Monopolies

EconBuff Podcast #18 with Anne Barthel

Dr. Anne Barthel talks with me about monopolies. We discuss what the textbook definition of monopolies is and how the field of economics is expanding the understanding of monopoly behavior. Dr. Barthel gives her view on the history of monopolies and how government policy evolved to fight monopolies. We talk about the negatives of monopoly and how the features and behaviors of firms facing other forms of competition impacts consumers. We investigate the nature of modern business with super firms such as Google, Apple, Microsoft and FaceBook and confront the challenges stemming from these tech giants, including privacy issues, prices, consumer options, and innovation. We consider the nuances of regulating monopolies and discuss some historical examples of regulation gone badly. Dr. Barthel lays out the ways monopolies are naturally limited by the market they serve, and how technology and innovation overcome seemingly invincible monopolies. We explore how the high prices monopolies charge and the profits they accumulate combine to sew the seeds of their own demise, how incipient competition threatens individual firm’s monopoly powers, and how Dr. Barthel views anti-trust laws as firms get larger and more powerful.

Transcript

Stitzel: Hello, and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. Anne Barthel, Professor of Economics at West Texas A&M University. Anne, welcome. Welcome back.

Barthel: Thanks for having me again.

Stitzel: So Anne, our topic today is monopolies. And I'm going to, sort of, be interested in talking about the modern view --- how econ as a field is, sort of, coming around to different aspects of it. But I want to get us started (especially for our listeners), sort of, what's the traditional definition of monopoly, and why monopolies might be problematic.

Barthel: O.K. so the econ 101 definition of a monopoly would be a market where you have only one firm. A little bit more loosely you could say where you have a firm that has a lot of market power; meaning you have one firm that's dominating the market, and they can charge prices higher than what they could charge if there were more competitors. And so, that's essentially the main problem that economists have with monopolies; [whereas] if you have this one firm that dominates the market, [then] they can charge much higher prices than a competitive market would.

Stitzel: And so, when they go about charging those prices --- and they want to manipulate to get to that higher price --- how do they go about doing that and creating that?

Barthel: You mean like how do they create their monopoly?

Stitzel: Well yeah. I'm sorry. Let me set that up a little bit better. So, a monopoly, you know, gets into some situation. And we could talk about --- if you want to talk about how they set up the monopoly situation in the first place--- you know, but there's, kind of, this common idea that we're like: O.K., we don't like monopolies because they manipulate prices. Of course, an economist would come along and say: well, really we're concerned about that restricting of output. That's, sort of, the fundamental problem that comes from that. And so, when we teach that, [then] our students always come out and say: monopoly! They can just charge whatever price it is that they want to charge! So, I wanted to, kind of, get your comment on…

Barthel: [Laughs]

Stitzel:…that. I set that question up poorly. So, I apologize for you, but.

Barthel: Yeah. It's a common misconception that monopolies can charge whatever they want. As you said, they can a monopoly can restrict output. They can produce less than what a perfectly competitive firm would. But in the end, they're still bound. They're still constrained by the demand curve. So, consumers at some point can always decide not to buy. Of course, we're often times thinking of --- when we're thinking about monopoly we're thinking of --- products where consumers have fairly inelastic demand, like something that's a necessity. Like people think of a evil monopoly, and think of the EpiPen or the PharmaBro, right, where all of a sudden medications cost exorbitant amounts of money. And of course, those are products where demand is fairly inelastic; meaning consumers aren't going to react very strongly to price changes. So yeah. With those products, we feel like the monopoly can really take advantage of the consumer. But generally, they can't charge whatever they want. There is going to be that breaking point where the consumer can choose not to buy.

Stitzel: So, in that case, highly inelastic demand [is] not very sensitive to the price; [however], a little bit of restricting output goes a long way.

Barthel: Right.

Stitzel: So, one of my favorite examples from a colleague that I went to grad school with (he said, you know,) --- he comes up with some silly invention, right? He's got a little mask thing. And instead of applying your makeup directly to your face, you apply it to the mask…

Barthel: [Laughs]

Stitzel: And then you just hit the button, and the mask slaps the makeup on your face.

Barthel: [Laughs]

Stitzel: It's a really dumb idea, right? And so, we get a patent audit, and now I'm a monopoly in this production of that thing. But I'm not gonna be able to charge a very high price…

Barthel: Right.

Stitzel:…because the market demand that I'm facing for that is extraordinarily low.

Barthel: Right.

Stitzel: So, you know, monopoly, kind of, has a long history in The United States. Do you see what are the, sort of, the most interesting examples of that, [that] would be worth talking about? [Give us] sort of the response to them, and then maybe if you have --- I don't know, I always think of economics as having things to say about every era, but something like --- [things to say about the fact that the idea of a] monopoly seems like such a modern phenomenon. What do you think about that?

Barthel: I mean, monopolies have been around for a long, long time. If we think back to Standard Oil and Rockefeller, back in the day --- was that 1860s-70s around that time….

Stitzel: Right.

Barthel:…and [those were] essentially the first really famous monopolies. And The Sherman Antitrust laws are essentially a reaction to the monopolies that were founded in the years prior to that.

Stitzel: So, I don't want to derail you; [however], this is a thought that came to me. And I always hate to spring questions on my guests here, you know. But I think --- when you say that, [then] I think --- of that as: O.K., monopoly is sort of an industrial capital…

Barthel: Hmm mmm.

Stitzel:…capitalism era kind of problem. And so, you immediately point out: well, if I teach my students, O.K. here's industrialism [and] here's capitalism, [then] historically they'll start in the mid-early 1800s, and it, you know, accelerates through. And you're saying: O.K., and then we immediately see monopoly crop up in that kind of case. You know, then I'm scratching my head thinking: O.K., well what's the historical. Sort of, when we go back to agrarian time periods, are there examples of monopoly? I can't think of any. Maybe you can think of one. I hate to put you on the spot.

Barthel: Uhm.

Stitzel: Do you agree with my assessment is sort of like an industrial capitalism kind of era problem?

Barthel: I mean, I think it's an industrial area problem, in the sense that the monopoly was, kind of, an effect of [where] It's something that grows out of that market.

Stitzel: Right.

Barthel: But I think you can probably find examples before then, where you have --- like, I'm just thinking if you have --- a king, like, a central authority.

Stitzel: Yeah.

Barthel: They're automatically going to be [and going to] make themselves the monopoly on certain…

Stitzel: Yeah.

Barthel:…things.

Stitzel: So, I guess if I'm thinking sufficiently, [then] narrowly O.K., [a] monopoly --- it's this business, [and] it's a separate entity from government. Yeah. But there's a very real way in which those kind of monopoly powers are being accrued --- like a king or a feudal level or something, you know, that we can think way back in history or something. You always think of --- [and] again, I'm not an economic historian. I kind of think about, like, farming plots or something where there's, sort of, [an economy where] every little family has their own or something. That's, like, the opposite of…

Barthel: Hmm mmm.

Stitzel:…[a] monopoly, right?

Barthel: Right.

