Rah Manic Monopolists?

The vast majority of economic growth is caused by innovation. So when it comes to long term policy, innovation is almost the entire game – whatever policy causes substantially more innovation is probably better, even if has many other big downsides.

One simple robust solution to the innovation problem would seem to be manic monopolists: one aggressively-profit-maximizing firm per industry. Such a firm would internalize the entire innovation problem within that industry, all the way from designers to suppliers to producers to customers – it would have full incentives to encourage all of those parties to put nearly the right amount and type of efforts into innovation.

Yes, even monopolists don’t have exactly the right incentives. They will tend to focus on what marginal customers want, at the expense of both lower-value customers pushed out by inflated monopolist prices, and higher-value infra-marginal customers. And when innovations can cross industry boundaries, industry monopolists may also fail to coordinate with monopolists from other industries. But still, this approach seems to get a lot closer to optimal that anything other simple policy. And if two industries had enough innovation interaction, one might just have a single firm cover both industries.

Ideally these monopolies would be global, but if not national ones might still be a big win over the status quo.

Admittedly, common intuitions don’t agree with this. For one thing we tend to think of monopolists as too lazy to innovate – it takes competition to push them out of their comfort zone. And I agree that this is a common situation for regulated utilities and government agencies. Often the employees of a monopolist tend to have enough political power to entrench themselves and resist change, at the expense of investors and customers. This is why I specified manic monopolists – we need investors to have enough power to impose their will, and we need to have  enough competition to fill these investor roles.

Yes, we also tend to be uncomfortable with the inequality and power concentration that manic monopolists would embody and require. It isn’t at all what foragers are prone to praise. But still, if innovation is important enough, shouldn’t we be willing to tolerate a lot more inequality to get it?

Added 8a 11Apr: In general, industries that are more concentrated, i.e., more in the direction of having a monopolist, have more patents, all else equal. This seems to be because they invest more in R&D. Data here, here.

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  • http://entitledtoanopinion.wordpress.com TGGP

    The lack of “manic” in monopolies is what Albert O. Hirschman complained about in “Exit, Voice and Loyalty”.

  • Robert Koslover

    I don’t understand your reasoning here. For literally decades, the telephone company (AT&T, and later on, its broken-up pieces) promised us that innovative picture phones were just around the corner (heck, I remember seeing video-phone phone booths at Disneyland’s tomorrowland, several decades ago), while bragging about how fiber optics were going to revolutionize and cut costs of communications, all while: (1) simultaneously raising their prices continuously to consumers, despite the presumed enormously-improved cost-efficiency of all those fiber optics, and (2) failing to provide any picture phones to anyone at all. Well, we finally got those picture phones, and lower priced communications too, by nearly totally breaking the phone company monopolies, and by using tools like voice over IP, Skype, etc. Innovation and lower prices come from competition, and massive/intense competition makes for the most frantic innovation and cost-cutting. You and I have seen it in other industries too, such as the IBM PC-compatibles businesses. Brutal, dog-eat-dog, innovate or go-broke competition among businesses makes for fantastic deals for the consuming public. I don’t see how putting limits on that frantic process would help. It could be just like bringing back Ma-bell! Seriously, do you really think you’d have a cool new iPhone or other smartphone in your hands today, at a low, low, price, if the only companies that ever made computers and phones were IBM, CDC, DEC and AT&T?

    • http://overcomingbias.com RobinHanson

      AT&T was not a manic monopoly. One good question is: why?

      • arch1

        I apologize for skimming, but I don’t recall seeing any examples cited of innovation-maximizing manic monopolies. So FAIK the answer is: Because in the real world, these things don’t (and can’t) exist

      • Melbourne

        I think a good example of “maniac monopolies” in the political context is the Westminister form of parliament. The ruling party has a monopoly on power while remaining accountable to citizens – hence the competition for that power is very real.

        Singapore being a pretty good example of how possibly plays out in practice.

      • Doug

        This whole discussion seems to be skipping past the concept of consumer demand elasticity. If demand elasticity for the industry > 1, then a manic monopolist would indeed innovate like a madman. Computers are a good example here, at least from 1970->2010 falling prices for computer power has resulted in an explosion of demand for computers. Competitive computer markets probably do underinvest in innovation relative to monopolists.

