24.3.04

REGULATION IN THE PUBLIC INTEREST? Henry at Crooked Timber finds occasion to bash Microsoft and to praise Albert Hirschman.
It’s a point that’s made eloquently in Albert Hirschman’s Exit, Voice and Loyalty. Hirschman, who has had far greater influence on political scientists and sociologists than his fellow economists (Brad is an exception) points out that the real costs of monopoly are much greater than the inefficient prices they maintain to extract rents. Monopolies are lazy. They have no reason to respond to their customers - where else, after all, can dissatisfied customers go? Without the threat of exit, monopolies face few incentives to improve their service.
Eloquence? Piffle. "The best of all monopoly profits is the quiet life," according to Nobel Laureate (Sir, for those of you still subjects of the Queen) John Hicks. Read on, there is more food for thought,
Of course, it’s far harder to model or to measure these effects than it is to measure the inefficiencies caused by monopoly pricing (and even that involves a fair amount of guesswork). Still, they’re the real reason for welcoming the EU’s forthcoming decision to restrain Microsoft’s shenanigans with media player software. If Microsoft has its way, we can expect to have similarly sloppy, bug-ridden media software, with infrequent updates and proprietary standards. This isn’t to say that Microsoft’s competitors have the consumer’s interests at heart: inside every lean, hungry entrepreneur, there’s a bloated monopolist struggling to get out. But without competition, there’s no restraint on firms’ ability to abuse consumers, and sometimes (as here) the maintenance of competition requires vigorous state intervention.
Curiously, in United States antitrust enforcement, it is often the lean, hungry entrepreneurs that stand accused and convicted of monopolization, despite Judge Learned Hand's dictum, "The successful competitor, having been encouraged to compete, should not be turned upon when he wins." It's the monopolies regulated in the public interest that often become bloated. Perhaps it is no accident that the electrical equipment manufacturers' price fixing conspiracy had the regulated electric utilities as principal suckers, and that manufacturers of chicken feed got to fix prices at the expense of subsidized agricultural interests.

Catallarchy takes on other parts of Professor Farrell's argument. Kieran at Crooked Timber offers a follow-on post with more discussion of the roles of exit and voice.

Exit matters, perhaps more than some of these posters understand. I recall a training poster for employees of the North Shore Line called "The Quiet Customer." It's premise: I am the customer who will not complain. It bothers me when I see others make a scene. But I am the customer who does not come back.

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