Stitzel: Yeah. O.K., so let's talk a little bit about then the/that development of [that]. You mentioned Rockefeller [and] Standard Oil. We have several good examples there. And then, sort of, tell me a little bit about what's the response to that from a policy standpoint.

Barthel: So, people were concerned with one company having that much market power. They felt like they could abuse that market power, in the sense of raising prices hurting consumers. And so, The Sherman Act essentially says that not necessarily that a monopoly outright is illegal; but monopolies are illegal if they commit bad acts (I think is roughly the wording).

Stitzel: Sure.

Barthel: Meaning if they are charging prices that are hurting consumers; and then there are certain practices, I think, like price fixing, [then] these sorts of things are outright illegal. So, it doesn't matter if the prices are high, certain things are just outright illegal.

Stitzel: So, I can't fix prices, even if that doesn't hurt. I don't know if I could think of an example where it wouldn't hurt.

Barthel: Right. Yeah.

Stitzel: But suppose with me for a second saying: oh, they're fixing prices, but they're just really bad at it or something.

Barthel: Right.

Stitzel: And then you could come and say: oh, this is fundamentally illegal…

Barthel: Right.

Stitzel:…when the government steps in --- that kind of thing. Or on the other hand, you're saying: well, these things that like hurt consumers. So, when we're hurting consumers --- are we thinking from a policy perspective? Is that more in line with that economic idea that we laid out earlier [of] restricting options and output? Or is it prices or both? Or?

Barthel: I mean, if you're restricting output, you're automatically going to see that higher price, right? So, I mean regardless of whether the monopoly sets a price, or sets a quantity and restricts output, [then] that's essentially, I think, what the policymaker would be looking at --- like how our prices in the market compare to what they would have been would if we had a competitive market.

Stitzel: So, we kind of have a picture now, right? Monopoly, single producer --- they have a lot of market power. They're manipulating their price and their output too. You know, obviously they're maximizing profit. And do we see, sort of, this understanding from economists that then translated in into policy. Before we sort of move into the modern element of that, can you give us like a brief picture of, sort of, alternative forms of competition, and what those benefits might be, and how economists, sort of, broadly think about the other ways that an industry and competition might be organized?

Barthel: Sure. So, monopoly is on one side of the spectrum, where you have one single producer. And then the total opposite end of the spectrum is what I've already referenced a couple of times --- what we call perfectly competitive markets. Those are markets where you have generally lots of firms [and] lots of buyers. Nobody has market power and is nobody can charge prices above their marginal cost of production. And then we have a whole lot of stuff going on in between, and generally we call those oligopoly models. So, you have oligopoly models where firms compete in prices or in quantities, if we're talking about homogeneous products. Or we also have something we call monopolistic competition, where firms don't necessarily sell exactly identical products, but they sell products that are slightly differentiated but very similar. So, just think [of] two different brands of phones, for example.

Stitzel: So, on one end I've got monopoly. You know, they're sort of targeting their price by limiting what's happening in the market. On the other end, we have perfect competition. These people are, you know, at the mercy of the market in some ways, right? They're not able to set their own prices. They're just choosing how much it is that they produce, right?

Barthel: Hmm mmm.

Stitzel: And then we have this spectrum in between. I've mentioned oligopoly [and] monopolistic competition. For those of us that are listening, [who] maybe haven't thought a lot about those individual [components], do you see outcomes in those markets --- in monopolistic competition [or] in oligopoly? How do you compare those to the outcomes in the markets for a monopolistic setting, or a perfect competition setting?

Barthel: So, in an oligopoly you are generally going to end up somewhere in between monopoly and perfect competition. And as --- if you only have two competitors, you're still going to be relatively close to monopoly. But then as the number of firms in that market increases, you're going to get closer and closer to monopoly. At least that's the case in the quantity-setting oligopoly. In a price-setting oligopoly, we actually under certain circumstances (which might be a little bit strong) we actually end up in perfect competition, right? If we have two firms that compete in prices, [then] they might just compete so much that essentially they move all the way down to the perfectly competitive price very fast. That's what we call Bertrand Price Competition.

Stitzel: So, if I have a duopoly --- I have an oligopoly and I've got two competitors, and they hate each other's guts, and they're just completely cut-throat policy all the time --- right…

Barthel: Hmm mmm.

Stitzel: And company A stands up in their boardroom and says: company B is scum of the Earth. We're gonna wipe them out.

Barthel: Yeah.

Stitzel: Then we get a, sort of, perfect competition outcome.

Barthel: Right.

Stitzel: If, you know, they --- is collusion too strong of a word? If they collude, or if they're just, sort of, like, are willing to allow them to have some market share, and we get our market share, and that helps us keep our prices up, then we get more of a monopoly outcome?

Barthel: I mean, sure. If collusion is enforceable somehow, then you can end up in fact with the monopoly outcome. Turns out in reality that often times doesn't work, because everybody has an incentive to break the agreement. And obviously, you can't write out a contract saying: oh, by the way, your firm and my firm --- we're going to be colluding. Because guess what? You just committed an antitrust violation.

Stitzel: Yes, so when…

Barthel: So that tends to be…

Stitzel:…that email gets out.

Barthel: Yeah.

Stitzel: Yeah.

Barthel: Exactly. And I mean, those are extremely expensive for the company. And, I think, they can even --- they're punishable by prison. I think you can go...

Stitzel: Is that right?

Barthel: Yeah. You can go to prison for antitrust violations.

Stitzel: If it's sufficiently bad?

Barthel: If it's sufficiently bad, I think. Yeah. I mean, I don't know the details on that, but I read that it's it is a crime. So…

Stitzel: So, I'm gonna be sort of tangential to the topic here, but that's why we see, like, cartel behavior where OPEC is enforcing some kind of collusive behavior (not so much) in a way. And of course, they're probably, sort of, extra-governmental which is why…

Barthel: Yeah.

Stitzel:…that works. But you're not going to really see that in a corporate setting in The United States, for example.

Barthel: Yeah. No. I mean it's/it is possible in the long run. Like, if firms are competing over a length of time, [then] it's possible to, kind of, build a reputation and to come up with some, sort of, clever mechanism how you can signal to the other firm; [whereas the signal is] O.K., I'm going to do this now with my output, or I'm going to do this now with my price. But you're always at the risk that somebody is going to discover that. I remember reading a case about a cartel in the vitamins market --- like feed grade vitamin. And they had economists look at the prices, and they estimated what the price would have been, had there not been collusion between all of those firms. And then they had the prices that were actually being charged, and you could see how much higher the actually charged prices were. And they also analyzed price announcements in that market, like: oh, I'm going to have to raise my prices because my inputs just got more expensive. And prior to the collusion era, those announcements came from any firm. There was no clear pattern to it. And they were always, only shortly before, they were raising their prices. And then all of a sudden, you see a dramatic change in that pattern; because now, like, among the three industry leaders, they take turns. Like, firm A gets to announce. Firm B announces. Firm C announces first. And also, all of a sudden, they have, like, really long lead times, because they want the other firms to be able to react to that, right? You don't want to surprise them. You want them to be like: oh, we're raising prices. O.K. got it. And if you're looking at that data, it seems fairly obvious that there was some collusion going on. And I believe (if I remember correctly) that those firms/they in the end pled guilty to collusion, because there was just so much evidence that they were working together.