        But many industries have demand elasticity < 1. Food's a good example, drastically falling prices for food has resulted in the food industry's share of GDP falling from ~50% to 2% in the past two centuries. A manic monopolist in food might innovate to lower his cost, but he'd keep income-adjusted prices around 1800 levels. Relative to a competitive market almost all innovation enhancement would be lost to economic deadweight. Consequently a monopolist in this industry would highly underinvest.

        AT&T circa 1975 probably understood telecom as a inelastic product. That seems silly from today's perspective, because most telecom today is data driven. And demand for data in highly elastic. But that's not the case when telecom demand is voice driven.

      • http://overcomingbias.com RobinHanson

        Sorry, this is completely wrong.

      • Doug

        Surely you must subscribe to the standard microecon analysis of monopolies. Monopoly equilibrium occurs at the intersection of the supply curve (S) and marginal revenue (MR). MR is twice the slope of the demand curve (D). Innovation results in a right shift of S. For the same shift in S, monopoly equilibrium results in 0.5*dQ as competitive equilibrium.

        Therefore standard micro tells us that innovation in monopolized markets results in an increase of deadweight loss. Since monopoly deadweight loss monotonically decreases with demand elasticity, we know that innovation is most disincentived for monopolies in highly inelastic markets.

        This isn’t to say that monopolies can’t promote innovation relative to competitive markets. Even without deadweight loss, if innovation spills over, those reaping the marginal consumer/producer surplus may not be internalizing the cost of innovation. But there’s clearly a cost-benefit tradeoff to monopoly innovation between public goods provision and deadweight loss, and it will highly vary depending on the market and industry.

        http://upload.wikimedia.org/wikipedia/commons/thumb/e/ef/Monopoly-surpluses.svg/250px-Monopoly-surpluses.svg.png

      • http://overcomingbias.com RobinHanson

        Yes, there is a static monopolist loss from excluded customers, and that loss depends on the demand elasticity. Innovation would increase demand and lower cost, to produce more total profits, consumer surplus, and loss But there is no particular reason to expect the loss to increase as a fraction of the total, nor to expect that to depend on the elasticity. The simple thing to expect is that the whole curve just scales up.

      • IMASBA

        I kinda agree with Doug here. In many industries it would be viable to innovate cut costs but keep prices the same. In fact I raised a similar concern myself in another comment. Society as a whole would innovate and perhaps faster than it does now (if your theory is correct). But relatively little of this innovation would reach consumers and as a consequence the owners of the monopolies would capture an ever increasing portion of the total income.

    • Dan Wang

      AT&T may not have delivered on picture phones, but through its division Bell Labs it gave the world transistors, the first American satellite, cellular telephony, early work on radar, and a lot of advances of telephones, in addition to the fiber optics you cite. See: The Idea Factory by Jon Gertner.

    • IMASBA

      AT&T had a government sanctioned monopoly. They had to deliver somewhat to stay on good terms with the US government. They’re not a good example either way (the US government may have pressured them to innovate but also prevented manic behavior).

  • Larry D’anna

    Would you describe any monopolies that have actually existed as “manic”? What kind of institutional change do you propose to create these manic monopolies?

    • Scott Leibrand

      Would Google’s search monopoly qualify? The combination of natural monopoly combined with ease of switching to a new monopolist would seem to give most of the gains of monopoly profits and high innovation while preserving the spur of (potential) competition…

      • Robert Koslover

        I don’t believe that Google actual has a search monopoly. Rather, they just have a very large share. If I don’t find what I want with Google, I will often try Yahoo, Bing, and sometimes others. And I also believe that this continuing competition is an important factor that keeps the Google folks working to not lose their advantage.

      • Scott Leibrand

        I guess what I’m getting at is that a “natural monopoly”, where multiple entities are competing to capture network effects to their advantage, may have the innovation-boosting effects that Robin argues for. But a monopoly based on barriers to entry such as regulatory restrictions or huge capital requirements is more likely to result in the stagnation of innovation that we see in traditional real-world monopolies.

