Deadweight losses

I know, I know, I know, that this is probably not really the point of this post. But within the academic environment in which I work most folks seem to use Mozilla. Either in the Firebird or Firefox versions it’s fast, suppresses pop ups nicely and handle pdfs well (my main requirements). Stop me as I mount my soap box, but I think its still not too late to switch browsers – choose the lean/mean/hungry software.

Should there be a distiction between a monopoly that grew naturally and without wrongdoing and one that expanded unfairly? Or, should all monopolies or share the same fate? I know that a monopoly would have the ability to abuse its customers, but what if it hasn’t yet?

Brad can be such a maroon sometimes. “crazed open sources” – jeez. Who cares if the advances aren’t coming from for-profit corporations? Does Brad belong to some For-Profit Corporation Defense League? I use Firefox by default and Opera for anything Firefox won’t handle. Is Brad aware that Netscape was the FIRST company to try to charge for a browser, and scandalized everyone because browsers were supposed to be FREE? Does he realize that other operating systems (e.g. OS/2 and, IIRC, most flavors of Unix) came with bundled browsers? MS was only playing catch-up. Had they not released a free bundled browser we’d either have been reading about a) the death of Microsoft, or b) MS’s dereliction of duty, using their monopoly power to thumb their noses at the commonly-accepted industry standard (real OS’s come with browsers).

Ditto for the miserable email programs that have just not kept up with the times (or the needs) of customers. I mean where do you go to be able to carry a months worth of email in your inbox? Two weeks up and out seems to be the absolute limits here, which is just miserable for all sorts of reasons.

It’s a bit unfair on economists to say they ignore the dynamic aspects of monopoly – after all, Adam Smith said that monopoly is a great enemy to good management and Sir John Hicks said that the best of all monopoly profits is a quiet life.

Bill: That’s not a joke! The deadweight loss of monopoly comes from all the consumers who cannot afford the product at the monopoly price but who would buy at the competitive price… no-one should care about transferring consumer surplus to producers per se.

Sebastian: I like the point about healthcare very much.

Mario: Mrs Tilton’s answer is also true of EU law. Monopoly-maintaining conduct is illegal, not monopoly itself.

Universal health care is not a monopoly in itself. But then how do you oppress people with their livelyhood if they can get a good health care?

DSW

Let me second the recomendation for Hirschman’s book Exit, Voice, and Loyality. It’s a much more nuanced look at these issues than I’ve ever found elsewhere.

In parituclar he makes an arguement that an excess of any one of the three can lead to lousy outcomes. So while a highly commoditized market with a lot of competitors will empower consumers to exit one vendor when ever they are unsatisfied it will also cause curious effect that the vendor never actually recieves any signal as to what’s going wrong. I.e. he get’s no voice input. That you need some loyality to force the customers to complain rather than leave.

The provocative point Hirschman makes near the beginning of this book is that while economics usually assumes that customer exit will create a signal that causes the firm to improve there is actually no carefully collected evidence to show that mechanism works! Further he points out that any such signal will need to be not to strong and not to weak. Too strong and the firm dies before it can respond, too weak and it gets ignored.

He wrote the book during a period when “love it or leave it” was a popular cliche to throw at antiwar protesters. He also says some very interesting things about politicians who resign as a matter of principle. All of which is quite topical again.

Krugman wrote a very nice essay about Hirshman that you can find on the web here: http://www.wws.princeton.edu/~pkrugman/dishpan.html

“Sebastian – knew that you or someone else would be coming at me with that line of argument. And indeed, it has some truth. But with government provided services, there’s the possibility that the other force that Hirschman talks about – voice – can play an important role in restraining bad behavior and pushing towards improvements in services.”

Always happy to oblige with the logically expected. ;)

Your main point about monopoly is not that it encourages bad behaviour, but rather that it encourages lazy behaviour. The need to innovate is stifled. I say ‘need’ because in a competitive environment you must innovate to succeed. Government control removes that need.

I don’t think your invocation of ‘voice’ saves the analysis. A huge number of important innovations start out at the margins and gain strength through the sorting of companies which takes place through profit and loss. A large majority (or even plurality) ‘voice’ will not demand these innovations because it will not see the need for them. However ‘voice’ will demand other innovations which they can forsee the need for, but which may not be efficient solutions to the problem at hand. The thing about ‘profit’ and its more important brother ‘loss’ is that they sort out good ideas from bad at a marginal level which does not have to come to the eye of majorities.

Government does not do that. The idea that government is particularly responsive to ‘voice’ in producing innovation strikes me as an article of faith. Or rather the idea that it does so with an particular speed is an article of faith. I’m perfectly willing to conceed that the government might come up with innovations after 30 or 40 years which the market could produce in 5.

