Monopoly Power And Competition: The Italian Marginalist Perspective

207 Pages·2018·1.395 MB·English

by  Manuela Mosca

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DOI10.4337/9781781003718
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Contents
Acknowledgements vi
Introduction 1
1 The sources of monopoly power in the history of economic
thought 5
2 The universal force of competition 36
3 Monopoly power: competition is never perfect 81
4 Monopoly power, competition and reality 121
5 The concept of the state and economic policy 148
Conclusions 186
References 201
Name index 237
v
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Acknowledgements
I wish to thank Saiyid Abu Turab Rizvi, Giampaolo Arachi, Corrado
Benassi, Elodie Bertrand, Michael Bradley, José Luís Cardoso, Alessan-
dra Chirco, Muriel Dal Pont Legrand, Gilbert Faccarello, Riccardo
Faucci, Amedeo Fossati, Yasunori Fukagai, Nicola Giocoli, Vitantonio
Gioia, Michele Grillo, Marco Guidi, Jan Horst Keppler, Ephraim Klei-
man, Atsushi Komine, Heinz Kurz, Cristina Marcuzzo, Luca Michelini,
Kayoko Misaki, Antoine Missemer, Fabio Monsalve, Mary Morgan,
Nerio Naldi, Antonella Nocco, Guy Numa, Raimondello Orsini, Cosimo
Perrotta,EnzoPesciarelli,AnaRosadoCubero,TorstenSchmidt,Fabrizio
Simon, David Teira, Gianfranco Tusset, Rob Van Horn, Masazumi
Wakatabe,KiichiroYagi,andananonymousrefereeofthejournalRivista
Italiana degli Economisti for their helpful comments. Special thanks for
their very useful comments go to Michele Giuranno, Bruna Ingrao,
Stephen Martin, Michael McLure, Donatella Porrini, Marcella Scrimi-
tore, Eugenio Somaini, and Richard E. Wagner who read a draft of the
manuscript. The usual disclaimers apply.
vi
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Introduction
According to modern economics, market power (or monopoly power)1 is
‘the ability of firms to influence the price of the product or products they
sell’(Martin 1989, p.16). But what’s the history of this idea? How have
theeconomistsofthepastexplainedmonopolypower?Andwhatrolehas
this concept played in economic interventionism? I first encountered this
question many years ago (Mosca 1998) when studying the work of
the engineer-economist Jules Dupuit, who had clearly described some of
the causes of market power, apart from the institutional ones.2 It made
me wonder where I could find a history of ideas on the sources of
monopolypowerand,asIwillexplaininChapter1,itturnedoutthatthis
history coincides with the theory of barriers to entry.
Histories of thought that focus on entry barriers, however, go no
further back than Bain (1956), even though models of monopoly and
duopoly date back at least to Cournot (1838). Quite apart from the use of
models, the question of the sources of market power has existed in
economic theory from the very beginning.3 I myself found a treatise on it
inthewritingsofDupuit.Anti-monopolypolicies,too,gobackatleastto
theendofthenineteenthcentury:4wasn’titthemonopolypoweroffirms
that such policies were designed to counteract? There must therefore
have been some historical research focusing on this theme in the great
amount of literature dealing with these policies. What emerged, instead,
was a gap in the historiography. I was puzzled as to why there were no
studies about the history of a category that certainly did not appear out of
the blue with Bain in 1956, and I decided it was worthwhile starting to
1 Market power and monopoly power are regarded as synonyms (see
Krattenmaker, Lande, Salop 1987). As claimed by Elzinga and Mills (2011,
p.560), the ‘provenance of these two terms is obscure’. We consider them
synonymous throughout the book, except for Chapters 4 and 5.
2 Dupuit (1854a, p.340) describes the difficulties of entering the transport
network market.
3 For a theory of monopoly before the time of Adam Smith (1723–1790),
see De Roover (1951).