Stitzel: So, a normal behavior in that setting is: man, my costs went up this quarter. And then I announced that my prices are going up, and then the next quarter the prices go up.

Barthel: Yeah.

Stitzel: That's sort of a normal behavior of a company that's not engaged in collusion, and probably competing on price with…

Barthel: Right.

Stitzel:…the other firms. But then now I announce it, and then I wait an entire quarter, and then my prices go up? And that's so that the other firm can then kind of adjust? Or?

Barthel: Right. I think they were actually talking about days in that case, like…

Stitzel: O.K.

Barthel: Initially they were announcing just like: oh, tomorrow we're going to have to raise prices, [and lead time] was like two-three days (kind of in that time frame). [The gave just], kind of, just a heads up [that] prices are going up; and then all of a sudden, the lead times were 10-14 days to give the other companies a chance to react and catch up.

Stitzel: So I'm lacking the intuition of, like, what's the enforcement? You were talking about an enforcement idea earlier.

Barthel: Hmm mmm.

Stitzel: Is there an enforcement in this case, or it's just the fact that the three big companies, sort of, realized: hey, if we cooperate we can get our prices higher?

Barthel: Right.

Stitzel: I think that's --- I mean that's I think --- how it usually goes. That they all think: O.K., let's cooperate. And the thing is --- as soon as one of them doesn't play nice, right, the whole the whole deal is off. It's over. And so, I guess you, kind of, have to make the calculation as the company. Do I want to be the one who breaks the agreement, and we're going to have one great quarter of sales, because we have essentially wiped out the competition? But it comes at the cost that from then on it's going to be cut-throat competition. So, that's the calculation that the firms have to make. Are we going to try to collude? But as soon as one of them breaks the agreement, then it's generally off.

Stitzel: All bets are off.

Barthel: Yes. Exactly.

Stitzel: So, it's --- I'm guessing that's almost the default setting, in terms of what we actually observe, when you have more than one firm.

Barthel: Right.

Stitzel: So, you know, in theory, like, [the] airline industry or something, we have relatively few carriers. Now…

Barthel: Hmm mmm.

Stitzel:…there's definitely some obvious industry leaders. And as much as maybe you and I don't like the prices on airline flights, it's not really (doesn't seem) like they're colluding to keep those high or anything like that.

Barthel: Right. Yeah. I don't think we can make a collusion argument necessarily there.

Stitzel: And it's almost interesting, you know, if you're thinking about this kind of thing, [then] you could look at you just like pick an industry at random; [whereas you could] be like: O.K., how are these how are these firms behaving? Now you've described a pretty sophisticated analysis, I think, that, sort of, caught them…

Barthel: Hmm mmm.

Stitzel:…in this case. The other thing that comes to mind for me is, you know, these --- if I have a skill set, and I'm in the feed-lot vitamin industry or something, that maybe I get hired from firm A to firm B, and then that does that have some kind of --- reinforcing mechanisms there. I guess maybe that's a pretty small effect, but any thoughts about [that]?

Barthel: Like, if they hire an expert from one firm, and then they attract him to the other company?

Stitzel: Yeah, or maybe, you know, it looks like corporate espionage, but it's actually the reverse, you know...

Barthel: Yeah. It could actually increase…

Stitzel:…of collusion.

Barthel:…it could increase competition, right?

Stitzel: Yeah.

Barthel: Because you might have/you have insider knowledge about the other company, and which might help them to compete against them more effectively. I don't know.

Stitzel: So, at that point, you know, I come [and] I raise my prices. And you decide: O.K., game's off now. And then now I've given you 10-14 days lead time. So, 13 days later you lower your prices, and all of a sudden there's this gigantic gap between…

Barthel: Right.

Stitzel:… your price and my price. You're trying to capitalize on that. Then I realize: O.K., the gig is up.

Barthel: Yeah.

Stitzel: And then I'm gonna go in.

Barthel: And then you're gonna lower your prices, right?

Stitzel: Yeah.

Barthel: And then down we go.

Stitzel: And then we're off into actual competitive. O.K.

Barthel: Right.

Stitzel: And then tell us a little bit about monopolistic competition then, since we've talked about oligopoly.

Barthel: Yeah. So, in monopolistic competition, we have products that are substitutes. So, they're --- they serve similar purposes, but they are slightly different. So, think of two cell phones. They might have different features, or even just different brand names, even if the product itself isn't that different. I'm just always thinking of, say, t-shirts, right? Like, the t-shirt itself might not look very different. But depending on what logo is on the front, the price that you have to pay for that t-shirt is going to vary greatly.

Stitzel: It might have even been made in the same…

Barthel: Right.

Stitzel:…manufacturing location overseas.

Barthel: Exactly.

Stitzel:…overseas.

Barthel: Yeah.

Stitzel: So when I'm thinking about monopolistic competition --- I think sometimes when I teach a principal's level class, and I'm talking about perfect competition ---- you know, I think and rightly so, the students often get a picture of agriculture or something where you have very similar good[s]…

Barthel: Hmm mmm.

Stitzel:…and you just, there's just no room to compete at all on differentiating the product. It goes, like, completely price. You and I settle…

Barthel: Right.

Stitzel:…on the same price if you're a penny over I'll get all the consumer rights.

Barthel: Right.

Stitzel: That's the sort of perfect competition, you know. But it seems to me --- (and maybe it's more of a just, sort of, observational bias) but it seems to me, so you see, right, [that] you mentioned phones, for example, right, [or] phone service carriers, or even phone the physical products themselves that seems ---- like a very vicious competition because of, like, how we see advertising, right? And you'll always see T-Mobile and (whatever) AT&T competing. And I'm competing on coverage, and you're competing on price. And, you know, this other person is competing on, like, number of calls that get dropped. There's this kind…

Barthel: Hmm mmm.

Stitzel:…of thing. So, do you have any intuition for us there in regard to --- is that as competitive as we think? Or is that, sort of, (I don't use the word sham because that's too strong, but it's, sort of, like) a faux competition and they're actually fairly content with the size of the market share that they're getting?

Barthel: I mean, personally I don't think it's as competitive as we think, because just the number of companies that we have in that market is really that small and it is a large market. If you think of the entire American population, and then you have the what? How many do we have now? Three big carriers?

Stitzel: Yeah, I guess it's just three now.

Barthel: It's just down to three, so, and they're constantly trying to merge; and then every now and then somebody is allowed to merge. So…

Stitzel: Yeah.

Barthel: I mean, there's three big companies for the entire United States. To me, I can't really imagine that that's super competitive. I mean, it has to be possible for them to slow charge prices that are higher than what they could charge if as if there were like a hundred different providers, right?

