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Quotations of the Day…

… are, first, from page 67 of Ronald Coase‘s 1972 article “Industrial Organization: A Proposal for Research” (as reprinted in Coase’s 1988 collection, The Firm, the Market, and the Law):

One important result of this preoccupation with the monopoly problem is that if an economist finds something – a business practice of one sort or other – that he does not understand, he looks for a monopoly explanation.  And as we are very ignorant in this field, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation is frequent.

The second quotation is from page 19 of a 2009 article by Dennis L. Weisman’s and my great administrative-law professor at UVA, Glen O. Robinson; it’s entitled “Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn,” which is chapter 1 in the superb collection New Directions in Communications Policy (Randolph J. May, ed., 2009):

On the face of it the net neutrality issue seems a legitimate concern.  If the providers of broadband service do have dominance, one might be reasonably fearful of their ability to discriminate against certain uses and/or users for strategic, anti-competitive purposes.  But even without the aid of a newspaper or blog to fix one’s attention on them, possible problems that need “attention” by regulators/legislators can be imagined without end.  From the beginning, the real core of the debate over net neutrality has been over whether the potential problems of discrimination by dominant providers has reached the point where an actual problem can be expected with sufficient probability to justify the cost (including the potential error costs associated with false positives) to warrant regulatory interventions.

Whole armies of goblins, ghosts, and things-that-go-bump in the night can be imagined.  It’s even possible to conjure in one’s worst-case-scenario imagination genuine and genuinely serious problems that might, just might, result from this or that economic, industrial, or institutional arrangement.  It is, for example, possible that with a free market in agriculture every person in the world will come to so hate agricultural work that no food will be produced and we’ll all starve to death.  This outcome is possible and, of course, imaginable.  But the likelihood of such an outcome is so small that no one would take it seriously as the basis for a government policy, say, to conscript ten percent of the population into farm work in order to guard against this fanciful possibility.

When Ronald Coase wrote the above words the economics profession, enchanted by the alleged perfection of “perfect competition,” still saw monopoly everywhere in the real world because nowhere in the real world did economists see anything that looked like a perfectly competitive market.  So every business action and experiment that does not occur in the model of perfect competition was presumed to be either evidence of existing monopoly power or evidence of efforts to create monopoly power.  Either way, such actions and experiments were assumed to be bad and, in many cases, so bad as to justify government intervention.

But in a flurry of research from the mid-1950s through the mid-1980s, some by Austrians but most of it by microeconomists working in the Chicago tradition – and the plurality of it published in the Journal of Law & Economics – showed again and again and again that practices once believed to be evidence of monopoly (or of the quest for monopoly) are, in fact, genuinely competitive.  Deep price cutting (“predatory pricing”) aimed at producing for the price-cutters genuine monopoly power?  Uh uh; it’s a unicorn; it’s imaginable, and even structurally possible, but no such creature has ever been found in reality.  And so it goes with other “suspect” real-world business practices such as exclusive-dealing arrangements, resale price maintenance, vertical and horizontal mergers.  Even horizontal price-fixing that harms consumers seems to require special government protection for it to persist long enough to become worrisome.  (There’s a reason the railroads needed the Interstate Commerce Commission.)

Competition is creative; it explores and experiments with new ways of doing business, new products and innovative financing arrangements, new marketing techniques.  Some will work; many will fail.  But history is quite clear that as long as consumers are free to spend their money as they wish and entrepreneurs and businesses are free to enter (and exit) and to experiment with different ways of attracting consumers’ patronage, nothing resembling true monopoly power emerges, at least not for any length of time worth worrying about.

Government imposition of “net neutrality” will substitute bureaucrats’ politically poisoned judgments on what are and what are not appropriate business practices for the market-tested judgments of legions of suppliers competing for the patronage of hundreds of millions – indeed, often billions – of consumers.