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Wednesday, October 28, 2020 Leer en Español

Government Should Address the Monopolies It Created Before Tackling Big Tech

Whether it’s Mylan’s EpiPen or the USPS’s monopoly on first class mail, there are countless examples where high prices and poor service have been built on a foundation of government protection.

It may be the age of technology, but things are not looking good for Facebook, Google, Amazon, and Apple. The House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law has concluded their 17-month investigation into the big four. They argue that “companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”

And if you thought that was rough news for the companies, the Justice Department followed this with an antitrust lawsuit against Google.

If the government is ramping up its efforts to combat monopoly power, does this mean we might see the end of government monopolies as well?

From White Boards to Board Rooms

First, we should be clear about our definitions. When we talk about monopolies, there are usually two questions that cause more frustration than any other. In the classroom, it’s students trying to remember, “Does P=MC or does MR=MC for a monopoly?” In the market, it’s legislators and consumers trying to figure out, “Is this a monopoly?” Unfortunately, while math can be intimidating, the second question is much more complicated.

Let’s start with the first question. Think about what it really means: Is a business making the most profit possible when the price is equal to the marginal cost? Well, surely one could make more money by having prices higher than costs, so this must mean there are competitive forces preventing higher prices. Therefore, the second equation (marginal revenue is equal to marginal cost) must refer to a monopoly firm because there are no forces present to put downward pressure on the price.

It is intimidating to be confronted with an equation full of letters and symbols, but math is often quite intuitive when you take a moment to break it down. Sadly, the same can’t always be said when we try to step away from the white board to investigate the real world.

While the math only took a single paragraph to explain, the House Subcommittee needed 450 pages to answer whether or not the tech giants are monopolies, and how they’ve achieved said status. This is because they needed to prove the conditions that existed within board rooms. The average person might think of a monopoly simply as a single business operating as the only provider of a good or service. Yet, the FTC uses a more nuanced definition such that, “Courts do not require a literal monopoly before applying rules for single firm conduct… .” (emphasis mine) Rather, they define “a ‘monopolist’ [as] a firm with significant and durable market power.”

This is how Facebook can be labeled a monopoly despite competitors like Twitter, Discord, LinkedIn, and Reddit. For Google, the list of competing search engines extends even further.

Thus, the process involves investigating if a firm has “monopoly power” in the market, asking if said power was achieved through improper conduct, and then evaluating possible justifications. Along the way, each of these steps is split into a myriad of questions about motive, intention, and context. Board members are interrogated, hearings are conducted, and documents are filed.

Governments are famous for moving slow, but this is one process that certainly cannot be completed overnight.

A Red Flag

Yet if you are looking for a monopoly, there is a red flag worth taking note of. It can be the difference between investigations that take years and those that take minutes. It allows one to cut out considerations of nuance, motive, and intent. In fact, the government won’t even need to subpoena documents since they should already have what they need on file. If you haven’t guessed, this red flag can be summed up in two words: government protections.

As Nobel Prize winning economist George Stigler said, “most important enduring monopolies or near monopolies in the United States rest on government policies.” Whether it’s Mylan’s EpiPen or the USPS’s monopoly on first class mail, there are countless examples where high prices and poor service have been built on a foundation of government protection.

No matter how well intentioned, constructing high barriers to entry will only serve to entrench the politically favored at the cost of not just their competitors, but society at large. This is why we see drug prices double without explanation or even a rush of new competitors. It is why incumbents become lax and seemingly unable to innovate. And it’s why markets continually get a bad reputation as it is easier to blame the “greed of CEOs” than to observe the unseen costs of legislative barriers.

The Devil You Know

If the government has a monopoly itch to scratch, maybe they should start by taking a closer look at the ones they themselves have created. The list is certainly long. They should start by reconsidering the protections granted to Mylan, Eli Lilly (insulin), and even the FDA itself. Beyond the medical industry, they should review the US Post Office and the TSA. And if that’s not enough to satiate them, why not reconsider the Federal Reserve’s monopoly on the money supply?

Whether the House’s investigation or the Justice Department’s lawsuit will result in any worthwhile changes is yet to be seen. Frankly, it’s not even clear that it is a worthwhile pursuit. However, scaling back government protections is something that could create real change for Americans. Best of all, it can be done quickly.

  • Nicholas Anthony is the Manager of the Cato Institute's Center for Monetary and Financial Alternatives.Originally from Baltimore, Maryland, he received a Bachelor's Degree in Economics and Business Administration from Towson University, and a Master's Degree in Economics from George Mason University.