Stitzel: So, of course there's always things that are causing an increase or decrease in the amount of competitiveness. The one that comes to my mind in that particular case would be, like, network effects or something…

Barthel: Hmm mmm.

Stitzel:…really strong advantages for --- you know, we're talking about carriers. So, the obvious thing there would be, you know people being on the same plan as you…

Barthel: Hmm mmm.

Stitzel:…and different perks that that would have. If you're talking about phones themselves, you know, then they're, sort of, an obvious. Like, I had one of my brothers [where] he needed a new phone, and he like briefly went Android, right? But everybody in the family has Apple devices, so then like you know texting features are different.

Barthel: Right.

Stitzel: And Facetime is gone, and all this is --- like, that lasted like two weeks, you know.

Barthel: [Laughs]

Stitzel: Back to that, and those are --- that's like a quintessential networking effect, right?

Barthel: Right.

Stitzel: And so, that, sort of, a in some sense they compete, right? Because you want to compete to get the market share, [in order] to build that network effect thing. But then, once you've got consumers into that situation. [then] it's going to reduce the competitiveness that an outsider is going to be able to exert on you, right?

Barthel: Right. And it's interesting that you bring up the network effects of: oh, if everybody's on the same provider, then it's you have certain benefits. That has kind of gone away hasn't it? Like, I remember 10 years ago it was you could, like, call for free if they were on the same carrier. Nowadays all most plans are unlimited minutes, or it doesn't matter which carrier you call.

Stitzel: So, that's got to be an impact of competition, right? So, I'm like: oh well, if you're on Sprint, [then] you can text other Sprint users or something, right?

Barthel: Hmm mmm.

Stitzel: But then when T-Mobile says: O.K. well, I'm not going to charge you anymore for calling across T-Mobile to Sprint. That's a competitive act. That's a competitive feature…

Barthel: Hmm mmm.

Stitzel:…of T-Mobile, then they win. Ergo, you know, you opened up the conversation talking about like options and choices as part of…

Barthel: Right.

Stitzel:…the benefit of competition. And so, that's kind of an example of that.

Barthel: Yeah.

Stitzel: I remember that very distinctly. You know, when I first chose a carrier --- I guess I'm embarrassed to say I'm with --- [I chose] Sprint, but that's the, like, low, low cost one, right? And when I first chose, you know, several of my family members were on that. And that was, like, a factor, you know. Like, the text. Of course, now I have the unlimited data, which I guess is probably the default choice for people. I don't know about that.

Barthel: Yeah, I don't know.

Stitzel: And so, it doesn't matter anymore, right?

Barthel: I think it's probably the default choice, because nobody -- off the top of their head --- really knows how much data do we use? And everybody is always worried about overages. So, it's like: ah, I just better get unlimited so that way I don't run that way. I know what I'm gonna pay, and I don't get the surprise bill at the end of the day.

Stitzel: Yeah. The transaction cost of the effort to keep…

Barthel: Yeah.

Stitzel:…track of, like, what my average usage seems to be like, you know. And then, you know, do I use it more in a particular month or time period or something? And then, I would need to, you know, pick the upper bound of that kind of thing. Yeah. I'm not interested in any of that. I doubt there are very many people that are.

Barthel: I think you can actually even change it like from month to month.

Stitzel: Oh.

Barthel: They generally allow you to change it, but again, who does that?

Stitzel: I mean, he's doing that. Yeah. I don't call my phone provider, you know, ever let alone once a month, right?

Barthel: Yeah. Exactly.

Stitzel: Or even if I left it for nine months and then switched it for the summer or something. I don't know. O.K., so I want to sort of turn the topic. Now we've we have kind of a clear picture of competition, monopoly, you know, prices, price competition or restricting output, [and] all these different ideas that we have. So, there is, kind of, a new way (I don't say a new way) to think about it. But there's a lot of economists out there talking about: like O.K., this old econ 101 --- which is exactly what you called it when we started the podcast --- like, it's just not a great way to think about monopoly. I guess [they] called [it], like, a toothless monopoly. Can you, kind of, talk to us about what the new way that economists are thinking about monopoly?

Barthel: Yeah. So again, the old way was: oh, it's simply the restriction of output and higher prices that are hurting consumers. And I guess the newer way of looking at things is that actually the way in which consumers get hurt is the lack of choices; and sometimes also things that are a little less tangible like the lack of service that comes with a monopoly. Because if you ask people often times [about] like a monopoly --- like, let's say the post office, right? People aren't necessarily upset about the price that they have to pay for shipping a package or shipping their letter. But they are going to be upset at the long line that they have to stand in and wait, and maybe a rude postal employee that they run into. So, it seems like oftentimes the negative effect of the monopoly is more that they don't really have that much of an incentive to provide good customer service. and I mean especially in The United States customer service is something that people appreciate a lot, and it's very important. I think in some other countries people might be a little bit less upset about these sorts of things. But especially here, I mean, that's one a negative effect of a monopoly; [whereas] that in the classical view of monopoly, [it] doesn't really fit, right? I mean, that's not really accounted for.

Stitzel: This is an econ focused podcast, but there is that. When you say that there's that little blip in the back of my mind that goes: yeah, what is it about Americans that we want to be treated so nicely? Especially, you know, you get into smaller areas, [and] you get into the, you know, the American South or that. Like, all the sudden the Southern hospitality thing…

Barthel: Hmm mmm.

Stitzel:…becomes a very real effect; whereas, you know, I won't hazard a guess as to as to where in the world this might be. You can fill us in, but there are other places in the world they just don't care about that at all. They're like --- they did their job. They got me in and out quick quickly. Like, I don't care if they said: hey, how are you doing.

Barthel: Right. Yeah. If I go to the grocery store in Germany, for example, I don't care if the cashier says: hello, how are you? How are you doing today? Did you find everything all right? To me sometimes it's like: just scan my stuff, [because] I want to get out of here, right? To me sometimes it's almost like: yes, you're trying to be nice, but I just want to get out of here. So yeah, in a lot of countries I think that kind of small talk, the hospitality [or] the social interaction is less part of the transaction. I mean, sure. You don't want them to be rude and yell at you. But as long as they say hello and then scan your stuff, [then] you're going to be happy.

Stitzel: So, I had an experience. I had a product shipped. It was a box that had other boxes in it. The box was ripped. Several of the inner boxes were missing. So, that's like…

Barthel: Hmm mmm.

Stitzel:…an enormously frustrating experience, right? So then, I'm just dreading [that] oh I got a call --- I think it was with UPS I had to call --- UPS and got to do. And they made it like as easy as it could possibly be.

Barthel: Hmm mmm.

Stitzel: You know, the delivery guy left a number, and his boss in managing ??@29:24. And I called them, and I got somebody else, and he personally took care [of the problem], you know. So, it's like still not a great like situation, because I ended up not getting, you know, part of the product that I'm paying for. But they made it as easy as possible, you know. I can't imagine that scenario going well at The Post Office there.

