Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects


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About the Author William F. The Structure of American Industry. Upper Saddle River, N. Introduction to Industrial Organization. Cambridge: MIT Press, Kwoka, John E. New York: Oxford University Press, Pautler, Paul A. Shughart, William F. Antitrust Policy and Interest-Group Politics. New York: Quorum Books, Rowley and Friedrich Schneider, eds. Boston: Kluwer, Brozen, Yale. Concentration, Mergers, and Public Policy. New York: Macmillan, Carlton, Dennis W.

Modern Industrial Organization.

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Reading, Mass. Coate, Malcolm B. Higgins, and Fred S. Demsetz, Harold. Goldschmid, H. Michael Mann, and J. Fred Weston, eds. Boston: Little, Brown, Goldschmid, Harvey J. Industrial Concentration: The New Learning. McChesney, Fred S. Shughart II, eds.

Transportation Economics/Regulation - Wikibooks, open books for an open world

Chicago: University of Chicago Press, Peltzman, Sam. Shy, Oz. The most potent fear expressed when economic power is discussed, is that large firms influence politics, and that state government is captured by big business. Capture theory is well known in the studies of regulation, and denotes conditions whereby state-appointed regulators act to the benefit of regulated firms rather than to the benefit of the state or its citizens.

In other words, to what extent is there an agency problem between the principal-state which would be served by certain regulations and enforcement, and the agent-regulator who chooses to be more permissive towards influential firms or stricter on their competitors. Regulatory capture occurs for a variety of reasons.

In either case, businesses requiring political support will be willing to pay for it, and governmental regulation has become an essential input to almost every large business. Economic power exacerbates the political and regulatory capture problem, since influence is subject to economies of scale and scope. Indeed, often this kind of influence works best when cultivated slowly, in gradual steps, where big favours are asked only after small ones were granted.

Similarly, a firm or business group able to garner political assistance on one issue, is likely to use the same contacts to help with other issues later on. As the governmental actor in question is higher in rank or better connected, he or she is more likely to be able to influence larger swaths of government action, in multiple offices and fields of regulation. Collectively, as more governmental actors are indebted to a particular business group, it becomes more difficult for others to refuse it. This stems from two separate effects: First, its influence within government often means the firm can create immediate hardships for those refusing to play ball.

Since government is itself a networked bureaucracy, each agent depends on others, thus influence is contagious, spreading among agents within government as those indebted to business groups pressure others to fall in line as well. Second, a collective effect of cognitive dissonance is in effect, whereby each governmental actor is pressured to interpret the situation as one of legitimate consideration, rather than illegitimate political capture.

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This effect is both internal and external. Internally, an agent wants to fit in, and avoid thinking of his colleagues as morally corrupt. When possible, the agent is also better off thinking of his assent as legitimate. This is especially so when it is coupled with personal interest, allowing psychological and material benefits to intertwine.

This can be interpreted either as a strategic action protecting themselves from rebuke, or due to their truly internalizing the cognitive dissonance effect, causing them to believe their actions are appropriate and others should fall in line as well. Regardless of the source of such collective effects, they produce contagion and cascade effects, creating economies of scale and scope in the markets for political influence.

Business groups operating in multiple industries subject to governmental regulation are even more invested in lobbying and the market for influence.


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The larger the affected interest, the more prominent are economies of scale. The more interests affected, in multiple industries, the more prominent are economies of scope. Both types of economies are present in markets for political influence, and the more we are worried about such influence, the more our definition of economic power should be formulated with these markets in mind.

In other words, firms or business groups holding prominent stakes in industries where regulation is a central input, should be judged as holding more economic power than firms operating in unregulated markets. Size in itself is not an antitrust offense, nor should it be determinative of economic power. On the other hand, size is closely correlated with the magnitude of economic effects stemming from certain regulations, provided size is adequately measured.

If the firm doubles its size as measured by market capitalization , its return on such a regulation doubles as well.