“An excellent explanation of hidden costs of monopoly. Shall we apply the lessons to universal health care? ”

I wasn’t aware universal health care included all health care providers being owned by the same entity. You’re confusing “monopoly in health care insurance” with “monopoly in the providing of health care services.”

Another (probably off topic) side effect of the Microsoft monopoly is the ease with which it allows the spread of viruses.

It’s not the poor quality of the Outlook application that is the cause of this but rather its ubiquity.

The homogenity of the network is its weakness. If there was a greater variety of e-mail applications in use then the damage done to the network by viruses would be considerably less, regardless of the quality of the software.

This point probably has more to do with the theory of evolution than anti-trust.

Should there be a distiction between a monopoly that grew naturally and without wrongdoing and one that expanded unfairly? Or, should all monopolies or share the same fate? I know that a monopoly would have the ability to abuse its customers, but what if it hasn’t yet?

Let me put this another way: should there be a distinction between a competitor that was defeated naturally through its own wrongdoing and one that was defeated unfairly? Or should all competitors receive the same government protection? Any attack on Windows Media Player is protection to RealNetworks, which makes one of the most irritating programs ever.

Krugman wrote a very nice essay about Microsoft that you can find on the web here.

I am very interested in this issue, and I’m very sorry to see this thread degrade into a rehash of the healthcare debate.

I have four family members who have been quite happy with the Canadian monopoly healthcare system.

Thank you, Sebastian, for preventing an interesting thread from erupting. I have better things to do anyway.

“I wasn’t aware universal health care included all health care providers being owned by the same entity. You’re confusing “monopoly in health care insurance” with “monopoly in the providing of health care services.””

I’m not confused though it is a difficult area. You are right there is a difference, but you are wrong to suggest that there is a dispositive difference. A monopoly on health care insurance would be a very large control of payments in a single governmental entity. It would have all the inefficiencies discussed above for insurance. And it would cause all sorts of problems with health care services even if they were not directly controlled by the government. To put it in Microsoft terms: Microsoft does not contol the software market. It only controls a very large portion of the operating system market. But this control lets it push around just about everyone in the more general software market. The insurance market drives a huge portion of health care payments. The rest of the health care industry could not survive without money, which the government would then control.

Think of it in empire terms. Did the USSR need to actually have a Russian president in East Germany to control it? It controlled the military and economic levers. That was enough.

As to the measurement of the “missing” innovation due to monopoly: what about “reverse” hedonic pricing? Though, yeah, it would be a big guessing game of “what would’ve been”, but couldn’t some kind of trend-line thingie be estimated? Especially if we’re claiming “harm” then some date and magnitude should be apparent.

I guess what I’m saying is, it doesn’t seem that such estimates would be so very much more subjective than current hedonic pricing techniques currently used in GDP and productivity accounting.

I’m currently unable to read mr DeLong’s log – cable connection acting funny – but I’d like to point to Norwegian browser Opera. To me this is far better than IE. Opera is the very proof that there is still improvement in browsers. The real problem is the Messenger. At least with browsers you have a choice, for IM’s the situation far, far worse. Not only is there is no choice, the product’s upgrades are – once installed – actually downgrades. So that’s where the competition should be.

I think that is a too narrow reading of Hirshman, which brings forth the sort of laissez-faire market fundamentalism — do away with “monopolies” in health care, in public education, etc. — that has broken out in this thread. “Exit” is not necessarily the only effective option; “voice” can be just as effective. The problem with MS is that there is no avenue for “voice” and precious few mass means to “exit.” That is a rather different from publicly owned, controlled and directed services.

“It’s not the poor quality of the Outlook application that is the cause of this [spreading of viruses] but rather its ubiquity.”

Hmm. I don’t think it’s quite as simple as that. In particular, the particular feature which allows viruses to spread easily is not an example of “poor quality”, but a design decision (to do with guessing the types of files). Usually these things are seen as a trade-off between security and convenience, but I’m not sure what motivated the particular decision here. Anyway, this is a problem in Windows, rather than Outlook.

At least with browsers you have a choice, for IM’s the situation far, far worse. Not only is there is no choice, the product’s upgrades are – once installed – actually downgrades. So that’s where the competition should be.

What the heck are you talking about?! Instant messaging software right now is where browsers were in 1995! Off the top of my head I can think of five competing instant-message software apps: MSN Messenger, AOL IM, ICQ, Jabber, and DBabble. I know Sun has a Java one as well. And that’s not counting the gazillions that have been designed purely for intranet use. If you don’t think the IM market is competitive then I wonder what market is!

