safety Commission to a boss to American’s producers would be funny.

And so we would pay attention to No. 23–just as we pay attention to Chanel No. 5–and paying attention is all it takes for identification to cross over into differentiation, as any marketer will tell you. Attention leads to familiarity which leads to irrational preference.

The only way out of differentiation and all the irrational loyalty that comes with it is not to identify. But to do that, without throwing the consumer into a hell of shoddy and fake goods, one must then build up that great bureaucratic organization standing over all brands in our economy, making sure each meets quality requirements, and willing to “fire” any firm that shirks or underperforms.

That is, we must put businesses in the position of poor, hardworking No. 23.

But even if we were to do that, I am not sure that the end would justify the means. For if the point were alone “the elimination of sustained monopoly profits” via the increased price competition that would follow the demise of trademark, as Chamberlin suggests that it would be, I have a better idea: just pass a law that says “charge lower prices.”

If the goal is, instead, to achieve better product quality standards than exist today, then of course the great economy-wide bureaucracy would be needed.

(I thank my colleague Brian Frye for triggering this line of thought.)

Antitrust Monopolization

The Original and Purest Form of Anticompetitive Conduct

Still in those early days trade depended not upon the quality of the goods but upon the military force to control the markets. The Dutch consequently valued the island chiefly on account of its strategical position. From Formosa the Spanish commerce between Manila and China, and the Portuguese commerce between Macau and Japan could by constant attacks be made so precarious that much of it would be thrown into the hands of the Dutch, while the latter’s dealings with China and Japan would be subject to no interruptions.

James W. Davidson, The Island of Formosa, Past and Present (1903).

Here Davidson nicely contrasts monopolies based on product quality with monopolies based on force, capitalism with mercantilism. I do not think it is too much to say that democracy, or at least a genuine republicanism, even if autocratic in administration, is the principal bulwark between the two, and that antitrust, when used properly, is meant to round off any remaining mercantilist edges.

When used improperly, antitrust is of course a gunboat all of its own.

Antitrust Monopolization Regulation

Antitrust’s Robocall Paradox

Today’s antitrust movement loves to point to the breakup of AT&T as an example of what antitrust enforcers can do when they put their minds to it. The only problem is that the breakup of AT&T was a disaster, and The Wall Street Journal has kindly provided a new example of that today: robocalls.

The breakup of AT&T was a politically-motivated hit, a Nixon-originated project that became the only monopolization case carried through to a conclusion by a Reagan Justice Department that otherwise wanted nothing else to do with antitrust. The target was widely recognized as the standard bearer of progressive managerialism and a leader in progressive labor practices. (Remind you of some other firms that have found themselves in the cross-hairs of an otherwise do-nothing Antitrust Division today?)

The country has little to show for the breakup forty years later. It didn’t eliminate the fundamental bottleneck associated with telephony: the massive last-mile infrastructure required to get calls into consumers’ handsets. That infrastructure is today mostly owned by just three firms, the new AT&T, Verizon, and T-Mobile, because it exhibits great economies of scale.

While the breakup did bring down long-distance rates, that’s a bug, not a feature. The only reason the old AT&T charged high long-distance rates was because the company was engaged in progressive redistribution of wealth, scalping businesses and well-off long-distance powerusers to the end of providing dirt-cheap local phone access and “universal service” to the masses.

Any economist who knows his Ramsey prices will tell you that’s not the most profitable way to set your rates, because long-distance calling is a luxury, but basic phone access is a necessity (911, anyone?). To get the most profit out of the public, you want to charge high prices for the necessity–because people will pay those prices whatever they may be–and low prices for the luxury. The trouble with that from the perspective of distributive justice is that it’s a regressive rate structure: charging the masses high prices and elites low prices.

Which is just what happened after the breakup of Ma Bell.

The court and later Congress forced the Baby Bells that owned the last-mile infrastructure to connect long-distance carriers’ calls, enabling massive entry into the long-distance market and driving down long-distance rates. But consumers don’t just pay for long distance, they also must pay for basic call connection that allows long-distance calls to reach consumers’ handsets.

The price of that went up, for everyone, not just long-distance callers, because the last mile remained a bottleneck, an infrastructure so expensive that few firms can survive in the market. Which is why the Baby Bells, which controlled that infrastructure, never went away.

Liberated from a dominating headquarters weaned on a New Deal politics that demanded the sacrifice of profits in favor of progressive pricing, the Baby Bells now charged whatever they wanted. At last they could enjoy whatever cream they might be able to skim from a public that needs phone service and has nowhere to go. The fact that they dominated regional markets, but not long-distance, gave them the political cover that hulking monopoly Ma Bell never had.

Free to grow fat, they matured into the tri-opoly we have today, one that has distinguished itself in its adherence to the maxim that the greatest reward of monopoly is a quiet life by supplying America with slower mobile internet service than almost any country in the developed world.

