Free Markets Are Monopoly Busters

Competition does the work that regulators can’t—especially in a technological age.

By David R. Henderson. Excerpts:

"The Aluminum Company of America (Alcoa) was an amazing success. Although Greenspan didn’t give the numbers about its growth, economist Joseph Schumpeter had done so in his 1942 classic, Capitalism, Socialism, and Democracy.

Here’s a quote from his footnote about Alcoa:

From 1890 to 1929 the price of the basic product of this single seller [Alcoa] fell to about 12 percent or, correcting for the change in the price level (B.L.S. index of wholesale prices), to about 8.2 percent. Output rose from 30 metric tons to 103,400. Protection by patent ceased in 1909.

That means that Alcoa’s aluminum output over those thirty-nine years increased by over 344,665 percent! This amounts to a compounded annual rate of increase of 23 percent. Keep in mind that economists’ objection to monopoly is that the monopolist sells too little and charges too much. But a 91.8 percent fall in the price over that time, along with a 344,665 percent increase in output, suggests, to put it mildly, that restriction of output and monopoly prices were not a problem."

"What’s astounding, though, is Judge Hand’s reasoning about how he thought it had tried to monopolize. In one of the most quoted paragraphs ever from an antitrust decision, Judge Hand stated:

It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel.

In short, Alcoa kept anticipating increases in demand for aluminum and kept increasing capacity so that it could meet that demand."

"Google put substantial resources over the years into building its metadata. Why should it be forced to share these data with rivals? Judge Mehta, an obviously ambitious lawyer, probably put effort into building a list of contacts who would help him get his current job. He was competing against others who didn’t have access to his data. Would Judge Mehta think it fair for a court to order him to share his list? Also, making Google share its index will signal to future companies that they may have to share their data with rivals. That will reduce the incentive to build such indexes in the future."

"Schumpeter saw it differently. In a chapter titled “The Process of Creative Destruction,” he wrote:

But in capitalist reality as distinguished from its textbook picture, it is not that competition [price competition] which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

He went on to write, “It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks.”"

"On May 19, 1975, fully six years after the IBM case was filed, it went to trial. Here’s what Historyofinformation.com says:

After thousands of hours of testimony (testimony of over 950 witnesses, 87 in court, the remainder by deposition), and the submission of tens of thousands of exhibits, on January 8, 1982, the antitrust case US v. IBM was withdrawn on the grounds that the case was “without merit.”"

"Competition was already undercutting IBM’s dominant position. IBM’s flagship computer was the System/360. In the 1960s, the midrange 360 was priced at about $246,000, which is $2.5 million in today’s dollars. IBM had quit marketing the 360 at the end of 1977." 

"within a few years after the case was dropped. We got cheap desktop computers that sold for less than 1 percent of the 360’s price."