    • http://overcomingbias.com RobinHanson
      • Larry D’anna

        Aren’t raiders just as likely to split companies up as they are to merge them? Wouldn’t enabling raiders just make firm sizes gravitate towards whatever is “natural” for each industry? Or would you say that most industries naturally favour larger firms, but they haven’t been able to form for some reason?

      • http://overcomingbias.com RobinHanson

        Assume for now that raiders aren’t allowed to break up the industry.

    • JW Ogden

      How about Standard Oil?

  • Hannes

    Your basic logic follows from the Romer model of innovation.

    But there have been challenges: in a Schumpeterian model a monopolist innovator loses his previous product, whereas that is not internalized by an external entrant. Secondly, there is an effect of escaping competition. The basic intuition is that innovation is driven by the change in rents from innovation — a monopoly has high post-innovation rents, but also high pre-innovation rents. Competition can lead to innovation to escape compeition, increasing delta-rent through a lower ex ante rent. These models have profit-maximizing monopolists, so I’m not sure the reasoning is saved by your appeal to strengthened investor incentives.

    The logic is spelled out in Aghion and Griffith’s book: https://mitpress.mit.edu/books/competition-and-growth

    where they also note that your reasoning is not borne out by the empirics: sectors with more competition innovate faster.

    • http://overcomingbias.com RobinHanson

      I agree that we tend to see more innovation with more competition; I attribute this to insufficiently-manic monopolists. I also agree that the fear of losing rents from prior products can deter monopolists from innovating on the margin. But those lost rents also correspond to lost welfare, so attending to that is part of internalizing the full effects. So I still don’t see why a manic monopolist doesn’t internalize the full effects of both the costs and benefits of innovation in its industry.

      • http://don.geddis.org/ Don Geddis

        “I attribute this to insufficiently-manic monopolists.”

        This suggestion strikes me similarly to advocating for a government of benevolent dictators, like Plato’s philosopher king. The problem, of course, is that real humans tend not to act benevolent, once you make them dictators. (Or perhaps the causality is reversed, but in any case the traits are rarely found together.)

        Similarly, real human monopolies rarely act manic. The whole point of market competition, is to incentive the individual firms to be forced to innovate, despite their natural internal desires.

        Isn’t your proposal a form of, “assume that humans are perfectly spherical and frictionless…”? You’re describing an ideal organization for entities different than humans.

      • http://www.stationarywaves.com/ Ryan Long

        Ah, I see Don Geddis beat me to the punch.

      • http://overcomingbias.com RobinHanson

        My point is that enough competition for control of a monopolist should ensure that it is manic.

      • Hannes

        I think monopolists are constrained to use a single price in the literature. Imperfect price discrimination means that you cannot capture the full rents. I haven’t studied the models in details but this seems like the likely source of a larger complexity in the choice between competition and monopoly when it comes to innovation. Then it comes to the question: can monopolists use perfect price discrimination? If they can, all the common efficiency arguments against monopoly falls and there is no trade-off — rah monopoly.

  • Edward

    > This is why I specified manic monopolists – we need investors
    to have enough power to impose their will, and we need to have enough
    competition to fill these investor roles.

    How common do you think these have been historically? Are there any regions or industries where they have been especially common? Do you think that there are policies that would greatly increase the proportion of monopolists that behave like this?

  • Owen Cotton-Barratt

    > whatever policy causes substantially more innovation is probably the better, even if has many other big downsides.

    This may be true, but note that it doesn’t necessarily follow that whatever policy causes most short-term innovation is also the one that causes most long-term innovation. It might be for example that that lower inequality leads to more people being educated to a high level, which gives a greater pool of talent to draw on when innovating in future years.

    There’s almost certainly some effect like this, so even if we only cared about innovation there would still be a trade-off to be made between short-term innovation and inequality. What that trade off should be is an empirical question — but the one we’d need to answer.

    • http://overcomingbias.com RobinHanson

      I don’t see how the degree of concentration of a particular industry has much to do with overall inequality in a society.

  • Guest

    How about pushing the idea further? Manic monopolist government doing innovation in all sectors? Wouldn’t the argument hold – or even work better?

    • http://overcomingbias.com RobinHanson

      The argument holds when we combine industries, but it is harder to see how the monopolists can both be “manic” and be “government” at the same time.