The Measurement of Industrial Concentration

This creates an incentive for such firms to collaborate on lobbying expenses, and an incentive to increase corporate size in order to reap such benefits while economizing on costs including legal repercussions. Beyond fixed costs, if the larger firm is able to use political and regulatory contacts created in one area of operations to the benefit of other divisions, economies of scale are created that go beyond the fixed-cost argument. If political influence has contagion effects, so that having good contacts make creating additional ones in other spheres easier, economies of scope come into effect as well.

senddhencompcofi.tk The result is that political power is related to extent of control, rather than extent of ownership, exacerbating the democratic problem assessed below. Still, this is not my focus here, thus I sidestep the corporate governance issue in order not to dilute the main points of political influence and democratic harm, which are more closely related to antitrust. Economies of scale and scope in political influence are a relevant factor in firm growth, but beyond that, in firm diversification and creating networks of collaboration.

Of course, conglomerate mergers create many other types of economies as well, unrelated to political influence, thus are often beneficial to society as well the merging firms.

Nonetheless, the current micro-market focus dominating most antitrust enforcement agencies should not blind us to the cross-market economic power effects that large conglomerate mergers and business alliances may create. Put succinctly, efficiencies are important and should be conserved, conglomeration allows for efficiency in attaining both social goods and social bads. My argument is not that antitrust should target size, however that may be measured, but that bigness, in the sense of overarching economic power, is a serious antitrust concern. Beyond the direct political influence that economic power rewards and instigates, is the more general fear that allowing agglomeration of economic power threatens the basic democratic ideal of a society comprised of equally empowered citizens exchanging their wares in a free market.

The free markets of unfettered competition are modelled as containing infinite consumers and producers, all comparable to their peers and none empowered with more influence than another. The paradigm of competition as an essential part of democracy is a guiding force which has much to do with the overwhelming popular support for antitrust. Antitrust is not merely an economic statute, but symbolizes democratic ideals as well, that none may accumulate sufficient power to force others into commercial submission. Economic power is no less of a problem in this regard than is market power, perhaps even more so.

When a few large players are recognized as dominant powers in a single antitrust-defined market, we call this oligopoly and are very aware of potential tacit collusion, the stickiness of prices, retardation of innovation, and enhancement of entry barriers. Large firms interacting with other large firms often leave smaller players operating in niche markets, with little access to where most of the action is. When markets are intertwined and the large firms operate in several important markets simultaneously, similar effects permeate throughout, impeding competition both as an economic concern and a democratic one.

I. Introduction

Of course, this is not to downplay the importance of within-market effects, which can be quite large. Large conglomerate firms enjoy economies of scale in the purchase of many cross-market inputs, such as advertising, services eg legal, accounting, consulting , and perhaps most importantly—financial support in the market for credit. Smaller competitors exercise similar self-censorship as mentioned earlier, but may be further constrained when service providers refuse their business. Here we consider the power exercised by firms not merely with respect to consumers through pricing , but with respect to suppliers and business contacts more generally.

Beyond this effect, though, it also extends existing market power over time, as in order to challenge a business group with economic power, a competitor must not only enter the relevant product markets, but also create a network of contacts and input providers, well beyond the obvious production facilities and marketing venues.

Concentration in the U.S. Economy

Large groups enjoy significant scale and scope economies in access to suppliers and markets as well as in prices offered to them due to bulk discounts and the like. Allowing size to grow unchecked shifts the market towards long-term oligopoly, not merely in specific product markets but in economy-wide conglomerates. The difference did not exist.

POLITICAL THEORY - Karl Marx

Our company is too big. It goes with the welfare of the country. Yet before we move on to then-predicted and now-proven economic effects of size, it is important to delve into the democratic values involved. Antitrust is state policy, democratically created in order to satisfy aggregate preferences and promote welfare. Antitrust is part of a whole, created and enforced in order to facilitate a social order extending well beyond price and output of specific products, or even ensuring consumers a larger surplus when shopping.

Antitrust is about competition, as the term is understood by laymen expecting to be able to choose between different providers and enjoy autonomy in the marketplace.

Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects
Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects
Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects
Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects
Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects Market Power and the Economy: Industrial, Corporate, Governmental, and Political Aspects

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