More on Competition and Monopoly

by Don Boudreaux on September 22, 2014

in Competition, Complexity & Emergence, Economics, Myths and Fallacies

Here’s an essay that I was asked to write for the blog at Library of Law & Liberty.  Specifically, this essay – motivated by Peter Thiel’s recent piece in the Wall Street Journal – explains that what we economists still formally call “competition” is not a very competitive situation, and what we call “monopoly” often is a situation of intense competition.

Here’s a slice:

The fact that almost no actual competition takes place in perfectly competitive markets doesn’t stop people, most of whom are unfamiliar with the theory, from supposing that what economists (the experts!) call “perfect competition” must be a condition of the most intense and ideal kind of competition—that any deviation from this condition must mean diminished consumer wellbeing and a weaker economy. Likewise, the existence of anything labeled “monopoly power” must mean that the general public is being harmed.

But such suppositions are incorrect. As Thiel (like Schumpeter long ago, and like Deirdre McCloskey today) explains, innovation is key to modern economic growth, and innovation is made possible only by the lure of large “above-normal” profits—profits that economists misleadingly call “monopoly profits.”

Genuine monopoly—that is, a market condition genuinely worthy of that ominous name—involves government erecting barriers to entry. Only governmentally created and enforced barriers can stop innovative entrepreneurs from vying with each other to tempt consumers with lower prices and better, or even completely different, products.

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