Commentary by Sandeep Vaheesan: Popular Intuition Is Right, Peter Thiel Is Wrong - Monopoly Is Bad for Society

Oct 15 2014

In his September 12th Wall Street Journal essay Competition Is for Losers, PayPal co-founder Peter Thiel presents monopolies as benevolent giants. They supposedly innovate at a higher rate and have the freedom from competition to treat their workers fairly. Even the high prices that they charge are a mere fleeting burden, per Thiel’s worldview. Reality, however, contradicts Thiel’s rosy picture. Much research has shown that non-monopolies are more likely to innovate than their monopolistic counterparts, and that their innovations are more likely to be significant. Moreover, monopolists often wield enduring and unaccountable power—power over consumers, suppliers, competitors, and our society.

Thiel’s essay rests on a false choice—“perfect competition” or “monopoly”—and ignores the vast and representative middle ground. A moment’s reflection would show that perfect competition hardly exists outside of textbooks. The norm in American industry is oligopoly, a market dominated by a handful of large firms. Consider oil or pharmaceuticals in which a small number of multinational entities together comprise the market.

Airlines, an example of a highly competitive market according to Thiel, are a far cry from perfect competition. To be sure, airlines in the United States have not been consistently profitable but they do not come close to a textbook ideal of competition. Today, the domestic airline industry is dominated by four carriers, with a few fringe competitors. And international air travel is controlled by three alliances that pretend to offer choice to the public through a number of subsidiary brand names. Even highly competitive markets, such as restaurants, feature product differentiation that distinguishes them from the model of perfect competition.

Businesses in oligopolistic markets are very different from atomistic firms in the world of perfect competition. Oligopolists often have the power to set prices paid to suppliers and charged to consumers. Without necessarily colluding, they can watch each other and coordinate their pricing. Not surprisingly, they often enjoy large profits. They can use these economic rents positively to invest in production and research but they also have discretion to pay their executives lavishly and shower hefty dividends on shareholders. Oligopolies are much closer to monopolies than the beleaguered small firms that Thiel describes.

Contrary to Thiel’s assertions about the technologically fruitful monopoly, research suggests that competitive oligopolies are more conducive to innovation than monopolies. These markets that produce innovation do not consist of hundreds of tiny firms that struggle to remain viable, let alone contemplate an R&D budget. They are instead markets with a half-dozen or dozen competitors that can devote significant resources to long-term planning—workably competitive rather than perfectly competitive.

This finding should not come as a surprise. A monopolist in a market with barriers to entry faces no direct rivalry and can afford to be slothful. In fact, innovation may only undermine its existing product lines. As Tim Wu has written, for a monopolist, “innovation can become a form of altruism, as opposed to a necessity.”

Lacking a competitive check from rivals, monopolies possess even greater might than oligopolies. Monopolists have more power to raise prices for consumers and depress payments to suppliers and workers. Thiel dismisses these costs of monopoly as temporary phenomena. Few, however, would describe AT&T’s decades-long monopoly or Microsoft’s diminished but still extant monopoly over personal computer platforms as “temporary.”

Rather than lower prices or improve their products, monopolists can use anticompetitive methods to foreclose rivals from the market—the old AT&T is a good example of such a bully. Admittedly, it developed numerous technological breakthroughs at its Bell Labs subsidiary. Thanks to its cozy monopoly status, it could devote substantial resources to scientific research. Yet, AT&T also used its power to stifle numerous innovations by rivals. In the 1970s, it used many weapons in its arsenal to exclude MCI, a then-newcomer that was poised to introduce competition in the long-distance market. Ma Bell feared that nascent competitors could eventually threaten its absolute control over the U.S. telephone network.

Going beyond strictly market matters, monopolists also wield tremendous power over society by virtue of their size and wealth. For example, Amazon’s growing dominance over the entire book world could ultimately threaten free expression. In the political realm, a member of Congress is unlikely to care much about the grievances of the owner of a family restaurant and may not go out of her way to meet with a representative of even a mid-sized business. Unless small and medium businesses organize, they are not likely to have much political influence. A high-ranking executive at Google or Microsoft, in contrast, probably won’t receive the cold shoulder from this politician—or any politician for that matter.

The private power of monopolies calls for public power to check these giants through enforcement of the antitrust laws and other competition policy. Business should be allowed to thrive through competition on the merits—but not through exclusionary or predatory tactics. Ironically, Thiel himself makes the case for public restrictions on monopolies in citing AT&T’s eventual loss of dominance. AT&T did not lose its monopoly power due to “natural” market forces but rather due to decisive public action. The government’s landmark antitrust suit broke AT&T into equipment manufacturing and long-distance entities and several “Baby Bells” in 1984 and helped pave the way for the proliferation of the internet and wireless communications. Even for Thiel’s dream of a constant succession of monopolies to hold true, public action is necessary to prevent incumbent monopolists from strangling the next generation.

Thiel’s vision embraces values contrary to the American tradition. Whereas we would not accept one party monopolizing our politics, Thiel asks us to accept one-party rule in the economic sphere. Unaccountable power—whether in the public or private arena—is unlikely to promote the general good. With the rise of Amazon, Google, and other dominant businesses, Americans should be demanding a stronger assertion of public power over private power, not showing blind faith in corporate beneficence. We should remember that our anti-monopoly law, “designed to curb the excesses of monopolists and near-monopolists, is the equivalent in our economic sphere of the guarantees of free and unhampered elections in the political sphere.”[1]

[1] LePage’s Inc. v. 3M, 324 F.3d 141, 169 (3d Cir. 2003).