4.2 — Consequences and Sources of Market Power — Class Content
Overview
Today we continue our look at market power, by looking at the social consequences of market power: deadweight loss, allocative inefficiency, x-inefficiency, and rent-seeking; as well as the primary causes: barriers to entry of various sorts.
Readings
- Ch. 9.1 in Goolsbee, Levitt, and Syverson, 2019
On Rents and Rent-seeking
- Munger, 2006, “Rent Seek and You Will Find”
- Econtalk with Mike Munger, 2006, “Giving Away Money: An Economist’s Guide to Political Life”
- Tullock (1967), “The Welfare Cost of Tariffs, Monopolies, and Theft”
- Kreuger (1974), “The Political Economy of the Rent-Seeking Society”
- Mitchell (2012), “The Pathology of Privilege”
- NPR Planet Money 599: “Why its Illegal to Braid Hair without a License”
- Freakonomics*: “Apple vs. Samsung: Who Owns the Rectangle?”)
On Benefits of Market Power/Creative Destruction
- Theil (2014), “Competition is for Losers”
- Manne and Stapp, 2019, “This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable”
Tullock (1967) is the famous paper that first describes the idea of “rent-seeking,” though he did not come up with the term, that comes from Kreuger (1974). Tullock is very readable, and shows the connections between monopoly, tariffs, and theft in terms of the rents and the rent-seeking they create. Kreuger (1974) considers rent-seeking at a national level in terms of how it harms trade and development.
Mitchell (2012) is a readable collection of many ways that business and special interests rent-seek and convince governments to erect barriers to entry at the expense of competition and consumers, e.g. monopoly status, favorable regulations, subsidies, bailouts, loan guarantees, targeted tax breaks, protection from foreign competition, and noncompetitive contracts.
Theil (2014) is a provocative Op-ed1 in the Wall Street Journal that is actually an excerpt from his excellent book Zero to One: Notes on Startups, or How to Build the Future2. Theil argues that it is a poor business idea to compete in a competitive market, and for a business to be successful, it needs to be the last-mover in a market, such that it acts as a monopoly. If the market is still competitive and dynamic, the quest for monopoly power can have benefits to consumers in terms of creativity and innnovation (think Google, etc), since they do not have to worry as much about competition.
Relevant classes from my Spring 2020 Industrial Organization course:
Slides
Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. The lower button will allow you to download a PDF version of the slides.
You can type h to see a special list of viewing options, and type o for an outline view of all the slides.
I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!