      • http://entitledtoanopinion.wordpress.com TGGP

        Mencius’ Moldbug’s argument for Fnargl as absolute global dictator seemed premised on the idea that such a thing is not a contradiction in terms. He was thinking in terms of the stationary bandit though and didn’t give much thought to why many monopolists aren’t “manic”.

  • Alex Godofsky

    Internet Explorer is a strong counterexample. Microsoft certainly ought to count as a “Manic Monopoly”.

  • myrealitie

    I am not an expert on this topic by any means, but are you familiar with the work of Gerard Tellis? He seems to suggest that only non-monopolies have any incentive to cannibalize their existing products; monopolies are too biased towards the present, preferring the current and reliable stream of profits coming from existing products, as they don’t have to worry about market disruption from other firms. If you are unfamiliar with the work, I think you might like it; it explores innovation-suppressing incentive structures within organizations.

  • http://www.stationarywaves.com/ Ryan Long

    One simple robust solution to the innovation problem would seem to be manic monopolists: one aggressively-profit-maximizing firm per industry.

    It’s not at all clear to me why you consider this a robust solution, or even a weak one. Indeed, when I think of innovation, this is among the last approaches I would ever consider, for reasons outlined by “Guest” and “Robert Koslover.”

    It would be nice if you fleshed out your reasoning here.

    • http://overcomingbias.com RobinHanson

      The robustness is obvious: the monopolist internalizes the costs and benefits in the industry regardless of most details of that industry.

      • http://www.stationarywaves.com/ Ryan Long

        Yes but all monopolists are “robust” in that sense, regardless of to what extent they are a “solution” to the innovation problem.

        Analogously, I could put forth that a benevolent dictator is a simple robust solution to the bad-government problem. Dictators tend not to be benevolent, and monopolists tend not to innovate. I guess that’s my mental stumbling block here.

      • http://overcomingbias.com RobinHanson

        “Benevolent” isn’t a parameter we can choose. But we could choose to ensure that there was strong competition for control of a monopolist.

      • http://www.stationarywaves.com/ Ryan Long

        We could choose to attempt it. I am unconvinced that we could ensure it, but thankfully now I understand you much better.

  • IMASBA

    “But still, if innovation is important enough, shouldn’t we be willing to tolerate a lot more inequality to get it?”

    Well no. What’s the point of innovation if few people get to reap the rewards? What’s the point of inventing antibiotics if no one can afford to buy them anyway?

    • Adam Casey

      Depends. “A lot more inequality” doesn’t have no mean no improvements for the poor.

      What’s the point of inventing a thousand new antibiotics if the poor can only afford the worst one? Because the poor get that new anti-biotic.

      • IMASBA

        You need a lot of conditions satisfied:

        1) that worst antibotic is better than what would have been available in a more equal world

        2) if 1) is satisfied then that gain has to be worth it vs. the psychological cost of inequality (knowing you get the worst antibiotic out there)

        3) if 1) and 2) are satisfied then the gain also has to outweigh any other negative consequences stemming from inequality (more crime, abuses of power or even endemc feudal warfare)

        Robin just assumes all of this.

    • Steve

      Depends on how much you value future people vs. present people. If a bird in the hand is worth two in the bush, you don’t want manic monopolists. If a bird in the hand is worth 1.05 in the bush, you probably do want manic monopolists.

    • http://overcomingbias.com RobinHanson

      I was only talking in the post about inequality among firms in an industry, not about inequality of income or consumption of the population. I guess I should learn to never mention “inequality” unless i must.

      • IMASBA

        Ok, that changes things a lot. Btw, how is equality among firms a forager value?

  • IMASBA

    Robin, am I correct in assuming you’re not talking about true monopolies because there’s still the threat of one such conglomerate going down to be replaced by a new one? If you assume that model to work why not go for a centralist solution that lets inefficient branches (shares could be owned by citizens) die once in a while?

    • http://overcomingbias.com RobinHanson

      You are not correct.

      • IMASBA

        So then what’s the mechanism? If investor pressure is the mechanism then surely it is the threat of investors abandoning the firm that makes the firm motivated to keep innovating? If there is no threat of failure (after which the firm would be replaced by a new firm) then what motivates them to do anything, wouldn’t that just be combining the worst of capitalism and communism?

