What are the economic effects of market dominance by one firm? To hear the Justice Department tell it, market dominance spells disaster. A market-share monopoly must be supplanted by a competitive environment imposed by the government. This view is shared by the man-on-the-street, who also fears the “market power” of a single provider of a good or service. Can capitalism survive when one company provides 80-100 percent of a good that is essential to our well being?
Let’s leave aside the Microsoft case for now, and consider the evidence from other market shares unearthed by Chana Schoenberger at Forbes Magazine (May 29, 2000). Her examples demonstrate that a high market share, and even a 100 percent “monopoly,” when earned the old-fashioned way, is nothing at all to be alarmed about. In a free market, the only way to dominate a market is by serving customers better than anyone else.
The first monopoly concerns the national pastime of baseball. It turns out that Rawlings Sporting Goods provides 100 percent of the balls used in the major leagues. Isn’t this a sort of guaranteed profit? Baseball will be played, balls will be hit and thrown, and Rawlings is going to sell them. Indeed, the baseballs used by the pros are part of the “national infrastructure.” Shouldn’t competition be imposed on this industry and teams be forced to use other manufacturers?
Well, there’s no exploitation involved and there’s no evidence that anyone is hurt by this arrangement. The consumers don’t mind, the players are pleased, and, if, the owners didn’t like it, they could change ball providers. But what if we discovered that Rawlings is “forcing” the balls on the League by, for example, threatening to withdraw advertising? Again, that the League goes along with the deal indicates that it likes the arrangement better than any feasible alternative.
The word “force” here is used loosely. No party to the transaction has a gun held to his head. They are all involved on a voluntary basis. By the very fact that they choose this arrangement over other possible uses of their money shows that they benefit from it. Not that there won’t be sore losers: a company like Diamond might wish it could get a piece of the action. And if an antitrust suit is ever filed against Rawlings, its competitors will be the likely instigators.
But is the Diamond baseball company harmed by not providing balls to the majors? No more than Burger King is hurt because it can’t crack the market for families that prefer to eat at steak houses. The whole purpose of free enterprise is to find or create a market niche, strive to be the best provider at the best price, and keep it up so long as there are profits to be had. If the majors were forced to use Diamond balls against the will of the owners, it would be the owners who would be harmed.
The second example also deals with an essential item crucial to our national well-being: shoe sizers. You can’t run a shoe store without one or more of them. Every store is “forced” to carry them or fit their customers in shoes that are either too small or too big. These shoe sizers–the infrastructure of something as basic as walking itself–are what make possible well-fitting shoes.
And yet, one company has a solid lock on 80 percent of the shoe-sizer market: Brannock Device Co.. Invented in 1927, the steel foot measurer has been a “monopoly” for generations. Today, they sell for $56, which seems a little steep and, unlike software, the price doesn’t seem to be on the decline. Yet if you run a shoestore, you are pretty much stuck with using it. It’s either Brannock or your customers don’t respect you.
An 80 percent market share surely qualifies as a monopoly in an item so essential. And yet why should anyone care? The product works. Consumers trust it. Shoe sellers evidentially like it. There are higher-tech and lower-tech options, but for the average shoe store, the Brannock Device seems to do the trick. The company doesn’t rest on its laurels, but there doesn’t seem to be much improvement going on either. Again, it doesn’t really matter.
Now to the Microsoft case.
If you want a computer that works right, you pretty much have to use a product called “Windows,” an operating system developed by Microsoft. Sure, there are other contenders. To keep them at bay, Microsoft keeps innovating and giving Windows-friendly gizmos away for free. Unlike baseballs and shoe-sizers, a new version comes out every couple of years that is better than the last one. Clearly, consumers love it, and so do Microsoft’s stockholders, who have seen their wealth grow and grow as Microsoft has gained more and more market share.
But isn’t there a fly in this ointment? Can it really be a good thing for one company to make a product so good that hardly anyone is willing to use anything else? Can’t that company exploit its monopoly position, stop improving the product, charge too high a price, or even restrict sales? If so, it hasn’t worked for Microsoft: prices of all software have fallen, improvements roll in by the day, and sales are soaring.
Sadly, that is not the end of the story. The government thinks that having 80 to 100 percent of the market is trouble by itself, an indication of wrongdoing and a rationale for busting up the company. This is not a bad strategy on the part of the government. For the person who hasn’t thought much about it, it doesn’t seem like a good idea to have only one company providing nine out of ten products within a particular market segment. Shouldn’t market power be more diffuse than that?
The short answer is that any market share that emerges in a market process is the right one. Should there be one shoe sizer or should there be 100 different ones? Who knows? Neither economists nor bureaucrats are in a position to second-guess the buying decisions of the public. Only the market can reveal what the optimum number of companies in a particular market segment should be and what percentage of market share they should have. And let’s remember, too, that all these market-share figures reflect historical data, and say nothing about what the market will prefer tomorrow or next year.
The Justice Department has recently intervened in a huge range of markets, charging the existence or threat of cartel in the branded butter market, the aluminum market, the vitamin market, among many others. Last year, the Justice Department even imposed severe penalties on a company called Dentsply, which makes and sells 70 percent of the false teeth in the U.S. This company was considered an evil monopolist and assumed to be guilty of foul play.
And yet the false teeth monopoly was, in fact, no more menacing to the common good than the baseball monopoly or the shoe-sizer monopoly. Every day, we are serviced by companies that hold a dominant market share because they are the best at what they do: making and marketing a particularly great good or service. A government that punishes success punishes free enterprise itself.
In all these anti-monopoly witchhunts, the government conveniently overlooks actual monopolies (meaning companies that enjoy legal privileges). The government’s post office delivers 100 percent of first-class letters, the government’s schools provide 89.5 percent of K-12 education, and the Justice Department and the FTC do 100 percent of the damage to the market economy that comes from anti-monopoly regulation.
