America's Game of Monopoly

America's Game of Monopoly

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Kimo Gandall, Fiscal Policy Associate Editor
 
The American Dream, one in which an individual can pull himself up, innovate, and work his way to the top, is slowly dying. In a recent article, I described this empirical trend; indeed, as I pointed out, new startups are at a 40 year low, and the the number of companies being opened up has shrunk by almost 44% since 1978. 
 
Excessive regulation definitely had a part to play in this trend --- however, there is, perhaps another cause: corporate consolidation. Indeed, theoretical market models have predicted the effect of this. In a 2017 Harvard Law and Policy Review Paper, analysts found that relative any given market, equilibrium price is higher and equilibrium quantity of output is lower where a concentration of market power exists. Simply put, when large firms control the appropriation of resources, those resources are allocated less efficiency, and the inequality of the distribution of wealth between the consumer and firm disportionately hurts the consumer.

Thus, at least in terms of theory, smaller firms benefit consumers more than larger ones. 
 
In many ways, we already knew this. The same, indeed, applies to government --- a concentration of power, when there is no incentive to compete and innovate, leads to inefficiencies. 
 
Case studies tend to the confirm this behavior. In the 2017 Harvard Law and Policy review study, analysts further looked into examples of this behavior being exhibited on the marketplace. The study examined the power of economic rent, i.e. the excess paid for a service or good due to competitive imperfection that exists in a marketplace that leads to one entity controlling said service or good. 

 

The graph above, most simply, shows that with higher levels of control of the dominant supply or service or in each sector, that revenues greatly increased, even when demand remained the same. This data, on a macroeconomic level, implies that large firms and suppliers benefit from imperfect competition on the marketplace. While this data is not causal (for instance, one could contend that larger companies are just more competitive and thus are simply providing better services and goods), it strongly suggests that our anecdotal examples, such as the increasing presence of institutions like Walmart over traditional mom and pop shops, has empirical backing. 
 
The existence of monopolies in our society ought to be alarming; indeed, empirical theory confirms this impact with theorists suggesting that such rent practices create social waste in the form of additional wealth extraction from consumers, and such wealth is often simply recycled into creating noncompetitive behaviors (such as artificially low prices, or, as I suggest, the purchasing of lobbying assets in Washington) (Baysinger 1975). This effect manifests as not only as a harm to dynamism in the economy, but, as previously stipulated, restricts the freedom of consumers to access the marketplace. 
 
However, this is not to immediately assume that the breakup of all industrial monopolies, in an immediate setting, is necessary. In fact, the very existence of government has created these uncompetitive environments --- for instance, in the past 15 years alone, the government has given out $68 billion in grant funding to companies, and 6 large corporations have received over $1 billion in this funding. Additionally, reports find that regulations kill start up companies, and as previously asserted, we now live in a generation where entrepreneurship is dying. Thus, in many ways it seems that the government, not the conspiracy of greedy businesses, is to blame for our current crisis. 
 
The Trump administration now has a difficult task in front of them --- not only must he break down regulatory barriers, but they must make the marketplace competitive again. Luckily, the President has sworn to reduce regulations by, “75%,” an effort that very well may be the needed stepping stone to Make the Market Competitive Again. 


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