4 It is well known that the first antitrust legislation was introduced in
Canada in 1889, followed by the ShermanAct in the USA in 1890.
1
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2 Monopolypowerandcompetition
write one.5 Dealing with the question of monopoly power made it
unavoidable to deal also with competition, which is widely studied in the
secondary literature. The first aim of this book is therefore to attempt to
reconstruct from a historical perspective the theory of market power and
the relationship it has with the theory of competition.6
The reason for the choice of four Italian marginalists (Pareto,
Pantaleoni, De Viti de Marco and Barone) will be thoroughly explained
in the first chapter, while their links and influences will be highlighted in
the other chapters. I will argue that these economists should be consid-
ered by historiography as a close-knit group constituting Italian margin-
alism.Thatisthesecondaimofthisbook.IshouldfirstclarifywhyIcall
these Italian economists ‘marginalist’ and not ‘neoclassical’. In fact, all
four belong to the era of the construction of the neoclassical paradigm,
being part of the generation following that of the first marginalists.7
Nevertheless, calling them simply neoclassical would be even less
effective for placing them in their period with any degree of precision,
because the term neoclassical is still used today to classify micro-
economists. It would perhaps be more exact to call them founders of the
neoclassical paradigm, or early neoclassical economists. But I will call
them marginalists, since the word marginalism was coined in order ‘to
cover the acceptance by economists of both marginal utility and marginal
productivity’,8 and, as we know, the latter concept was incorporated into
economic theory not by the first generation of marginalists, but by the
onewearestudyinghere.9InthisdecisiononterminologyIalsohavethe
5 Duringtheresearch,oneofthecausesofmarketpower,namelyeconomies
of scale when they lead to natural monopoly, required separate study due to its
complexity and its implications. This issue was therefore the subject of an
independent study (Mosca 2008).
6 I started dealing with the relation between competition and market power
in a work on the Italian late classical liberal economist A. Marescotti (Mosca
2005b).
7 Barucci (1972, p.512) sets 1890 as the date marginalism completed its
first inroads into Italy; Screpanti and Zamagni (2005, Ch. 6) gave the title ‘The
Construction of Neoclassical Orthodoxy’ to the chapter on the period from the
end of the 1800s to the early 1920s.
8 Howey(1973,p.15);accordingtohim,thewordwascoinedbyHobsonin
his Work andWealth (1914).
9 Inthecomingchapters,wewillmentiontheroleplayedbyoneofourfour
economists (Barone) in founding the theory of marginal productivity.
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Introduction 3
supportofthosewhofeelthetermneoclassicalisnotatallappropriateto
describe the marginalist theory.10
Deciding the angle to adopt for a research study on the history of
thoughtisalwayscomplex;Ifollowedthecriterionofplacingimportance
onwhatwasrelevantfortheeconomistsexamined.Istartedfromasound
basis of history of analysis; that is, from their ‘pure economics’:11 the
third aim of this book is precisely to expand the existing awareness of
howextraordinarilyrichandinnovativetheirtheoreticalcontributionwas.
However, I will not limit my analysis to the reconstruction and interpret-
ation of abstract theories; but will also treat the ideal and political value
conveyed by these theories as an integral part of the study, along with the
hoped-for effects they were intended to achieve. As we shall see, in the
specific case of the four economists at the centre of this research, these
external aspects were not only present, but also pervasive and often
dominant. The fourth aim of this work is therefore to make an in-depth
reconstruction of the historical and political context in which their
theories were generated, also focusing on the way they have been
applied. This corresponds to my belief that reconstructing exclusively
internal history could give the impression that these four economists
wrote only for the sake of the advancement of economic analysis: a
purely rational reconstruction12 in fact conceals the motives behind the
formulation of the theory, although its normative implications may give
somepointers.Itisonlyawell-contextualisedapproachthatenablesusto
know the aims those theories sought to achieve, and that also provides a
key to understanding theoretical passages that are difficult to interpret.13
I wrote this book with the impossible desire to be judged by the
authors I’ve dealt with, and with the illusion of hearing them say I’ve
10 InAspromourgos’words, ‘it would be best if the term were now entirely
expungedfromthelanguage’(1986,p.269).HealsocitesSchumpeter’scriticism
of the term neoclassical (p.266). See also Colander (2000).
