On Monopolies And Oligopolies

Trying To Untangle Success From The Moral Failures

Last week in the Sydney Morning Herald was this piece about Paul Keating and his perhaps ever-so-slightly self-aggrandising account of Australian Banking in contrast to what has happened elsewhere with their crappy banking failures.

US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery.

Australia’s banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the “Four Pillars” policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them “cannibalising each other”, in Keating’s words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively.

Their strength certainly wasn’t due to the brilliance of their managers, whom Keating described as “counterhopping clerks” who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of “the recession we truly did have to have”.

In sum, Tim Geithner is a gigantic fool, the IMF the gun that can’t shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It’s a world of many villains. And only one hero.

That there would be our old PM Paul Keating, brandishing his legacy from the graveyard of politics. Yeah, it’s a bit rich when he’s the only person who called it right. The Australian Banks are in less trouble because they weren’t prompted to take stupid risks – they were busy ripping us all off with excessive fees.

But then I came across this interesting account from Nate Silver of Baseball Prospectus and FiveThirtyEight.com fame.

Why do baseball teams seem to thrive as seemingly every other investment fails? How can the Yankees, in the midst of a recession, get away with shelling out $161 million to three-hundred-pound pitcher CC Sabathia, or with charging $500 a head for premium seats at the new stadium? Will the baseball bubble ever collapse?

There are, arguably, some signs of weakness. More than half of baseball’s thirty clubs are freezing or reducing season-ticket prices, according to USA Today. And while Sabathia and the Yankees’ other new blue-chippers, Mark Teixeira and A. J. Burnett, have made out very well for themselves, an unprecedented number of free agents were still searching for a home as the snow began to thaw, including All-Stars like Manny Ramirez, Adam Dunn, and Ben Sheets.

A catastrophic collapse of the baseball market remains unlikely, however, for two reasons. First, major league baseball is a monopoly with a legal exemption from antitrust laws, and therefore it’s not subject to the ordinary laws of supply and demand. In 1908 — the last time the Cubs won the World Series — there were sixteen major league baseball clubs for about 89 million American citizens, or one team per 5.6 million potential fans. But now there are thirty clubs for around 300 million Americans — just one to go around per 10 million of us. If not for its monopoly status, there might be forty or sixty major league baseball clubs, and the individual franchises would be less valuable. But because of it, buying a piece of a baseball club is a bit like marrying into the Rockefeller trust.

So on the one hand you have Paul Keating praising the picture with ‘the four pillars of wisdom’ in his banking oligopoly, and then Nate Silver pointing out that Major League Baseball with its monopoly is just as robust. You’d have to be a mug not to put two and two together and realise just how powerful this idea is.

Think about this for a moment. Even in this most dire of dire moments, Microsoft is still turning a large profit, even as they cut staff. Microsoft of course has a virtual monopoly on the operating system market. They’re not the only one: against a world wide deflationary pressure, Apple computers just announced they are raising prices on their wares. And much as they might deny it, they do have a monopoly on Apple machines – they do go after any vendors that might try to sell ordinary Intel PCs with OSX loaded up.

What this says quite plainly is that the total control of a monopoly or a collusive oligopoly actually smooths out the ups and downs of a market. And there are even sociological observations to back this up.

The economists’ model says markets are composed of many firms competing vigorously with each other, with the aim of maximising their profits. Paradoxically, the competition keeps profits in check and ensures the customers do best.

When sociologists look at markets, however, what they see is quite different. Neil Fligstein, a professor of economic sociology at the University of California, Berkeley, once wrote a paper on markets as politics.

Huh? Well, he was arguing that the producer side of markets is composed of people in organisations seeking to exercise power – both within their organisations and between organisations.

Like all sociologists, he sees markets as a social institution rather than an impersonal economic mechanism. The firms that dominate markets have their own objectives: not to maximise profits or give customers value for money, but simply to survive and prosper.

If markets really worked the way economists’ theory says, they’d be a lot more unstable than most markets actually are. Prices would move up and down erratically and a lot more firms would go out backwards.

Most markets don’t work that way because the goal of firms is to create a stable world and find social solutions to competition.

“The social structures of markets and the internal organisation of firms are best viewed as attempts to mitigate the effects of competition with other firms,” Fligstein says.

It’s clear from the outset that, whereas the economists’ basic model assumes a large number of small firms in a market, the sociologists assume a small number of large firms. Economists call the latter “oligopoly”, and it’s ubiquitous in the real world.

Trouble is, economists don’t know much about how oligopolies work. So maybe they have something to learn from the sociologists.

The sociologists argue that certain “social institutions” are necessary preconditions for the existence of markets. By institutions they don’t mean organisations, they mean shared rules, which can be laws or just collective understandings. Such understandings are held in place by custom, or explicit or tacit agreement. (This is a part of reality than economists simply don’t see.)

That’s from a Ross Gittins article from back in June. So you see where I’m going with this. I’m beginning to think that may be we have to resign ourselves to collusive oligopolies if we want to have a stable society, and that the current chaos we’re seeing in the Global Financial Crisis is actually a direct result of deregulating markets for full competition.

In other words, when the Free Marketeers got exactly what they wanted under GWB by getting full deregulation and non-regulation, the picture got so scary, the rich simply pulled their money out of the markets. The semblances of stability all these years in various capital markets were more a result of this non-transparent, almost corrupt collusion rather than the robustness of the capitalist system itself.

That’s just a thought.

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