  • VV

    > The vast majority of economic growth is caused by innovation.

    Evidence?

  • Silent Cal

    If monopolies will be more efficient in the long term, does that mean we should expect to see most industries get monopolized if the government doesn’t prevent it? Would cutting anti-trust and raider obstacles be sufficient to give us this system?

    • http://overcomingbias.com RobinHanson

      No, we don’t have a competition between industries whereby the inefficient industries are replaced by efficient ones.

  • Sieben

    Hmm, maybe the problem is that you began by using the term “monopolist” without much qualification. When I think about “monopolist”, I assume that the firm has full market share and demand is fairly inelastic. Like health care or something…

    This is different from say, a monopoly on gaming consoles where people have many other entertainment options if the console-monopoly underperforms. So there is competition amongst firms for consumers, and therefore you have the appropriate pressures on price and quality (at least as far as attracting and keeping marginal customers).

    I suppose the advantage of this would be that there would be increased incentive to innovate within that market, since you would capture 100% of the gains. But how is this outcome not identical to a very aggressive form of IP?

    Anyway, overall I think the argument comes down to something like this: Manic monopolies are beneficial in industries that suffer from public goods or other coordination/scaling problems as long as the industry’s products are in competition with alternatives from another industry. Video games vs. sports equipment or something.

    I somehow doubt that a manic monopoly would be desirable in inelastic industries like food production. It might work if you gave a company a monopoly on something narrow like grapes, but if there were a global monopoly on , I can see some problems.

    • IMASBA

      I guess it doesn’t matter how you define an “industry”. What would matter in practice is to what degree a firm would be able to get away with no innovation of their products and services. Obviously they would still innovate to cut costs but Ithink you need some kind of competition to transfer that innovation to the product/service itself and/or lower the price for the consumer. Cost-cutting innovation probably has environmental advantages so it’s worth something, but at some point you want the consumer to benefit as well instead of being stuck with an ever decreasing portion of the total purchasing power.

  • James Scott

    Is there some technical definition of “manic” that I’m missing here? An organizational design strategy, a set of legal incentives, characterization of behavior? Googling for “manic monopoly” or even “manic firm” brings irrelevancy or…here.

    • http://overcomingbias.com RobinHanson

      As I say in the post, “manic’ here means “aggressively-profit-maximizing.”

      • Will Rinehart

        Alchian seems applicable here. As he notes, companies are not profit maximizers but only trying to do relatively better than their competitors. Also intrafirm transaction costs seem to suggest that such a firm wouldn’t be able to achieve the manic moniker.

  • jhertzli

    Isn’t this what patents are for?

  • Ronfar

    Would the U.S. military count as a “manic monopolist”? Lots of innovation has come from there.

    • http://don.geddis.org/ Don Geddis

      Compared to what? It isn’t enough to just see a monopolist have some innovation. Robin’s claim is that you would get MORE innovation with a (manic) monopoly, than with a competitive marketplace.

      I would say that the first-world militaries (esp. Germany, UK, US) were tremendously innovative in 1939-1945. Inventing radar, rockets, and nuclear weapons, and huge improvements in cryptography, aircraft, tanks, and submarines. Really amazing advances in humanity’s capacity to wage war, in only a few short years.

      But 1950-2010? When they aren’t under competitive pressure, major militaries don’t seem to have an especially impressive record of annual innovation contributions.

      • Lord

        Don’t forget Sputnik. Less annual, more generational.

  • Ronfar

    I don’t see how profit-maximizing necessarily leads to innovation.

    Let’s say that AT&T has a monopoly on landline telephones. Someone comes up with an idea to build a cellular telephone network to supplant landlines. Now, AT&T could replace its landline network with a cellular one and increase its revenues somewhat, but it’s already making a lot of money on landlines, and the difference between the amount of money it makes on landlines and the amount of money it could make on cell phones is less than the cost of building the cellular network. It doesn’t make sense, from a profit-maximizing perspective, for AT&T to “innovate” by building the cellular network.

    Now imagine a potential competitor. The competitor currently has zero revenues. If it builds the cellular network, it steals all of AT&T’s revenues and makes a profit. The landline network is a loss, but AT&T, not the competitor, suffers that loss. So the competitor would indeed be willing to build the cellular network.

