Let's talk about monopoly rents

[oldfart]

WONK WARNING: While a graduate degree in economics is not required to follow this discussion, it doesn't hurt. A familiarity with history of economic thought would be a good idea too. If this is going to give you indigestion, I recommend skipping this thread. If you want to plow on, I'll try to make it as readable as possible. I also think it is worth the effort at the end! [/alert]

I ran across a discussion of a golden oldie which may be making a comeback. In the theory of firm behavior and monopoly is the concept of "monopoly rents". Bear with me a bit because this needs some background.

The granddaddy of modern production functions is that developed by Charles Cobb and Paul Douglas during 1927–1947. They tested it statistically on historical data to come up with the values for the main variables, and along with Leontieff input-output models this is the basis of virtually all work in the field today. And it can't be called Keynesian because it predates Keynesian theory by almost a decade.

The Cobb-Douglas models posits a simple economy where there are two factors of production, labor and capital, which are used to produce a single output (affectionately called "schmoos" in the literature) which is used to produce everything else. So we have a labor market, a capital market, multiple product markets which have schmoos as the only input, and of course a market for schmoos. This is about as simple as you can get in a production function; David Ricardo had three factors of production in his (land, labor, and capital). Hang on to the name Ricardo; you need it later.

The interesting application of the Cobb-Douglas model comes when you compare what happens with it when the product markets are perfectly competitive against what happens when the product markets are monopolies. With a bunch of simplifying assumptions, it turns out that the share of national product going to labor decreases as markets become more monopolistic (no surprise there). But the share going to capital also decreases (i.e. the rate of return on capital investment also decreases). This is not a good thing. Where did the missing portion go?

Bring back David Ricardo. In his model labor received wages, capital received profits, and owners of land received rents. In Ricardo's system, land and rents were the bad guy. Since the supply of land was fixed and ownership was exogenous to the economic system (owners of raw land didn't have to really do anything other than breath and accept money), over time the share of national income going to this "unproductive" class increased. Thomas Malthus extended this analysis to population dynamics and ended up with inevitable poverty for the workers as they kept reproducing as wage rates fell and rentiers became wealthier. If this sounds Marxist, remember that this is a century before Marx. Marx was a Ricardian.

So what does Ricardian rent theory have to do with Cobb-Douglas production functions? Well both are examples of monopoly rents. Classic Ricardian rents are created by the scarcity of land and the independence of land ownership from economic function. With Cobb-Douglas profits are divided into "normal profits" which are returns to capital and "monopoly profits" which are returns to monopoly power. In a purely competitive market, monopoly rents are zero.

I'm finessing another issue here. Monetary theory posits another element, financial capital which has a return called interest. This introduces concepts of time preference and financial (capital) markets. Businesses use financial capital to purchase physical capital. This results in interest being the share of national income going to the owners of financial capital, and because financial markets are assumed to be highly competitive and efficient, the projected rate of return on financial capital should be the same as the projected rate of return on physical capital. In other words, a financial capitalist should get the same return investing his money in financial instruments as he would investing in plant and equipment. This leaves the share of profits to be a "pure" return to entrepreneurship or management skill. So the final model would have income shares going to land (rent), labor (wages), financial capital (interest), management skill (profit), and monopoly power (monopoly rents).

So where does all this lead us? The surmise is that technological change is increasing the role of intellectual property which is a legal monopoly in many cases. Patent and trademark law are basically ways to establish and control legal monopolies. It's also argued that more mundane factors (like "too big to fail") are causing concentration in many markets. And as companies like Apple emerge with virtually no connection to physical production, and the marginal cost of much of what they sell is zero (what really is the marginal cost of the millionth copy of downloaded software?), they charge whatever the market will bear. To them all costs are sunk costs incurred before there is any income (think R & D) and the connection between income and future investment is conjecture. This is monopoly rent.