But at least we got competition in long distance, right? Now anyone with $10,000 in working capital and a closet to store some routers can be a long-distance provider. Isn’t that a win for local self-reliance?

More like a win for fraud and robocallers, according to the Journal, in a story about the “dozens of little-known carriers that serve as key conduits in America’s telecom system,” connecting robocalls that “in total bilked U.S. consumers out of at least $38 million in 2019.”

The Journal treads lightly here–after all it’s got as much to gain as any newspaper from the current antitrust campaign against the tech giants that have out-competed the paper for advertising revenue in recent years–but it’s hard to disguise the culprit:

These small carriers took hold in the decades following the 1984 breakup of AT&T’s phone system monopoly, which was designed to lower the costs of long-distance calls. They mushroomed during the introduction of internet-based calling services in the 2000s.

The emergence of these small phone companies was in many ways a positive development for consumers who now pay less for long-distance calls. The downside is that the system wasn’t designed to discern between legitimate and illegitimate calls, which are sometimes mixed together as they are passed along. U.S. regulators generally didn’t require these carriers to block calls and in some cases forbade them from doing so as a way of limiting anticompetitive behavior. Some telecommunications experts say that opened the door for smaller carriers to hustle business from robocallers, or simply turn a blind eye to suspect traffic.

Ryan Tracy & Sarah Krause, Where Robocalls Hide: the House Next Door, Wall Street Journal, August 15, 2020.

Would there have been robocalls if we still had Ma Bell? Unlikely for a company that was so obsessed with control over its network that it famously stamped “BELL SYSTEM PROPERTY – NOT FOR SALE” on every handset in America.

(I do have to admit, however, that another communications monopoly still with us today provides something of a counterexample. The largest category of mail delivered by the U.S. Postal Service is advertising.)

Antitrust Civilization Monopolization Paradise Lost World

Permian-Triassic Extinction Event Antitrust

The Great Dying deconcentrated markets:

The complexity of an ecosystem can be estimated by the relative number of species: if a handful of species dominate, and the rest carve out a marginal existence, then the ecosystem is said to be simple. But if large numbers of species coexist together in similar numbers, then the ecosystem is far more complex, with a much wider web of interactions between species. By totting up the number of species living together at any one time in the fossil record, it’s possible to come up with an “index” of complexity, and the results are somewhat surprising. Rather than a gradual accrual of complexity over time, it seems that there was a sudden gearshift after the great Permian extinction. Before the extinction, for some 300 million years, marine ecosystems had been split roughly fifty-fifty between the simple and complex; afterwards, complex systems outweighed simple ones by three to one, a stable and persistent change that has lasted another 250 million years to this day. So rather than gradual change there was a sudden switch. Why?

According to paleontologist Peter Wagner, at the Field Museum of Natural History in Chicago, the answer is the spread of motile organisms. The shift took the oceans from a world that was largely anchored to the spot — lamp-shells, sea lilies, and so on, filtering food for meager low-energy living — to a new, more active world, dominated by animals that move around, even if as inchingly as snails, urchins and crabs. Plenty of animals moved around before the extinction, of course, but only afterwards did they become dominant. Why this gearshift took place after the Permian mass extinction is unknown, but might perhaps relate to the greater “buffering” against the world that comes with a motile lifestyle. If you move around, you often encounter rapidly changing environments, and so you need greater physical resilience. So it could be that the more motile animals had an edge in surviving the drastic environmental changes that accompanied the apocalypse . . . . The doomed filter feeders had nothing to cushion them against the blow.

Nick Lane, Life Ascending: The Ten Great Inventions of Evolution 145-46 (2009).

There is much food for antitrust thought in evolutionary history if you think of firms as representing methods of extracting value from the consumer environment. That makes them like species, all the members of which tend to use the same methods of extracting value from the natural environment. One species of bird uses long bills to get worms. Another uses short bills. And so on.

The Advantage of Incumbency

The Great Dying teaches a number of lessons. First, like the Cretaceous–Paleogene extinction event about which I have written before, it suggests the advantages of incumbency. The fact that less motile organisms have not reattained their former dominant position in the 250 million years of relative competition that has prevailed since the Great Dying tells you that less motile organisms were not particularly competitive relative to motile organisms. And yet for the 300 million years until the Great Dying they dominated, despite the parallel existence of more motile organisms. Why? Perhaps simply because they evolved first.

Industrial organization economists have long warned about these “first-mover advantages,” but the antitrust laws ignore them. The “conduct requirement” in antitrust holds that simply being dominant is not an offense in itself. There are plenty of good reasons for that rule, because it’s easy to use it to punish justified market success. But one bad reason to support the rule is that the dominant firm is always the better firm. If the history of the Great Dying is any guide, incumbency does sometimes protect uncompetitive firms.