    In this situation, it might actually be better not to have the cellular network built (because the landline system has value), but if you’re optimizing for innovation, you get less of it when you’re not incentivized to tear down existing systems.

    • Doug

      Your analogy is succumbing to the sunk cost fallacy. AT&T has already spent the capital to build the landline. Whether the landline system cost nothing or cost a fortune it wouldn’t affect AT&T’s decision. It would only factor in the cost of the cell system and against its marginal increase revenue.

      The point you’re trying to make its that AT&T’s marginal revenue on the cell system is less than a competitor’s because it factors in cannibalization to its existing business. But the cost of cannibalization has nothing to do with the initial capital outlay.

    • http://overcomingbias.com RobinHanson

      If the added revenue from introducing an innovation does not cover the costs of change, it isn’t obvious that the innovation is worth doing.

  • Storewars News

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  • Rob W

    If so, why not just strengthen patent protection? This provides a limited monopoly that is intended to have this effect. Yet experts seem to think patent protection is already too strong.

    The mystery to me is why monopolies do not appear more innovative than other firms, as predicted by the standard economic model.

    • http://overcomingbias.com RobinHanson

      The scope of a patent is just not the same as the scope of an industry. A patent can cover many industries, and there can be many patents in each industry.

  • Daniel Carrier

    Incentive alone won’t guarantee that something happens.

    In a competitive economy, if one player is too stupid, and doesn’t do what they’re incentivized to do, they won’t be able to compete as well, and will get crowded out.

    In a monopoly, there’s nothing forcing this to happen. If you’re stupid, it just sucks for everyone.

    • http://overcomingbias.com RobinHanson

      Hence the modifier “manic.”

      • Daniel Carrier

        I am not entirely sure what that word means. More importantly, how do you ensure that the monopolies will be manic?

      • Daniel Carrier

        What does manic mean, and how do we make sure they’re manic?

  • brendan_r

    “Often the employees of a monopolist tend to have enough political power to entrench themselves and resist change, at the expense of investors and customers.”

    I think intra-organizational particularities determine whether monopolists behave manically or not.

    Founder CEO’s are unusually powerful and more capable of combating stasis promoting fiefdoms.

    But Founder CEO’s vary in their preferences. Bezos is more manic than Gates.

    An industry monopolized by a company run by a manic Founder-CEO might deliver what you want.

    But if the success of promoting Manic Monopolies depends upon such intra-organizational subtleties…seems a very hard problem.

    • http://overcomingbias.com RobinHanson

      The question is: if there were a strongly competitive market for control of a monopoly, how much influence could an aggressive new owner actually wield, if freed from current legal restrictions.

      • brendan_r

        Ah, I guess that’s what it boils down to.

        Trouble is that strong and large institutions attract rent-seekers. How fast does a Manic Monopoly’s mandate go from “maximize innovation” to “all of your departments must have precisely 52% females”, etc. etc.

        Given the government we actually have, an economy dominated by a couple dozen monopolies seems a horrible idea.

      • http://overcomingbias.com RobinHanson

        A mandate to be manic enforced by the government doesn’t sound promising. Making it easy for raiders to buy the monopoly, and letting those raiders change anything they want to, sounds more promising.

      • brendan_r

        Right. My point is that big, strong, highly profitable firms are easy targets for government, right?

        Take the electronics contract manufacturing industry. Highly competitive, many firms, low margin. Horrible target for govt rent seekers, cause they’ll kill a company before they can take anything.

        But you could cut a bunch of slabs of meat off Google w/ out anybody noticing.

        What if most economic activity was conducted by large, enormously profitable, dominant firms.

        What constrains government influence then?

  • Pedro Romero

    It sounds familiar to what Porfirio Diaz did back in early 1900s in Mexico. Look where they are now.

  • IMASBA

    “In general, industries that are more concentrated, i.e., more in the direction of having a monopolist, have more patents, all else equal. This seems to be because they invest more in R&D.”

    Are you sure it’s not the reverse: patents (especially the silly ones that don’t actually contribute to innovation, like Apple’s patent on rectangles with rounded edges) helping to form monopolies?