One of our government's roles is to protect the business environment from monopolistic behavior which undermines the free market. This is a necessary role to protect consumers and the efficiency of the free market. The Sherman Antitrust Act was the first law put into place allowing the federal government this enforcement. But, with the recent political environment of less government, at least in economic matters, we’re seeing several examples where lack of enforcement has likely led to harmful practices and market behavior.
There are many examples of monopolies being dealt with in US history. Well known ones include Standard Oil, AT&T in the 80’s, and Microsoft in the 90’s.
The bigger challenge in today’s economy is the oligopoly. When a single entity manages to get enough market power to break the efficiency of the market, it’s generally clear that for assessing blame, and it’s (relatively) clear to consumers. An oligopoly is a lot harder to see, because there isn’t a simple causal relationship in place.
The government was able to establish that AT&T was abusing its market power, and addressed it by getting AT&T to break up into the “Baby Bells.” It was clear that AT&T had enough market power on its own to justify these actions. How do you establish that market power is being abused when no single entity has enough market power to control the market on its own?
In the 70’s the OPEC countries formed a successful cartel, putting price controls in place which significantly raised prices. Yet, no single OPEC member could have done this alone (a good reason why the cartel didn’t last). It was clear that market power was being abused because the OPEC members weren’t secretive about it. For a similar situation in the U.S., this would be illegal, so there’s a greater incentive to stay covert. Hence, much harder to establish abuse of market power.
Today, and more importantly, in 2008, the financial industry was run by a couple very large banks. The bailout of these banks was justified due to these companies being “too big to fail.” Being too big to fail, as in being critical to the economy, so much so that the government will pay to avoid a complete failure isn’t in itself an abuse of market power. (There are other issues with this system, but market power abuse isn’t inherently one of them.)
These companies are still acting as an oligopoly though. In a competitive market, these financial companies should have to deal with a bunch of startups (in a free market, new entities are free to enter or leave). Another property we would expect to see if the financial industry isn’t operating as an oligopoly would be price pressure from competition from one another. Norm touches on this in this post. Showing that these firms are able to charge $3000/hr for their services in some cases. That’s quite a premium to see where there are neither new entities entering the market nor existing competitors undercutting that price.
Neil Barofsky, special prosecutor overseeing TARP funds was interviewed by Bill Moyers about his experience with dealing with the big banks. He makes a very good point about a market failure regarding bailout funding. Because there is a presumption of bailout, the big banks are seen as very safe investments, so they get preferential treatment and higher credit ratings as a result. He suggests that breaking up the big banks would be the best approach to this problem.
As I mentioned in my previous post, not a whole lot of restriction was put on the big banks that needed bailout money. As a long-term solution to this too-big-too-fail issue, establishing that the big banks are acting as an oligopoly, this might be a good way to create some more competition and reduce the market power of these big banks. At the same time, reducing the size of these entities would reduce the risk to the economy when one of them fails, thus not needing to bailout failing companies in the future.