Barthel: Oh, I can pretty much tell you what that would look like, because I've had packages that were ripped and half the stuff was missing. There was --- I'm not even sure if there was --- even a note in there. I think the package was just wrapped in plastic.

Stitzel: Wow.

Barthel: And that's it. They just dropped it off at my doorstep like that.

Stitzel: And as opposed to my experience. What I'm doing, you know, a firm that's more interested in competing and partially competing on service, you know, and the delivery man's actually like stopped…

Barthel: Hmm mmm.

Stitzel:…and stayed long enough to help me, sort of, get the ball rolling. I think the quintessential, like, uncompetitive market that that Americans are tired of experiencing is, like, Wi-Fi, right?

Barthel: Oh, yeah!

Stitzel: You're, like, Internet providers --- like, that's the worst experience…

Barthel: Yes.

Stitzel:…ever, right? Like, here in the Amarillo area I'm with Sudden Link. It's like, I don't even! Sometimes I'll just grit my teeth. I'm like --- I guess I'll be out --- I'll be without Internet for six hours; and hopefully it finds a way to turn itself back on, because…

Barthel: [Laughs]

Stitzel:…[I’m] calling the providers [and am] like pulling teeth, you know.

Barthel: Yeah. It usually takes a long time until you get somebody to show up. I once had a situation when I was living in a different state, where I had to call them; because, yeah, my Internet was out, and it didn't magically turn itself back on. I waited for like a day or so and it never came back on. So, I called them, and I think another day or so later somebody finally showed up at my house; and then they checked it and they said: oh, you know why your Internet isn't working anymore? Your neighbor disconnected it…

Stitzel: Yeah.

Barthel:…from your line…

Stitzel: [Laughs]

Barthel:…and plugged it into their own line when they were installing their own Internet. And so they fixed it, but yeah, I mean that's two days without Internet for me.

Stitzel: That’s hilarious.

Barthel: Yeah, it was.

Stitzel: Not to laugh at your pain, but that's pretty funny.

Barthel: It was pretty funny. I mean, I just looked at them. I was like: what do you mean my neighbor unplugged my Internet? And they're like: well, I don't know who else this would have happened.

Stitzel: So it's like an old school version of stealing your neighbor’s…

Barthel: Hmm mmm.

Stitzel:…television service, right?

Barthel: Who knows? Maybe it wasn't the neighbor. Maybe the person who was installing the neighbor's Internet made a mistake, and just was like: oh, let me just plug this in. I don't know.

Stitzel: I don't want to, you know, take too much time to talk about this kind of topic, right? But there are, sort of, different reasons that we would think monopolies would have a chance to exist. Some of the/many of those [monopolies] probably are legal. There's also this, kind of, like natural monopoly idea. And since we're on the topic of, like, telephone…

Barthel: Hmm mmm.

Stitzel:…you know, [and] telecommunications type stuff, you know, one of the sources of concentration or monopoly power tends to be things like: well, this system that you're installing to deliver Internet is [that] it's so very consuming, right? It's so it it's hard to change it out, and you have different access [levels] to it.

Barthel: Hmm mmm.

Stitzel: And you can't/I can't have 27 people putting up phone lines in my city, right? You're going to have…

Barthel: Oh gosh. Yeah. What would that look like?

Stitzel:… [a complete] mess of a design there, right?

Barthel: Right. Yeah. So, commonly we find these natural monopolies in industries where you have, like, a high fixed cost [and] a high start-up cost. So putting in that grid…

Stitzel: Hmm mmm.

Barthel:…the electric grid, the water pipes, the cell phone towers, [and] all these sorts of things, like, there's a very high cost initially to get that grid set up; but then providing access to just one additional consumer is relatively cheap. And so, those are usually the circumstances where naturally one provider emerges, because it's just cheaper for that one provider to service the entire city than to have a second one. Because they can do it at a lower cost, actually, than if you had two providers. That's one of the, kind of, interesting paradoxes of a natural monopoly --- that your cost might actually be higher if you allow competition in under those circumstances.

Stitzel: You've laid that out really elegantly. I've --- I always struggle to teach that. You know, you draw these graphs and big, huge, long-run average cost curves…

Barthel: Hmm mmm.

Stitzel:…and you just see the students’ eyes roll back in their head.

Barthel: [Laughs]

Stitzel: They're, like, not remotely interested in that. It's like: O.K., you know, and so maybe I need to take an intuitive approach like you just laid out. What do you think of these, sort of, net neutrality type arguments? Where on one hand you say: well, you tend to have a couple of producers in an area, [and] you have these, kind of, you know, wires in the ground type problem. O.K., so do we regulate their behavior on the back end and say: O.K., you can't favour different packets (or however they would regulate that)? Or maybe you go, and you do it on the front end? And you have, you know, cities maintaining the actual lines? And then hopefully you open up lots of competition for providers to have, sort of, equal access to that infrastructure? Any thoughts about that? Or?

Barthel: I mean, I think both approaches have been tried, right? I mean, I think an interesting example for that would be the electricity market in, I think, a lot of European countries, where you initially had kind of a state-owned monopoly. And then the idea behind that was actually having the state provide these, sort of, essential products, because they would be able to (if needed) subsidize; so that they could provide electricity --- something that's very essential for the citizens of the country, at a price that's affordable to everybody. So essentially, almost like a --- yeah. What should I call it? Again, they weren't even --- it was not a monopoly that was talking about: like oh, let me rake in as much profit as we can. It was more kind of a social monopoly, if you will, to ensure that there's equal access to everybody. And then later on they decided to open up the market to privatize it. And oftentimes it was exactly what you were saying, where they may be maintaining the lines, but then different competitors could come in and provide their product. And I believe from what I read (I'm not 100% sure from what I read) was that actually prices initially decreased in the electricity market; but then later on, they went up again, which may have been because firms started to form…

Stitzel: Right.

Barthel:…actual monopolies.

Stitzel: Actual concentration.

Barthel: Actual concentration in the market. So, it was a short-lived effect of lowering prices, but then afterwards it didn't really have any long-run effects.

Stitzel: So natural monopolies present a real problem, right? So, any good economist, you know, we're gonna spend our time talking about the power and the benefit of markets and low prices, many options, good service, [and] hopefully innovation as well. And that to me [is], sort of, where it jumps out, you know. A state-run monopoly you're saying: O.K., well they're not going to have that profit motive, so maybe we don't worry too much about the pricing component of it. Of course, we are going to worry about the output levels in that case. O.K., is everybody getting as much as they want? We lose that important sort of price feedback mechanism.

Barthel: Right.

Stitzel: How much more do we need to be producing? You know, is it being over or under consumed because the price isn't right? Those are all big problems. The state-run monopoly obviously is not going to be able to solve that.

Barthel: Right.

Stitzel: You know, but then it occurs. To me the problem, and that kind of situation, is going to be the innovation, right? Part of the market process is this discovery process, right, where I'm going to try to start up this company and see if I can't displant, you know, (I don't know) cell phones with holograms or something. And maybe that's a great idea and it takes off.

