Monopolies and Antitrust

By Kelvin Tai - Economics and Management Student @ Harris Manchester College, Oxford

With an abundance of venture capital funds, many startups aim to blitzscale, which means that they seek out market share before profitability, growing to immense sizes before turning to profitability. However, the logic behind scaling up has contributed to debates about the harms of monopolies.


Antitrust is not a new concept. The Sherman Antitrust Act was passed in 1890 in response to the rise of monopolies that could fix market prices far greater than the socially efficient cost. The Act was wielded by the US government to break-up behemoth corporations such as Standard Oil, which dominated the oil industry in the early 1900s. The rationale for this is that excessive market dominance allows a company to abuse its position when dealing with other stakeholders such as customers and suppliers. With only one party on a side of the transaction, the price elasticity of demand decreases since customers can only choose to do without a good if they deem the price too high and cannot switch to another provider.


By the Lerner Index (see the further reading for more information), a low-price elasticity translates to a high markup on prices from marginal costs. A dominant position also allows a company to place barriers to entry that prevent new entrants from entering the market and gaining economies of scale, hence protecting the incumbent’s inefficient monopolistic operations. There was also a fear that companies that had too much sway over the economy could influence politics and hence further entrench their market positions through legislation.


However, antitrust legislation in the USA was weakened when Robert Bork’s influence emerged. Writing The Antitrust Paradox, he argued that antitrust laws should only be enforced against companies if such legislative action would lower prices. Monopolies did have the potential to bring about more efficient outcomes, since larger companies could reap economies of scale. This coincided nicely with the rise of internet companies who were in the business of providing free service for individuals while reaping profits from the monetization of data. It became improbable that competition would reduce prices below free and large technology companies could operate with more ease. For instance, little opposition was made when Facebook acquired Whatsapp and Instagram, despite the significant market share these acquisitions accrued to Facebook.


The flip side of excessive antitrust can also be damaging to the economy. T N Ninan writes in his book Turn of the Tortoise that populism by leaders in India have led to a preference for small businesses, which reduced the efficiency gains otherwise available from economies of scale. The OECD reports that in 2005, 87% of manufacturing employment in India were from companies with less than 10 employees. As a result, productivity was hobbled until deregulation was implemented.


With the new Biden administration and a more aggressive Federal Trade Commission Chairperson, Lisa Khan, we could see a paradigm shift in the philosophy behind antitrust and this could have implications for companies beyond the USA and around the world. The fates of large conglomerates may be affected dramatically in the near future.


Further reading:

  1. On the Lerner Index: https://www.jstor.org/stable/41798556

  2. https://www.washingtonpost.com/outlook/five-myths/myths-antitrust-law-amazon-google-monopoly/2020/03/20/ead2a072-6a1a-11ea-9923-57073adce27c_story.html

  3. Wu, Tim. The Curse of Bigness : Antitrust in the New Gilded Age. New York, NY, 2018. Print.

  4. https://www.oecd.org/economy/growth/46286595.pdf

  5. https://www.bloomberg.com/opinion/articles/2021-03-09/antitrust-free-ride-is-over-for-amazon-google-and-facebook