The reasoning goes that a Cobb-Douglas model in this set of circumstances would predict a falling share of national income to wages, financial capital, and profits and an increasing share to monopoly (market) power. Branding, advertising, and intellectual property litigation, as well as lobbying regulatory agencies and legislatures, come to the fore replacing hiring, training, financing, and investing in physical capital as the means of generating success in business. International competitiveness decreases as income inequality increases. Production, employment, raw resource prices, and national income all decrease or stagnate. Sound familiar?

So is this an adequate explanation of what is happening today? And if so, what can be done to reverse it? What say you?

 

[Kimura]

WONK WARNING: While a graduate degree in economics is not required to follow this discussion, it doesn't hurt. A familiarity with history of economic thought would be a good idea too. If this is going to give you indigestion, I recommend skipping this thread. If you want to plow on, I'll try to make it as readable as possible. I also think it is worth the effort at the end! [/alert]

I ran across a discussion of a golden oldie which may be making a comeback. In the theory of firm behavior and monopoly is the concept of "monopoly rents". Bear with me a bit because this needs some background.

The granddaddy of modern production functions is that developed by Charles Cobb and Paul Douglas during 1927–1947. They tested it statistically on historical data to come up with the values for the main variables, and along with Leontieff input-output models this is the basis of virtually all work in the field today. And it can't be called Keynesian because it predates Keynesian theory by almost a decade.

The Cobb-Douglas models posits a simple economy where there are two factors of production, labor and capital, which are used to produce a single output (affectionately called "schmoos" in the literature) which is used to produce everything else. So we have a labor market, a capital market, multiple product markets which have schmoos as the only input, and of course a market for schmoos. This is about as simple as you can get in a production function; David Ricardo had three factors of production in his (land, labor, and capital). Hang on to the name Ricardo; you need it later.

The interesting application of the Cobb-Douglas model comes when you compare what happens with it when the product markets are perfectly competitive against what happens when the product markets are monopolies. With a bunch of simplifying assumptions, it turns out that the share of national product going to labor decreases as markets become more monopolistic (no surprise there). But the share going to capital also decreases (i.e. the rate of return on capital investment also decreases). This is not a good thing. Where did the missing portion go?

Bring back David Ricardo. In his model labor received wages, capital received profits, and owners of land received rents. In Ricardo's system, land and rents were the bad guy. Since the supply of land was fixed and ownership was exogenous to the economic system (owners of raw land didn't have to really do anything other than breath and accept money), over time the share of national income going to this "unproductive" class increased. Thomas Malthus extended this analysis to population dynamics and ended up with inevitable poverty for the workers as they kept reproducing as wage rates fell and rentiers became wealthier. If this sounds Marxist, remember that this is a century before Marx. Marx was a Ricardian.

So what does Ricardian rent theory have to do with Cobb-Douglas production functions? Well both are examples of monopoly rents. Classic Ricardian rents are created by the scarcity of land and the independence of land ownership from economic function. With Cobb-Douglas profits are divided into "normal profits" which are returns to capital and "monopoly profits" which are returns to monopoly power. In a purely competitive market, monopoly rents are zero.

I'm finessing another issue here. Monetary theory posits another element, financial capital which has a return called interest. This introduces concepts of time preference and financial (capital) markets. Businesses use financial capital to purchase physical capital. This results in interest being the share of national income going to the owners of financial capital, and because financial markets are assumed to be highly competitive and efficient, the projected rate of return on financial capital should be the same as the projected rate of return on physical capital. In other words, a financial capitalist should get the same return investing his money in financial instruments as he would investing in plant and equipment. This leaves the share of profits to be a "pure" return to entrepreneurship or management skill. So the final model would have income shares going to land (rent), labor (wages), financial capital (interest), management skill (profit), and monopoly power (monopoly rents).

So where does all this lead us? The surmise is that technological change is increasing the role of intellectual property which is a legal monopoly in many cases. Patent and trademark law are basically ways to establish and control legal monopolies. It's also argued that more mundane factors (like "too big to fail") are causing concentration in many markets. And as companies like Apple emerge with virtually no connection to physical production, and the marginal cost of much of what they sell is zero (what really is the marginal cost of the millionth copy of downloaded software?), they charge whatever the market will bear. To them all costs are sunk costs incurred before there is any income (think R & D) and the connection between income and future investment is conjecture. This is monopoly rent.