Barthel: [Laughs]

Stitzel: And now that's the new big thing. Maybe it's a terrible idea and then my business goes away. You just don't have any of those pressures in the state monopoly…

Barthel: Right.

Stitzel:…setting, right? So, it's sort of like, I don't know, like limiting the damage that a monopoly might cause kind of scenario.

Barthel: Right.

Stitzel: But you would say in response: I think O.K. well, if it is a natural monopoly, [then] you're going to end up in this monopoly situation anyways. You're not going to get any of those benefits that you'd like to have.

Barthel: Right. And regulating a natural monopoly is actually a very tricky thing to do. Because if you wanted to step in as the government and say: O.K., we're going to tell you that you have to charge a price that is equal to your marginal cost of production, well guess what? You've just killed your only electricity provider…

Stitzel: Yeah.

Barthel:…because marginal cost tends to be below average cost --- meaning the firm can't even cover their costs anymore.

Stitzel: Yeah, losing money.

Barthel: So, they're now losing money.

Stitzel: Because of high fixed costs.

Barthel: Because of high fixed costs. Exactly. And so, when you're regulating --- if you wanted to regulate that natural monopoly in some way or form then I guess --- the best you could do is force them to charge their average cost of production so that they break even.

Stitzel: Yeah.

Barthel: But even that, of course, then they have an incentive of inflating those costs, so that they are allowed to charge higher prices.

Stitzel: And all of a sudden, production’sinefficient.

Barthel: Right. And I mean also, you still don't get quite the output level that you would have gotten had they produced at the competitive output level. So, I mean, it's kind of --- you can't really win with a natural monopoly. You can't get a 100% economic efficiency in under those circumstances.

Stitzel: O.K. so this new idea of monopoly --- we started out with a classic definition [that] it's one firm, right? But now we're starting to see these firms that are really big. They seem to be really, really powerful. They don't seem to jack prices up. They don't seem to, right? So now, all of a sudden, O.K. yeah. It's not technically one firm, so we can't call it a monopoly. But they seem to, sort of, have outsized power, maybe on our personal lives [or] maybe in government. Although there are some good economists that argue, you know, businesses don't have as much power over government as we think they do. But yet, we do see a lot of, sort of, anti-competitive regulations that would be supported by regulation; [whereas] that's sort of the anti-competitive and it's going to keep competitors out. Big firms are going to be able to handle the regulations. Little firms aren't. Those…

Barthel: Hmm mmm.

Stitzel:…kind of powers. Tell us the story of this big firm, that's not truly a monopoly, but what economists are starting to look at with the side of our eye and say: maybe that's a real concentration kind of problem.

Barthel: So, you're thinking of something like Facebook?

Stitzel: I mean, Facebook would be, like, literally the first thing that came to mind.

Barthel: O.K., yeah. Because I mean, you have Facebook, and then there are all these other social media platforms that are also part of Facebook, right? I mean.

Stitzel: Yeah. My favorite three are Instagram and Snapchat and Facebook. Those are all --- those are all Facebook things.

Barthel: Those are all Facebook, right? So, on the face of it, it doesn't look like it's all Facebook; but Instagram is not really a competitor to Facebook, but they're the same. They're owned by the same company.

Stitzel: I always wondered if the intuition behind Instagram was: hey, there's a lot more interactions on Facebook posts where there's a picture included. Let's just make people include pictures.

Barthel: Right. I think initially.

Stitzel: Is that why Instagram was born?

Barthel: Yeah. Initially I thought Instagram was just, kind of, more for the people who wanted to post pictures; and then it just kind of took over as for some people the primary form of social media instead of Facebook.

Stitzel: I've managed to more or less purge Facebook from my personal life. I still have it, but I don't spend any time on it. I like the messaging feature much better than the main Facebook. But I'll be darned if I can kick my Instagram habit.

Barthel: [Laughs]

Stitzel: It’s the pictures that get.

Barthel: It’s the pictures. That's right.

Stitzel: Yeah. So what about? So, if you're talking to somebody and they didn't have like a real clear idea about, like, what's the problem with the Facebook or Google or a YouTube --- or I guess YouTube is kind of a Google thing --- or Amazon or Microsoft [or] whoever else it is (and we're forgetting about these, like, tech titans that we're really concerned about), sort of, what's the/how do you view the problem, right? Because I'm going to come to you and say: well, you just gave me econ 101 prices…

Barthel: Hmm mmm.

Stitzel:…but most of those things are literally zero. If it's Amazon, [then] it's the lowest prices I can possibly find. You know, if I want to go purchase something on Amazon, [then] I have 80 options. And, you know, probably I get bored and stop looking after the first page of options of the same product that I wanting to buy. What's the concern there? What's the [problem with having a] mono[poly]? Shouldn't I just embrace and celebrate the tech giants?

Barthel: Well, yeah. So, it's true that Facebook isn't charging you an exorbitant amount of money every month for having a Facebook account. I guess the concern with those kinds of companies is more what they can do with the information that you give them. Because they can on the back end --- they learn a lot about you as you're posting your pictures, [inclusive of] what kind of products you look at on Amazon, things you Google, etc., etc. And they can essentially sell these sorts of things to other companies who might be interested in sending you exactly the ad for the product that you didn't know that you were looking for. I think I was talking to my husband the other day and he's like: I kind of like these Facebook ads. I didn't even know that I wanted to buy this t-shirt, and then I saw it, and I clicked on it, and I bought it, and I really like that shirt.

Stitzel: I'm with your husband on this one. You know, it's like I get these random advertisements for stuff. I don't care. So, I picked up golf this this summer --- sort of obvious reasons, right – [because of the] Coronavirus shut down. Like, outdoor activities gonna be a lot better than anything else.

Barthel: Hmm mmm.

Stitzel: Right? And of course, golf is just an absolute money pit…

Barthel: [Agrees] Oh yeah. Right.

Stitzel:…of a hobby, right? So, I've got some second hand, you know, 20-year-old golf clubs that are perfectly fine for me to go, you know, hit balls into the water. You know, but the targeted advertising on web pages that I go to --- you know, Facebook when I get on it, [and] it's all over Instagram, etc. --- I mean it's just all golf right?

Barthel: Hmm mmm.

Stitzel: And then there's a reason for that, right? Because on one hand, people [who] are selling golf products understand that: O.K., this is a really lucrative thing to be doing. And you're going to be able to talk people, and [tell them that] now you need new clubs every six months or whatever, right?

Barthel: Hmm mmm.

Stitzel: And so, I made the mistake of (who knows what it was), like, liking one too many golf related Instagram posts. Or heaven forbid I, you know, went to a went to Amazon and typed in, you know, golf clubs for…

Barthel: Right.

Stitzel: You know, let's look and see what my options are, and then I'm just drowning in it, you know. But in some ways maybe that's a lot better than, you know, if I get [non customized ads]. I'm not into designer t-shirts like your husband; maybe, but so, I don't want to see those ads, and then he wants to see them. So, we're getting a better experience. That's, like, a part of the social media value.

