Michael Hicks: Monopoly isn’t just a game anymore


Monopoly is again becoming interesting, and I don’t mean the board game.

Over the past few years, both academic and policy researchers have found growing evidence of market concentration or lack of competition in many business sectors.

For a variety of reasons, this will likely emerge as a campaign issue in the next national election, so it is helpful to understand what economists mean when they talk about competition.

Economists favor competitive markets over monopoly-like markets because competition yields much better outcomes to both consumers and producers. However, this remains a hard concept for many to grasp. Everyone understands that competition yields lower prices, higher levels of production and, over the long run, more innovation. Competition also responds more quickly to consumer demand.

Markets don’t always work perfectly, which is what this column is ultimately about. But, when they work well, no other human contrivance is as effective at matching desires to goods and services and workers to the jobs they want. What often confuses folks about competitive markets is that individual firms don’t want to be in a competitive market.

For individual businesses, it is better to avoid competition and operate in markets with few rivals. Individual businesses go to great lengths to deter rivals. However, firms in competition hire more workers and produce more goods than those who can protect themselves from competition. So, it is better for commerce as a whole to operate in competitive markets. That part slips by many people.

The United States has long led the world in policies designed to protect against monopolies. The Sherman Act of 1890 outlawed direct collusion between firms. Since then, the country has developed a streamlined and economically informed set of laws and legal precedent that promote competition. We just have not used them as much as we might.

Over the past 25 years or so, competition in the country has dwindled. New firm creation has plummeted, and the share of employment in the largest few firms in each industry has grown significantly. This is known as market concentration and is a big signal of growing monopolization.

The biggest concern over market concentration has long been its effect on the price and availability of goods and services. Monopolies and monopoly-like market conditions are among the few places where the bulk of economists believe market intervention is warranted. Indeed, almost the only disagreement about the scale and scope of government intervention comes in our ability to judge effectively when a market possesses too little competition.

For example, in many cases monopolies, are transient. Facebook, for example, developed very deep market concentration in social media. However, if my teenagers are to be believed, Facebook is now nothing more than a reliquary of childhood vacation pictures accessed mainly by an ancient race of people aged 40 and older. This is not a recipe for sustained monopoly, so natural market forces alone might be as effective as government in promoting competition in this market.

More recently, there is growing evidence that less competitive markets are influencing more than just prices, and might now be playing a role in suppressing wage growth. In rural places and small towns, this has likely been the case for some time, but several recent studies suggest the problem is broader than has long been thought to be the case.

Right now, there is growing evidence that lack of competition in labor markets is a broad problem. Still, this is an area where politicians on both the right and left are likely to see policy concerns. If so, state policies toward business should be among the first to see pressure for reforms. I see two major policy concerns.

First, state policies that funnel workers into specific occupations will face much more scrutiny than they currently do. These policies likely restrict wage growth while overwhelmingly benefiting just a few larger firms. Because these policies face almost no oversight today, this would be an easy problem to address. Second, there is likely to be a growing discomfort with tax incentives. Large businesses are disproportionate beneficiaries of tax incentives, which is ironic since larger firms already benefit from low-capital costs in ways small firms cannot.

As with many state policies, special advantages given to large firms often come at the expense of their smaller, less well-connected competitors. Worse still, neither workers nor taxpayers seem to benefit much from these policies. So, in a world where small firms are a shrinking share of the economy and wage growth is sluggish, there should be growing call for change.

Michael J. Hicks is the George & Frances Ball Distinguished Professor of Economics and director of the Center for Business and Economic Research and professor of economics at Ball State University.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].