Wu Knows What a Monopoly Is?

Columbia Law School professor Tim Wu wrote a bit for the Wall Street Journal called In the Grip of the New Monopolists. It's about Facebook, Google, eBay, Apple, and Amazon -- and a bunch of people say he doesn't know what he's talking about.

George Mason University's Adam Thierer claims that Tim Wu Redefines Monopoly, and accuses Wu of being "hell-bent on redefining the English language". TechDirt's Mike Masnick states confidently that "domination of a market, by itself, does not create a monopoly", and goes on "if we look at the basic definition of a monopoly, you see that it's about having an exclusive situation – being the only seller in the market, or having exclusive control". In BusinessWeek and GigaOm Mathew Ingram picks up the story and declares "none of these examples – with the possible exception of Google and search – meets any kind of serious test of the term monopoly" and that "It's not clear what Wu even means by saying that Apple has a monopoly on "online content delivery."

But Wu is right and they are wrong. Monopoly is an economic term and he is writing in the Wall Street Journal, so it's not far-fetched to use the economic definition. And no less a source than Google's own economist Hal Varian defines a monopoly as "a situation where a market is dominated by a single seller". Not "where there is only one seller". The graduate text "The Theory of Industrial Organization" by Jean Tirole says that "most of the [monopoly] phenomena here could be derived even in the presence of competitors as long as the firm retained some market power. So it's pretty clear that economists use the term the way Wu does.

I did point this out in the comments to Adam Thierer's piece, and Cato Institute's Jim Harper (or maybe some other Jim Harper?) replied that "The stylized version of the word "monopoly" adopted by some economists is fine for them to use in talking among themselves. In the Wall Street Journal, readers will take it to mean "one seller," just like they take "monorail" to mean "one rail" and "monotheism" as the belief in one god, etc."

But is that how people use the word in everyday life? Let's turn to a couple of tech columnists to see how they use "monopoly". Here is one Mike Masnick: "In the past, Microsoft used to be willing to admit that unauthorized copies helped the company, as it helped establish its software as a near-monopoly in certain areas, and kept competitors out." Or how about one Mathew Ingram - the one who says "It's not clear what Wu even means by saying that Apple has a monopoly..."-arguing against a suggestion that micropayments can work for newspapers:

Reifman defends his approach by pointing to several successful models of payment for services, including iTunes, text messaging, TiVo, and broadband Internet. The first thing that leaped out at me is that three of those four things — iTunes, text messaging and broadband Internet — are a result of something approaching a monopoly (or an oligopoly or cartel, in the case of text messaging and broadband Internet). Apple can charge for music because it controls access to the songs from all the major record labels. Phone companies and cable companies can charge usurious rates for text messaging and Internet because they have little or no real competition.

Yes, I guess people really do use "monopoly" the way Tim Wu does.

Comments

[Chris Weagel]

I use and enjoy many of the products from these companies but I don't have any illusions: of course they're monopolies. What is interesting is the near-uniformity in the tech writers/defenders thinking on it. They reflexively deny reality and scream like terrified orphans when you point out the obvious to them.

[Mike Masnick]

Well, that's about as misleading as you can be, frankly. I said *near* monopoly, not monopoly. There's a difference, and it matters. Furthermore, it could be reasonably argued that Microsoft did, in fact, have a monopoly under the *actual* definition of monopolies that we discussed on our site: which is a seller who has so much power that they can define pricing and block competition. Microsoft did have that in certain areas of software. Contrary to Wu's claims, neither Google nor Facebook can do that.

Adding more intellectually dishonest statements to the mix does not help. It just makes Wu look silly.

So you are wrong, and I would ask for a correction or retraction. I did not use "monopoly" the way Wu does.

Furthermore, Wu admitted on Techdirt that he DID NOT use "monopoly" in the way an economist does, but the way a lawyer does. If he said he used it the way an economist does elsewhere, he's (again) bobbing and weaving away from admitting that he exaggerated massively in that WSJ article.