Barthel: I guess. I just always, kind of, get (I almost get) mad at them. I was like: you just want me to buy more stuff, right? And it's not that I necessarily need this item that you're advertising, but, I mean, you're just hitting me over the head wherever I go. It's just following. I just always feel followed. Like, you can't go anywhere on the Internet without seeing that one item that you briefly considered buying…

Stitzel: Yeah.

Barthel:…and then decided: yeah, I don't really need it, but then they keep following you with it.

Stitzel: Heaven forbid you put it in your checkout basket and…

Barthel: Oh yeah.

Stitzel:…and then navigate it away, because then you're really gonna get it.

Barthel: Yeah. Exactly.

Stitzel: That's the ultimate signal, you know, that you are this close to buying it. Do you worry about general privacy concerns? And we've, sort of, talked specifically about consumer behavior in that regard. I, sort of, always have this --- like, I understand the discomfort that I get from, like, you know, [the fact that] Google's tracking all my clicks, I'm sure. And, you know, who knows? Google probably, like, sells the email header subjects that I'm writing; because there's really going to be a good insight into what my personal interests are. Because they're going to be bored. Because it's like 90% economics. But maybe they're not bored. Maybe that's interesting to them. Do you worry about that privacy? We're, sort of, like, outside the bounds of monopoly type stuff here. But, like, O.K. There's econ 101 prices [and] output kind of thing. And then where do we fit in some kind of concern about what Facebook is doing with my personal [data]?

Barthel: I mean, I think it kind of goes back to the lack of options here, right? I mean, if all your family is on Facebook [and] if all your family is on Instagram, and if you want to see your brother's new puppy picture --- unless you want to bug him every day to send you a picture --- [then] if you want to be part of that, you, kind of, have to join that social network that is going to be selling your information. I mean, yes there are people that decide that for them the privacy concerns are too big. I mean, I can name my own sister I think as one of them. Like, she's not on any social media platform. But I have noticed that oftentimes it's harder to stay in touch with people who completely opt out of these things. And so, I think, kind of, that lack of other options is essentially where we're coming back to, I guess, more than the modern understanding of a monopoly that that's what's really, in some sense, hurting the consumer.

Stitzel: Which is such a wild contrast, right? You say: well, on one hand you're 100% right. If I want to be on social media and connect with my friends, [then] if it's not Instagram or Facebook, like, I don't know what it would be, you know. Now the young people who are listening to this episode are laughing at me, right, because they know all the different social media.

Barthel: Yeah.

Stitzel: I'm sitting here thinking about going Instagram, Snapchat, LinkedIn, [or] maybe Facebook? Like, where am I going to connect with people? Like, Facebook's so ubiquitous…

Barthel: Hmm mmm.

Stitzel: At this point that that's just my default. If I was like how…

Barthel: Right.

Stitzel: I wonder what so-and-so from high school got up to, right? Like, I'm going straight to Facebook, you know what I mean?

Barthel: That's right.

Stitzel: And then on the other hand you say: O.K. well, but the tech giants/they're all providing you (I don't say unlimited) just an unbelievable amount of variety, you know. I especially think of, like, a Google or Amazon, right? And I was --- my mom is interested in reading some books. We have some overlap of these historical books that we that we want to read. And I said share your list with me, and I'll share my list with you.

Barthel: Hmm mmm.

Stitzel: And instead of just, like, texting that back and forth (which would have, sort of, been obviously fine) I'm like: oh, I made a Google document and then I put it in here. And then I sent it to her, and she put her [list there as well] now. So, now we have kind of a curated list of books…

Barthel: Hmm mmm.

Stitzel:…that we want to read and argue about later on. And in some ways that's an enormous amount of choice, right? It's just an unbelievable variety of places that I could store documents, create documents, [and] share documents. That's like a feature in my life that, sort of, is unfathomable how valuable that is, right?

Barthel: Right.

Stitzel: So, yeah. I don't know how you balance that.

Barthel: Sure. It has its pros and its cons, right? So, I mean…

Stitzel: Yeah.

Barthel:…Google also, I mean. I don't --- I mean, who uses a search engine other than Google these days, right? I mean, there are people who do.

Stitzel: People who are really worried about privacy is DuckDuckGo.

Barthel: DuckDuckGo, that's right.

Stitzel: Yeah. Bing is a joke. So yeah, I think you're right.

Barthel: I think, in terms of the algorithm I guess, Google is the one that has it optimized, right? And so, people use Google.

Stitzel: Hmm mmm.

Barthel: I mean, it's even what do we call it --- I'm going to Google something.

Stitzel: Yes.

Barthel: Right. So, it's everywhere and…

Stitzel: I have a distinct memory of the first time someone said that to me: why don't you just Google it. And I was like: do what?

Barthel: [Laughs]

Stitzel: You know, and it's, like, what an odd verb that is! Yeah, but I guess we --- that's a really common thing, right, where, like, a brand leader morphs into just, sort of, a social consciousness, right?

Barthel: Right.

Stitzel: I don't --- you don't hand me a facial tissue.

Barthel: No.

Stitzel: Hand me a Kleenex, right?

Barthel: A Kleenex, that’s right.

Stitzel: And the list of those things would be kind of endless. Well actually that transitions perfectly into another idea I'd like to talk about somewhat briefly. You know, one of the things that I've come to understand, that I think is extraordinarily valuable, is businesses really value that brand name. You can see that in a lot of ways, right? They're quick to do things anything in the public spotlight that they think is going to tarnish the brand name. They're really militant about protecting that. And, I think, people sometimes, sort of, undervalue the competitive (or at least maybe like pseudo-competitive) effect that has. So, what are your thoughts in general about how, you know, a brand name [would deal with this]. I like to give this example, right, which is: I guess tomorrow Samsung television could produce the crappiest, low quality, [and] cheapest things. [And what] they would do [is] they would make tons of money, because their costs would go almost to zero, and then they'd still be able to sell them for, whatever [a] T.V. [would go for such as] a $1,000 a pop. And then they would make a lot of money, and then next quarter they would go out of business, right? And so, that brand name has that, kind of, has that, kind of, power on one hand; but then it's also this idea that you want to position your particular firm or your particular brand as strongly as you can, because you, kind of, always have this idea of incipient competition. So, could you define that for us, and [then], kind of, talk a little bit about the power of brands and, sort of, the competition that we're not necessarily seeing, right, on the surface?

Barthel: Sure. So, I mean brand names are essentially just some ways of differentiating your product, right? So, if you go to --- let's say if you go to --- Walmart or any of the grocery stores, and you look at the cereal aisle, [then] you're going to see the Kellogg's brand name. I don't even know. Cornflakes. Let's go with the simplest one --- the Cornflakes. And you're going to see the generic version. And I mean, for some people it doesn't matter which one they buy. Those are probably the more price conscious consumers. But then, you're also going to have people who will have very strong opinions on that, [that] the brand name one just tastes better. Which sometimes it's all in our minds, right? I mean, there --- I believe it was laundry detergent in Germany [where] they did a chemical study on the leading brand name laundry detergent that was being sold in Germany, and a store brand that was being sold at Aldi's. And chemically it was exactly the same product. And I think the conclusion was that it is the same laundry detergent, and it's essentially just a form of price discrimination, right? You're selling it cheap as the Aldi store brand box to the very price conscious consumer, and [then] you're selling it at a much higher price to the consumer who's shopping in the higher end grocery store.

