Can Monopolies Be A 'Good' Thing?

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Posted on : 2/10/2010 12:08:00 PM | By : Dann | In : ,

Perhaps.

Megan McArdle notes that whenever a company has a monopoly that is not enshrined in the law, that there are limits to the amount of abuse a company can heap on consumers before it becomes attractive to do business with competitors.

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.
 Something to keep in mind.

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