Monopoly: Better As a Board Game Than Having Increased Corporate Monopolization In Real Life

As a child growing up, I remember playing the board game known as Monopoly. It would take hours to rack up all those properties before declaring a winner. Because it took so long, it ended up being one of those board games that one plays when it's raining out and it's one of the only things to do. I'm sure enough of you had similar experiences with Monopoly growing up. As I got older, I ended up spending some of my professional life conducting market research. One of the trends I realized is that multiple markets had high market concentration. What I mean by high market concentration is that very few market competitors (usually less than five) control most or all of the market share. When one company controls the entire market, the market becomes a monopoly. Under the Federal Trade Commission's definition, however, a company does not need to be a literal monopoly (read: pure monopoly) before it applies its rules towards single firm conduct.

Last Monday, the Open Markets Institute released an intriguing report entitled America's Concentration Crisis. OMI covered 32 markets in its report, ranging from home improvement stores and cell phone providers to pet supply stores, e-commerce, and beer. The report also covered the increased monopolization of domestic airlines, a topic that I covered separately last year. Shortly before the report was released, the New York Times released an article on the topic with a concise and damning chart (see below).

Some of you are probably wondering what could possibly be wrong with having monopolies. Some could argue that "bigger is better" in that they could offer the same good with less cost, thereby increasing the possibilities for consumers. I actually made that argument myself when discussing Big Banks in 2016. To tease out some nuance, there are some markets that do better with size. What we have to remember with banking is that a) it is a large market to begin with, and b) the market is not concentrated (see chart above).

With most markets, there are issues that come with too much market fragmentation. The same is also true for its inverse: too high of market concentration (e.g., Schmitz, 2016; Gumus, 2006; von Mises, 1998; Posner, 1974). Why? Looking at a basic economic model of a monopoly (see below), it creates deadweight loss. Deadweight loss is that allocative inefficiency when a good or service cannot be allocated at its most efficient, which is in a competitive market. This has to do with the fact that in a monopoly or a market with high concentration, a company has much more liberty to set prices, which means less of a good or service is produced. As a result, society as a whole is worse off. It is not solely a matter of decreased economic welfare. Fewer competitors in a market means that consumers have fewer places to buy goods and services. Not only do producers have less of an incentive to keep prices down, but they have greater incentive to keep quality low.

There is also a more prevailing theory on the Left that wage stagnation is caused by the employees' lower bargaining power due to market concentration. A recent paper from the Washington Center for Equitable Growth postulates that increased monopoly rents causes wages and interest rates to decline while the average rate of return on capital stays the same. I looked at the theory in August when analyzing wage growth stagnation. I thought the argument had some merit, although the research on monopsony power is relatively new. I can find myself agreeing with my Left-leaning friends on this increased power while disagreeing with the underlying causes (e.g., government intervention in protecting certain companies over others, also known as "rent-seeking") or the solutions (e.g., should we toughen our antitrust laws?). I don't expect those discussions to be resolved anytime soon. What I can say is that monopoly is better as a board game than it is played out as an economic reality.