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Questions About Market Power

I’m surprised by many of the comments on David Henderson’s recent EconLog post on the economics of workplace safety.  (By the way, many of the commenters seem not to have read Kip Viscusi’s Concise Encyclopedia essay to which David linked.)

In one comment, Daniel Kuehn says that he “sees no reason” to assume that “employers hold no market power.”

In contrast, I see no reason to assume that employers do hold market power of the sort that is relevant here – that is, power to keep the amounts they pay to workers consistently below the marginal value of workers’ productivity and/or the power to keep the prices they charge to consumers consistently above the average – that is, unit – costs of the goods and services they produce for sale.

In a post back in February I offered one objection to the too-loose use of the concept “market power.”  Here I want to come at the matter from a slightly different perspective.  Here I want to demonstrate the unsung yet vitally important role of sound economics in causing those who grasp it to ask probing questions.  While the asking of such questions seldom settles the matter convincingly, it does typically shift the burden of persuasion from one disputant to another.

Here, then, are questions that someone of Dr. Kuehn’s disposition – of which there are many, even in the ranks of economists – should be asked to probe the veracity of his stated assumption that employers generally possess real and relevant market power:

(1) What is the source of this market power?  Is it government-imposed restrictions on entry?  If not, what?  (Note that the typical economist’s notion that any firm that faces a downward-sloping demand curve for what it sells and/or an upward-sloping supply curve for the inputs that it buys is illegitimate and misleading – in part for reason spelled out here.)

(2) If there are no significant legally imposed entry barriers into markets, why does not the assumed market power attract entry by other firms – entry that obliges incumbents to raise the wages they pay to workers and/or to lower the prices they charge to consumers (and/or to improve the quality of their workplaces and/or the quality of their product offerings)?

(3) Even if entry is somehow prevented, how do incumbent firms succeed in stymying competition amongst themselves – competition which would improve the pay and/or work conditions of workers, and/or lower the prices (and/or raises the quality) of the goods and services incumbent firms sell to consumers?  Do they all, at least in general, successfully collude with each other on all (!) the relevant (price and non-price) margins?

(3a) Even if all workers are currently uninformed and insufficiently aware of their own best interests, why does not competition lead employers to compete against each other in part by making workers better informed and more aware of their – the workers’ – own best interests?  If the combined extra cost of offering a safer workplace and of informing workers of the safer workplace is lower than the resulting reduction in wages that an employer will thereby be obliged to pay (or if this cost is lower for this employer than is the improved productivity that a safer workplace will promote), even the greediest employer has incentives to supply a safer workplace and tell worker about it.  One answer to this question might be “market power” – to which I then direct the reader to questions (1), (2), and (3).

The bottom line is that asking questions such as these reveals that there is no more reason to believe that markets undersupply workplace safety as judged by workers than to believe that markets undersupply first-aid products, ice cream, running shoes, dress shoes, baseball caps, MP3 players, diapers, condoms, or most any other product you can name that is supplied in markets unobstructed by significant legal barriers to entry.

Asking probing questions of the sort prompted by a solid grounding in traditional price theory – price theory as understood by (despite the differences amongst these economists on other fronts) the likes of Armen Alchian, Frederic Bastiat, William Allen, Milton Friedman, Harold Demsetz, Walter Oi, Deirdre McCloskey, Ludwig von Mises, F.A. Hayek, Ronald Coase, Gary Becker, Jim Buchanan, George Stigler, Gordon Tullock, Robert Higgs, James Gwartney, Dwight Lee, Sam Peltzman, David Friedman, Israel Kirzner, Mario Rizzo, Robert Ekelund, Robert Tollison, Bruce Yandle, Roger Meiners, George Selgin, Thomas Sowell, and Walter Williams (and all of my other GMU Econ colleagues) – casts burden-shifting doubts on many of the claims commonly issued by those who are not solidly grounded in this kind of illuminating price theory.