Can Monopolies Help Consumers?

By now, I'm assuming that most of you know the rough outlines of last week's dispute between Amazon and Macmillan.  The shorter version is that once the iPad was introduced, Macmillan used its new leverage to demand that Amazon let the publisher raise the prices of eBooks in order to protect sales of its front list hardcovers.  After a weak attempt at retaliating, Amazon folded.

The longer version you should get from our excellent Atlantic Business piece by Virginia Postrel.

So as soon as competition was introduced into the eBook market . . . prices to consumers go up?  This sounds like an odd outcome.  Isn't competition supposed to make prices go down?

Not necessarily.  Actually, if you're among the majority of Americans who view the Sherman Anti-Trust Act as one of the finest legislative achievements in our history, you'll be surprised to find that the evidence that breaking up monopolies helps consumers is actually kind of weak.  Monopolists often operate in markets where there are great returns to scale, and they keep competition out by offering prices too low for a smaller new entrant to compete.  After the breakup of Standard Oil, probably the Sherman Act's most famous scalp, prices for key petroleum distillates actually rose.

Government granted monopolies do display higher prices and poorer quality, because the government-granted monopolies don't need to worry about new entrants.  If cartel agreements were legally enforceable, all monopolies would look like Comcast.

But Kindle's strategy was on the "benevolent monopolist" side:  Amazon wanted to attain a virtual monopoly over the eBook market by using its bargaining power to keep the prices of eBooks low.  Once Steve Jobs showed that he was willing to give publishers better terms, that bargaining power was eroded.

Does that mean consumers are worse off?  Maybe.  As someone who likes to consume cheap electronic reading material, I'm tempted to say yes.  But the publishers would say that if consumers like new books, they need profit margins high enough to feed the queue.

There's also the possibility that once companies have gotten a monopoly, they will start gouging consumers.  In practice, you see less of this than you'd think, because in the absence of some sort of legal protection of their monopoly status, they can't act so badly that people start switching to other companies.  But that's not to say it doesn't exist.

Still, I think it's worth noting that while we usually discuss antitrust as a means of helping consumers, in fact, it's more obviously successful at helping competitors.  This is why libertarians are so often against antitrust interventions:  they don't recognize a right to be free from competition, even the "unfair" kind.

It may also explain why the harshest actions against Microsoft have come out of the EU.