11 This is how they defined the new economic theory, and it is also the title
of a book by Pantaleoni (1889), who in the Preface writes: ‘This manual is
intended as a succinct statement of the fundamental definitions, theorems and
classifications that constitute economic science, properly so called, or Pure
Economics.Thus,allquestionspertainingtoeconomicart,orPoliticalEconomy,
are beyond its scope’(1898, p. vii).
12 We refer here to Blaug’s distinction between rational reconstruction and
historical reconstruction, on which see Maas (2013), among others.
13 Thinkforinstanceof‘TheMinistryofProductionintheCollectivistState’
byBarone(1908b),whichcouldbeinterpretedasbeinginfavourofsocialism,if
itwerenotforitsauthor’swell-knownpoliticalposition.SeeBradleyandMosca
(2014).
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4 Monopolypowerandcompetition
givenafaithfulreconstructionoftheirthought.Thisbookisforhistorians
of economic thought, of economic analysis and of economic policy, for
industrial economists, microeconomists, economic historians, and histor-
ians in general.
PLAN OF THE BOOK
Chapter 1 sets the research field and explains the motivations. Chapter 2
deals with the theory of competition in the work of the four identified
Italian marginalists. Chapter 3 is devoted to their ideas on monopoly
power. Chapter 4 examines the application of these theories and ideas to
various aspects of reality. Chapter 5 analyses their vision of the state and
of economic policies. The last chapter then offers some concluding
thoughts on the results that have emerged from our enquiry.
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1. The sources of monopoly power in
the history of economic thought1
1.1 INTRODUCTION
When was the notion of market power defined? And how has it been
explained in the history of economic thought? In this chapter, we
distinguish four different fields of enquiry in which to seek a history of
ideas on the causes of market power.The first concerns the history of the
formalmodelsofprofitmaximisationinimperfectlycompetitivemarkets;
the second, competition policies in a historical perspective; the third, the
theory of competition in economic thought; and the fourth, the develop-
ment of the notion of entry barriers.This chapter is of a historiographical
character and places this book within the existing panorama of the
secondary literature. Moreover, it has been written in the conviction that
in the study of economic thought one cannot restrict oneself to simply
narrating a history, one must also have some very good reasons for doing
so.
1.2 FIELDS OF ENQUIRY
The four possible fields of enquiry in which to seek the origins of the
notion of monopoly power are to be found within the pre-history and
history of industrial economics and competition policies. This is true
insofar as market power is the characteristic feature of all imperfectly
competitive markets, so the natural place to look to follow its historical
1 A previous version of this chapter was presented to the Conference
‘Histoiredesthéoriesenéconomiepublique’(Paris,10–12December2008),ina
seminar at the Dipartimento di scienze economiche e matematico-statistiche,
University of Salento (Lecce, 14 January 2009), at the 73rdAnnual Meeting of
JSHET, Keio Gijuku University (Tokyo, 30–31 May 2009) and at the 36th
Annual Conference of HES, University of Colorado at Denver (Denver, 26–29
June 2009). It was also published as a working paper (Mosca 2009); some ideas
presented here are also included in Mosca (2008) and Mosca (2016a).
5
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6 Monopolypowerandcompetition
development is in these fields. Nevertheless, as we shall see, also the
historiography of the theory of competition will provide various ideas for
a history of the sources of market power.