[tomslee]

You object to my quote both because you didn't accuse Microsoft of being a monopoly (just "near-monopoly"), and because "it could reasonably be argued that Microsoft did ... have a monopoly", but the case is different to Google and Facebook. One or the other I can see, but objecting to both seems a bit harsh.

I think we'd agree that the border between what is and what is not a monopoly are fuzzy in several dimensions - what constitutes a distinct market, how much of a market constitutes "dominance", how long monopoly power can be exercised, how big the market is, and so on. Given that, I would have thought the difference between "near-monopoly" and "monopoly" is bound to be small, which is why I felt I could use that quotation.

Microsoft certainly had competitors in the personal computer OS space, just as Google has competitors in the advertising space. And I was surprised to find out that Microsoft's revenue from Windows in 1998 (when the antitrust suit was filed) was only $6.28 billion [link], while Google's revenue in 2009 was $23.6 billion [link], so the market definition can't be too narrow.

I think there is good reason to think that Google, at least, can define pricing and block competition - not absolutely of course, but in part. Google's auction mechanism is a very smart way to set prices. It makes Google an effective price discriminator, which lets it appropriate the market surplus for itself (according to Hal Varian's economics textbook anyway), which perhaps makes it more dangerous as a monopolist than Microsoft was. And if Google's promotion of its own services (Maps, Money, News, Video) within its search results is done by "hard coding" (Ben Edelman's recent study here) then I'd say it is blocking competition too. I have not seen an appraisal of Edelman's report on TechDirt, so maybe you don't think it is reliable.

Finally, I had missed the comment where Wu says he is using the term "monopoly" in its legal sense. I should have guessed he would, and I have not seen him claim otherwise. But the two meanings are close, so I don't think I have done any lasting harm to my small number of readers.

So sorry, but I won't correct or retract just yet. I might be more conciliatory if it wasn't for the "intellectually dishonest" remark, which did irk me.

[Tim Wu]

From Tim Wu (feel free to make into a post if you like):

"The existence of ... [monopoly] power may ordinarily may be inferred by the predominant share of the market." United States v. Grimmell, 384 U.S. 562 (1966).

“Absent other pertinent factors, a share significantly larger than 55% has been required to established prima facie market power.” United States v. Dentsply Intern., Inc., 399 F. 3d 181 (3d Cir 2005).

Thanks for this post. The idea that a dominant share of the market infers monopoly power is not some invention of mine, but rather the Supreme Court's. The usual presumption in the caselaw is that market dominance - a market share over some amount, like 70% -- suffices to create a presumption of monopoly power.

For more cases so holding, see United States v. E.I. du Pont de Nemours and Co., 351 U.S. 377 (1956); United States v. Microsoft Corp., 253 F. 3d 34 (D.C. Cir. 2001); Fineman v. Armstrong World Industries, Inc., 980 F. 2d 171(3d. Cir. 1992) (“A predominant share of the market, or a lesser market share combined with other relevant factors, may suffice to demonstrate monopoly power.”)

Technically speaking, the courts are inferring monopoly power - the ability to exclude competition - from the dominance of the firm. The presumption of monopoly power can be rebutted; by showing for example, that absence of barriers of entry means that the firm does not hold the power its market share suggests.

It is fair game to argue that matters SHOULD be different. Some economists have criticized the presumption I’m speaking of, and insist on a more complex look at multiple factors. You can also argue that, in high tech industries, dominant monopolies should be left alone to be destroyed by eventual competition. That’s fine, and a good subject for debate.

But arguing that dominant market share doesn’t, in American law, lead to an inference of monopoly is a mistake.

[tomslee]

Thanks for the comment. I agree, unsurprisingly.

[a H]

I think this is the most interesting part of the WSJ piece,

"The rise of the app (a dedicated program that runs on a mobile device or Facebook) may seem to challenge the neat sorting of functions among a handful of firms, but even this development is part of the larger trend. To stay alive, all apps must secure a place on a monopolist's platform, thus strengthening the monopolist's market dominance."

What should we do with private corporations that control markets? In finance we regulate them heavily, but should we do this with software markets, auctions?