Competition’s Good Side or The Virtue of Theft

The Great Dying’s second lesson for antitrust has to do with motility, for motility means, at least in part, predation and theft. Creatures that move can seek out new environments not yet colonized by stationary organisms feeding off minerals or sunlight. But one of the major things that motile organisms also do is to predate. Motility lets you range across the environment eating the organisms that have done the hard work for you of generating energy from light and inanimate matter.

We think of theft as being a problem in the law. We like to say that theft reduces incentives for innovation and economic growth because it means that innovators can’t fully reap the fruits of their productive labors. The plant that has a leaf torn off by some vicious armored predator has done the environmentally-friendly work of converting light to energy without so much as emitting a single carbon atom, and yet here the fruits of its labors have been stolen from it. Fortunately, we say, in the business context the law is there to stop such theft.

But the fact that the flourishing of motility after the Great Dying was correlated with an increase in ecosystem complexity—a reduction in species dominance—suggests that theft is not necessarily bad, at least if deconcentration of markets is your thing.

This is a familiar point, approached from a different angle. Industrial organization scholars have long pointed out that the strength of intellectual property protection matters. Make the patent term too lengthy and innovation will fall below optimal levels, because inventors won’t be able to build on prior art to create the next generation of inventions. It follows that if patent rights are too strong, then theft of intellectual property could actually lead to more innovation, and richer and more complex markets. Similarly, when a monopolist ties up a source of supply and uses it to suffocate competitors, theft would bring more competition to the market.

Antitrust recognizes the importance of theft for competition, although antitrust—probably wisely—doesn’t say so in quite such stark terms.

Every time antitrust enforcers order a dominant firm to supply an essential input to competitors—and antitrust does do that occasionally, even in the United States—antitrust is, objectively speaking, revising a property right. Which is to say: authorizing disadvantaged firms to steal from the dominant firm.

The nice thing is that when you’re the law you get to define the boundaries of the law, so you can plausibly say it’s not theft that you’re authorizing, but rather that the dominant firm’s ownership rights over the essential input never actually included the right to deny the input to competitors.

Regardless how it’s characterized, antitrust’s forced dealing remedy does allow other firms to take the fruits of the defendant’s labors, and for a price that must be less than their value, otherwise the taking would provide no competitive succor to the beneficiaries. That’s legalized predation in the biological sense. The aftermath of the Great Dying suggests that it’s probably justified, at least if the goal is to deconcentrate markets.

Competition’s Bad Side or The Horror of Predation

But at the same time, one must proceed with caution in celebrating the complexification of ecosystems that followed the Great Dying, because complexity and competition are not ends in themselves.

There’s a reason for which biologists also refer to the great age before any predators had evolved, the Ediacaran period, as the “Garden of the Ediacara.” We can view the rise of motility and predation, and the demise of filter feeder dominance after the Great Dying, as leading to a golden age of competition and complexity. It’s the golden age we live in today (or lived in until we started wiping out large parts of it starting with the end of the last ice age).

Or we can view the rise of motility and predation as destroying a peaceful Eden in which life competed principally on the virtuous project of converting the inanimate into the animate, of extracting energy from the physical environment, rather than from other living things.

From this perspective, if over the first 300 million years of the existence of complex life evolution tended to hit a wall, and for eons life did not get much better at converting the inanimate to the animate, then that says something about the limits of biology. It does not tell us that the motility, predation, and theft that followed represented an improvement.

From this perspective, the rise of motility and predation was instead a symptom of evolution’s defeat. When life could no longer advance by getting better at converting inanimate matter to animate matter, it turned on itself, leading to the hell of predator-prey competition that has characterized the past 250 million years. If only there had been a world government in the Ediacaran capable of enforcing the basic rules of criminal and property law!

Life would have stayed happy.

In general, the antitrust laws today are much more sympathetic to this dark view of predation than to the other. Antitrust enforcers for the most part shy away from revising property rights. And the legal system as a whole, of which antitrust is just a part, gives great priority to property. The natural world is, of course, the state of nature. And if there is one thing that separates civilization from the state of nature, it’s the concept of property, the notion that theft is to be curtailed, and that evolution within civilization is to take place along the old Ediacaran lines, with each attempting to better himself other than at the expense of others.

Over its first 300 million years, complex life does seem to have hit a wall in bettering itself through virtuous, non-predatory competition, at least so far as the biochemistry of energy production out of inanimate matter is concerned. Our inability to generate energy other than by burning fossil fuels shows that for all our own ingenuity we humans haven’t managed to outdo nature either. We live off the productive labors of other creatures, including both living plants and those dead so long as to have been ground into oil. That makes us, and the horror we have meant for the planet, the logical extreme end of the triumph of motility and predation after the Great Dying.

But the fact that civilization’s vision, honored however often in the breach, is fundamentally Ediacaran, suggests to me that there is hope. Climate disaster is effectively forcing us to extend the property laws we enforce within civilization to the life outside of it. With luck, the virtuous, non-predatory competition that results will help us achieve the breakthrough that life could not, and allow us to advance into new methods for generating energy from the inanimate.