SOME POLICY ISSUES

The neoclassical economics of public policy assumes that exchange is cooperative, but that all other economic phenomena, including the terms of exchange, are determined by noncooperative decisions. If we conceive the firm as a cooperative coalition, we might expect that the implications for public policy would differ, in some cases. This section explores the implications, in this last-stage model, of some classical cases in the economics of public policy: monopoly power and its regulation, excise taxes and subsidies per unit of output.

Monopoly Reconsidered

The theory of monopoly in the late nineteenth and twentieth centuries has been little more than an elaboration of a passing remark of John Stuart Mill, who writes in the Principles of Political Economy (1865/1898, p. 272) “The monopolist can fix the price as high as he pleases, . . . but he can do so only by limiting the supply.” This is true (and the Marshall- Lerner conditions make the point more precise; Lerner, 1934) provided the law of one price applies, so that price discrimination, all-or-nothing offers, and such can be excluded. Now, Mill was aware that the law of one price cannot always be applied where competition is imperfect (1865/1898, p. 149) but his argument here is that “Monopoly value . . . is but a mere variety of the ordinary case of demand and supply” (p. 272). But with the word “value” Mill adopted a law of one price and a long-run equilibrium perspective from classical value theory. For classical value theory value is a unique central tendency toward which prices, determined in the short run (p. 273) by supply and demand, must tend. This idea that a monopolist profits by restricting output has continued to dominate neoclassical economics throughout its history.

There are some firms that have monopoly power but have a “competitive fringe” and so cannot effectively make price-discriminatory offers. However, a literal monopoly will be able to make such offers, and will always increase the surplus by doing so. And increasing the surplus will increase the profit, along with the net benefit to other members of the coalition who possess positive bargaining power.

This applies with particular force to monopolistic competition. Where monopoly power is based on product differentiation there will not, in general, be a competitive fringe. “Each firm has a monopoly of its own product” (Robinson and Eatwell, 1974, p. 173) and there can be no fringe of competitive sellers of the firm’s own brand. Monopolistic competition will indeed be the general case in a world of positive transaction costs, but for many purposes, we can apply the perfectly competitive model - marginal cost equal to marginal willingness to pay, supply equal to demand - to firms in such a monopolistically competitive situation, if we assume, as this chapter does, that prices are determined cooperatively.

An exception that deserves mention is the sale of tickets to performances, where the events are differentiated but the tickets can be “scalped” or resold. The scalpers are an instance of a competitive fringe. If a company that puts on such performances restricts its output in order to raise the price, it seems that it is competition, as much as monopoly, that causes the inefficient allocation of resources in such a case. Exceptions may also include cases in which a law of one price is imposed by law or regulation, that is, where price discrimination is prohibited. This may be a necessary condition for the allocation of resources through an auction mechanism, which is itself in the last analysis a cooperative arrangement (McCain, 2014a, pp. 65-6, 123-5). In some cases, however, regulations that exclude price discrimination may lead to an inefficient restriction of output.

But the key point is that monopoly power, per se, does not distort resource allocation away from efficiency. The impact of monopoly power is thus to be seen in the distributive, not the allocative decisions of the coalition for production and sale. Monopoly may well be, in Mill’s words, “the taxation of the industrious for the support of indolence, if not of plunder” (1865/1898 p. 476), but not a source of inefficient resource allocation. This is important, for present purposes, because antimonopoly policy is generally premised on the supposed inefficiency of resource allocation under unregulated monopoly. It would seem that the whole discussion of economic policy toward monopoly, in the twentieth century, has been based on a mistaken premise. The impact of monopoly power is to be found, instead, in the bargaining power of the monopoly vis-a-vis its customers, and thus in the realm of distribution.

In the context of monopolistic competition, monopoly power may have little influence even on bargaining power. Monopolistic competition may take place among quite small businesses with products differentiated by location, reputation, or style. For an industry of this kind, nothing seems to be lost if we apply the perfectly competitive model, in that it will predict the marginal price and the quantity sold accurately. In short, monopolistic competition per se has no prima facie policy implications distinct from those of pure or perfect competition.

Thus far we have discussed decisions by an individual monopoly or monopolistically competitive coalition. A case of oligopoly - that is, where interactive noncooperative decisions of different firms are important - may yield different results.

 
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