1.2.1 The History of Formal Models
The first field of enquiry concerns the attempts to calculate equilibrium
prices and quantities in imperfectly competitive markets. The history of
these attempts has been reconstructed by many scholars,2 who all agree
on the fact that it began with the work of Cournot (1838), followed by
Dupuit (1844), Bertrand (1883), Launhardt (1885), Auspitz and Lieben
(1889), Edgeworth (1897), Bowley (1924), Hotelling (1929), Chamberlin
(1933) and J. Robinson (1933).3 These formal models do not consider
entry of new firms, and do not pay much attention to the causes of
marketpower,oftentakingthemasgiven.4Thesearethereasonswhythe
historiography that focused on profit maximisation models in imperfectly
competitive markets has little to say about the causes of monopoly power
in economic thought.
1.2.2 The History of Competition Policies
The second field of enquiry concerns the history of the theory behind the
two main competition policies, namely antitrust policy and regulation.5
2 See, among others, Schumpeter (1954), West (1978), Stigler (1982),
Niehans (1990), Ekelund and Hébert (1999), Puu (2002, pp.1–5).
3 The reason I stop at the 1930s is explained further on in section 1.3.
4 Modigliani for example writes that ‘the impossibility of entry is fre-
quently at least implicitly assumed in the analysis of oligopoly, following the
venerable example of Cournot, with his owners of mineral wells’(1958, p.216).
And according to Ekelund and Hébert, among all the ‘pioneers’ they cite,
‘Dupuit alone examined in detail the sources of monopoly’ (1999, p.19, my
italics); I have already mentioned this in my Introduction. Clearly, in the models
of monopolistic and imperfect competition the cause of market power is
explicitly indicated in product differentiation (Hicks 1935). See section 1.2.4.2.
5 ‘The main instruments of competition policy are: antitrust policy, the
policyfortheefficiencyoffinancialmarkets,regulation,theproductionofpublic
services, the policy for innovations and patents’(Grillo and Silva 1989, p.501);
here we restrict ourselves to considering the two main ones. Unless stated
otherwise, the translations of quotations are my own.
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Thesourcesof monopolypower 7
1.2.2.1 The history of antitrust
Since the specific purpose of the firms at which antitrust legislation is
directed is that of obtaining and enhancing their own market power, it
would be reasonable to expect to find the history of the discovery of the
causes of monopoly power by analysing the theories that have inspired
antitrust legislation over the years.The developmental history of antitrust
policy has been the subject of a great many studies: some of them affirm
that in the first decades of its activities antitrust was moved more by
political and social considerations than by economic ones;6 others argue
the presence of a strong influence of economic theory right from its very
beginnings.7 This latter position8 would involve the possibility of recon-
structing the development of the ideas on the causes of market power by
means of a comprehensive review of the theories behind the antitrust
legislation; however, even if one were to accept the most extreme version
of this position, we still wouldn’t find the history we are looking for, for
various reasons.
The first of these is that antitrust does not consider the existence of
market power illegal per se,9 but restricts its interest to those cases in
which firms, to obtain it, adopt anticompetitive practices.10 So, we in this
historiography cannot find a general interest in the causes of monopoly
6 Peritz (1990) cit. in Giocoli (2009). Stigler (1982) was still sceptical
about the influence of the economists on antitrust policy.
7 See, for example, Hovenkamp (1989b), Kovacic (1992) and Meese
(2003).
8 In the words of Hovenkamp, ‘Antitrust policy has been forged by
economicideologysinceitsinception’([1989b]1991,p.136);and‘Theantitrust
laws are […] eternally wedded to prevailing economic doctrine’(p.157).
9 However, there are practices considered violations per se that it is held
necessarilyprocuremarketpower(andinfactdonotrequireanenquiryintotheir
existence); e.g. antitrust has almost always considered price agreements illegal
per se, holding them to be clearly a cause of market power. For EU competition
policy, the exercise of market power is, in principle, an abuse of a dominant
position, although cases where this rule has been applied are rare. I thank
S. Martin for this suggestion.
10 These practices consist of: collusive behaviour, mergers and takeovers,
monopolisation(intheUnitedStates)orabuseofdominantposition(inEurope).
Within the latter, practices excluding rivals take on especial significance.
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