Stitzel: So, we haven't really defined price discrimination. So, in that case you mean being able to charge different prices to different groups…

Barthel: Right.

Stitzel:…because there's some feature about them which we can distinguish to separate the…

Barthel: Right.

Stitzel:…two groups, and we need to do it accurately. And we need to be able, to sort, of keep them in those two particular groups. But they're self-sorting in this case.

Barthel: Right. Exactly.

Stitzel:…into brand name. But it's really --- there's a price discrimination-esque thing happening when it comes to the stuff that we talked about observing your tendencies online and then creating a profile.

Barthel: Hmm mmm.

Stitzel: Right. It's cliche at this point to say if you're getting something on the Internet for free, [then] you're the product not the…

Barthel: [Laughs]

Stitzel:…not the consumer, right?

Barthel: That’s right.

Stitzel: And so, I think that is really insightful, and that's why it's such a provocative thing to say. But it's almost --- it's almost that, like, price discrimination thing, like, on steroids or something. We're saying: O.K., what is your average, you know, 30-year-old American male who lives in the South going to be interested in? Like, golf might be on that list.

Barthel: Right.

Stitzel: But if all of a sudden you can observe: well, you know, he clicked on this Amazon link to look at golf clubs. Like, that’s, sort of, price discrimination on steroids, right?

Barthel: Right.

Stitzel: But that tends to, kind of, work in our favor too --- which is a weird aspect, right?

Barthel: Well, yes and no. I mean, price --- so, the most extreme form of price discrimination (which we call first degree price discrimination) is if a firm could charge every customer exactly what they're willing to pay, right? So, normally that's not possible, because when you walk into the store, well, how are they supposed to know exactly what you're willing to buy to pay for those golf clubs? But if now you're Googling, [and] searching on the Internet, and they can tell:  oh, he looked at the golfclubs that were whatever price. That and then they can sell that information to somebody else: oh hey, he was looking at this in this price range. Well then the targeted advertisements that you're gonna get are probably going to be lying exactly in the price range of products that you were looking at.

Stitzel: So, they're not trying to sell me $5,000 golf clubs?

Barthel: Well, because they know that you…

Stitzel: I didn't click on any of them.

Barthel:…because you didn’t click on them, because they know that you're not going to be willing to pay that much. But maybe, I mean I don't know if they actually do that. But they could essentially offer for the same set of golf clubs, they could offer different prices to different consumers based on what their history was. So, I mean that's --- it does come at a cost for us, because we're revealing information about our willingness to pay, which enables the company to fully extract that willingness to pay from us.

Stitzel: So, there's, sort of, two effects there of the Internet. One would be having a really good sense of what it is that I am willing to pay. So potentially, right, if I'm a if I'm a careless online customer, they can say: well, you know, he thinks these golf clubs are worth $400, and now we'll sell them to them $400. And you're a more conscious customer and you think: O.K. well, these are probably worth $300, and they'll sell them to you for $300.

Barthel: Hmm mmm.

Stitzel: Right. But we probably don't observe that too much, because by now most of us have figured out: O.K., I'm going to go look at all the prices…

Barthel: Right.

Stitzel:…of all the different things. And I was doing that over the weekend looking at, you know, some parts. And I go and, you know, it's like at the end of the day. I don't care where they come from. Like, I need the parts to meet this specific specification. So, I went to site one and I pulled it up, and put it in the checkout basket, and saw all the prices of what I want. Then I went to site two, and then I look for coupons, and all this kind of thing. So, it's like the price competition is absolutely fierce in that kind of setting.

Barthel: Right. But it's because you were willing to go and check, right?

Stitzel: Sure.

Barthel: So again, that's price discrimination. The consumer who is willing to shop around versus the consumer who sees the first thing. And because time is costly, right?

Stitzel: Yeah. Transaction costs, right?

Barthel: Right. Transaction costs. So, some consumers might just click on the first thing that they see and not spend the time searching around. Oh, is this really the best price?

Stitzel: Right. O.K., so we've talked about brands. So now tell us a little bit about this incipient competition idea.

Barthel: Yeah. So, the idea is that sometimes it doesn't necessarily need actual competition, but just if there's a threat of competition that that can already help kind of keep a monopoly in check. So, if you are a company, and you're producing a product, and you're charging very high prices, [then] there's always the chance that consumers are going to move their money elsewhere, right? That instead of buying --- let me think of a good product. I don't know. Instead of buying pricey golf clubs, you are going to play basketball instead, because you can buy a $5 basketball. These sorts of things. So, it doesn't --- often times we may when we're talking about monopolies, we have a rather narrow definition of the market. And I mean, defining a market --- I mean that's a whole another question for itself. That is not as easy as it sometimes comes across. So, the idea is that sometimes we might be defining the market a little bit too narrow. That consumers aren't necessarily hell-bent on buying something from that market, but they might just switch to a completely different product instead. Even if you are a very powerful monopoly in one market, you never know. What if there's going to be a product that makes your product obsolete, or at least not as desirable anymore? So, I mean, even if you are dominant in such a market, there's no guarantee that that demand is always going to be there, right? I mean, you might as we said coming back to the beginning, the monopolist is always going to be constrained by the demand curve for the product. And so, if for whatever reasons consumer preferences change and demand shifts to other products, then that monopoly is going to well, they might still be a monopoly (but again like your makeup example in the beginning), just one with not a lot of demand for it.

Stitzel: So, I want to kind of bring this in for a landing. We're here over an hour now. And the kind of concluding thought I wanted to get from you is: do you think antitrust laws like we talked about in the first podcast --- are those still relevant? Do they need updating? Do we just not worry about monopolies at all, because of some of the ideas that we talked about in the second half of the podcast? Just what's your thought? I know there's probably not, like, a right or wrong answer there. But what's your thoughts on that?

Barthel: I mean, I think given that there are still lots of antitrust cases that are currently happening, and there's constantly that desire of some of those big players and those markets to merge, I think they're not going to go away. So, I think there's still a place for antitrust laws, just because they help keep the market landscape a little bit more competitive in certain markets, right? I mean, yes, there are examples where it takes care of its on its own, and we don't really need to step in. And I guess the way antitrust laws are being interpreted nowadays is not necessarily to avoid monopolies, right? I mean as we said, they/we only do something about monopolies if they cause bad acts, right? So, essentially it's a way of stepping in should a monopoly behave like a bad monopoly. If it's a good monopoly, nobody would bring an antitrust case. Or even if they were, nothing would happen. I mean, they wouldn't be guilty of forming a bad monopoly.

Stitzel: My guest today has been Anne Barthel. Anne, thank you for joining us on the EconBuff.

Barthel: Thanks for having me.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.