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Russ (through Tyler) links [2] to William Gadea’s concern that a commercial baker (in Gadea’s example, the maker of Arnold bread) can reduce competition by producing a large number of varieties of bread. (Read Gadea’s post [3] for the full account.)
Without commenting deeply on this matter here – I’m still on the road, at the end of a long series of trips – I note that Gadea’s post reminds me of the (in)famous action by the U.S. Federal Trade Commission in the 1970s alleging that Kellogg’s, General Mills, General Foods, and Quaker were harming consumer welfare through “brand proliferation” – that is, by offering such a broad and complete range of different types of breakfast cereals that each and every consumer demand for cereal was met, from demands by the health-conscious for unsweetened Corn Flakes to demands by children for sugary Lucky Charms. These firms’ success at satisfying consumer demands, noted the F.T.C., made entry by upstart cereal producers more difficult. So the F.T.C. accused Kellogg’s and other established firms of monopolizing the market.
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I tell my students that almost anything is possible. It is possible that firms that work unusually hard at meeting many nuanced differences in consumer demands can wind up with a monopoly that harms consumers over the long run. (Note: the only standard here is consumer welfare. A business practice should not be judged by its effects on actual and potential rivals. Effects on rivals matter only insofar as these effects affect the prices, quantities, and qualities available to consumers.) But any such possibility is too remote to take seriously; it’s (at best) an intellectual curiosity. We economists had best focus our attention on understanding what is plausible.
In the Fall 1990 issue of Regulation, I addressed “brand proliferation” and other theories of so-called “non-price predation [4].” My argument there is that proponents of non-price predation theories take inadequate account of counterstrategies readily available to rival firms. (There are other flaws – in addition to inadequate attention to counterstrategies – that infect such theories.)
Common sense and basic economic intuition should cause one to approach with serious skepticism any alleged account of monopolization that features monopolist wannabes increasing consumer choice.
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(In a total coincidence, I had dinner last night with Tom Campbell, one of the authors whose work on non-price predation I challenge in the above-linked article. Tom – a wonderful and incredibly bright guy – is, btw, now Dean of the law school at Chapman University.)