I’ve experienced two forms of health care in my life: the American, private, messy, bug-ridden health care system, and the American Military public, messy, bug-ridden, underfunded health care system. I prefer our private system.

Well, that’s such a very large distribution from which to draw your conclusions.

Returning to the non-hijacked discussion: the problem with Microsoft’s dominance of the basic browser market is that it has, undoubtedly, got lazy.

On the one hand, it’s thrown all of its development efforts into the bloated, pay-as-you-go MSN Explorer, in an attempt to compete with AOL. (Coincidentally enough, there’s actually competition in that specific area of everything-but-the-kitchen-sink dial-up/email/browser applications.)

On the other hand, while IE has market dominance, it has shitty shitty standards support, which infuriates developers who now have browsers which render pages as they’d expect, but have to design around the bugs and inconsistencies in IE because that’s what people get with Windows.

IE has damaged the development of better sites. It’s not just to be seen from the side of the browser user.

Personally, I think the only reason most people stick with Microsoft’s overrated products is because that’s what comes on the machine. It bennefits the manufacturer and MS to bundle everything together as it draws in lazy consumers who think searching for freeware and shareware is too technical or time consuming. MS browsers and Word processors work well enough so why bother? The answer is simple: you can get faster, more user friendly and efficient programs for free or next to nothing but it takes effort. Not a lot of effort but not a lot of effort is nore than most people are willing to put forth. So they use what they’re given and complain when it crashes on them.

As a side note, I just finished purging all Microsoft products from my laptop. Grant it, I’m a Mac user so it wasn’t that hard. AppleWorks 6 instead of MS Office 10, Safari as my main browser with Mozilla’s Camino as my backup (for the.02% of websites that don’t support Safari).

If you go to versiontracker.com, the process of purging MS apps becomes so much easier. You could do it on a saturday afternoon and it might cost you $50 if you go for the flashy shareware.

“For Microsoft, the only sense in which we can talk of “voice” is an expression of consumer dissatisfaction which it is entirely free to mostly ignore, given its quasi-monopolistic position in the market; for public education and public health, there are democratic political processes, both representative and participatory, through which “voice” can play a role in the formulation of policy and the delivery of the service.”

Very idealistic concept of voice. I wonder if Hirshman has actually had to work with government bureaucrats on a day to day basis. In the US, public education is a classic example of a government-run institution which is almost completely unresponsive to the ‘voice’ of the parents. Almost every legislator who can afford to opt out of the public system does so. They would be the ones with the very most ‘voice’ yet they still adopt an ‘exit’ strategy. That suggests to me that ‘voice’ isn’t all it is cracked up to be.

>> Very idealistic concept of voice. I wonder if Hirshman has actually had to work with government bureaucrats on a day to day basis. In the US, public education is a classic example of a government-run institution which is almost completely unresponsive to the ‘voice’ of the parents. Almost every legislator who can afford to opt out of the public system does so. They would be the ones with the very most ‘voice’ yet they still adopt an ‘exit’ strategy. That suggests to me that ‘voice’ isn’t all it is cracked up to be. << This is the argument put forward by market fundamentalists who want to privatize public schools, most notably in the "rational choice" text of Chubb and Moe, "Politics, Markets and American Schools." It never seems to dawn on these folks that when you start out with a explanatory model based on a conception of human beings as entirely self-interested, instrumentally rational beings -- that is, as beings that are perfectly aligned with laissez-faire markets -- it is not all that difficult to come up with a conclusion that markets are the only effective means for the delivery of public goods such as education. It is an argument which, taken to its logical conclusion, would completely replace the citizen with the consumer, the public with an aggregate of private interests, democracy with laissez-faire markets. It is most interesting that arguments for the privatization and marketization of public education almost always operate from first principles, how markets function in theory, and never discuss the actual operations of such experiments in the real world, such as in New Zealand or in Pinochet's Chile, under the direction of Milton Friedman. Nor is any attention paid to the consequences of the massive privatization and marketization of American health care over the last three decades. If this was done, than it would become manifestly clear that if there is any idealist notion in these discussions, it is that of the sovereign consumer, shaping public service through laissez-markets, so that the service is delivered more efficiently and with higher quality. Tell that to the consumers of HMO health care.

Leo, Funny that you suggest I engage only in theory while ignoring my quite concrete example where ‘voice’ doesn’t produce the changes that its proponents suggest it should.

But they are also the ones with the best ‘voice’. And even if you hate my legislator example, surely you understand that the public schools in the US have not been successful–they aren’t responding to voice, they aren’t responding to practicially anything.