The reasoning goes that a Cobb-Douglas model in this set of circumstances would predict a falling share of national income to wages, financial capital, and profits and an increasing share to monopoly (market) power. Branding, advertising, and intellectual property litigation, as well as lobbying regulatory agencies and legislatures, come to the fore replacing hiring, training, financing, and investing in physical capital as the means of generating success in business. International competitiveness decreases as income inequality increases. Production, employment, raw resource prices, and national income all decrease or stagnate. Sound familiar?

So is this an adequate explanation of what is happening today? And if so, what can be done to reverse it? What say you?

Very well written, Sir!

I like to add a blurb about economic rent, which also includes land and financial rent, which are ultimately taken from productive activity through revenue extraction so to speak. This was very evident to the classical economists. A perfect example would be aristocrats who inherited their fortunes, enjoying massive wealth and leisure, while workers subsisted on what could only be termed as slave wages. With Agriculture becoming less of a factor in the economy, and workers moving to factories, shops and urban areas, this feudal economic distortion was relegated to the dustbin of history.

Land ownership is now viewed as capital along the same lines as industrial and financial capital. Economic rent is financial rent, land rent, and monopoly rent. By its very nature, economic rents makes zero contribution to productivity and is inherently parasitic on the overall economic system in my estimation.

The problem, at the end of the day, is that capitalists are almost pathologically driven to seek economic rent to obtain a higher percentage of value than is given to workers, regardless of any type of productive contribution. As they increase wealth and their percentage of income, they can influence the political process.

I also think problems arise when we assume any and all economic behavior revolves around utility maximization. But I digress, it's time for some coffee. I'd like to discuss this further.

 

[oldfart]

I like to add a blub about economic rent, which also includes land and financial rent, which are ultimately taken from productive activity through revenue extraction so to speak. This was very evident to the classical economists. A perfect example would be aristocrats whom inherited their fortunes, enjoy massive wealth and leisure, while workers subsisted on what could only be termed as slave wages. With Agriculture becoming less of a factor in the economy, and workers moves to factories, shops and urban areas, this feudal economic distortion was relegated to the dustbin of history.

You make a good point about Classical economists attitudes toward feudal "economic distortion". The Classical economists wee waging war on mercantilism and feudalism. They regarded rents as unearned. Land in their view was an an accident of nature. Improvements to land were considered capital. I believe that Adam Smith even wrote of manuring fields as an example of useful agricultural investment. They had two prime examples of land; tillable agricultural land and urban land for factories and worker housing. They respected the capitalist classes that developed the farm land (many were enthusiasts for rural projects!) and built factories, commercial districts, and worker housing. The aristocracy that inherited both land and/or money they had little use for.

Land ownership is now viewed as capital along the same lines as industrial and financial capital. Economic rent is financial rent, land rent, and monopoly rent. By its very nature, economic rents makes zero contribution to productivity and is inherently parasitic on the overall economic system in my estimation.

Realistically there is no way to separate out Classical land rent from the return on land improvements in modern national income accounts, just like there is no way to compute "normal profits" of managers and small businessmen which has been considered as a special case of labor. Arguably a self-employed worker making say $50,000 on a Schedule C is simply getting a return for his or her labor and while this is counted as business income, there is no real profit. I tried to finesse this in the OP with references to returns to management or entrepreneurship. A lot of theorists try to restrict profits to a return for risk-taking and some argue it should tend to zero. I'm not convinced by either argument. I think time has made the land argument relatively moot, but the concept of rent to "unproductive" factors of production is a useful one, especially "monopoly rent" in this case.

The problem, at the end of the day, is that capitalists are almost pathologically driven to seek economic rent to obtain a higher percentage of value than is given to workers, regardless of any type of productive contribution. As they increase wealth and their percentage of income, they can influence the political process.

I think the problem is broader; monopolists seek to maximize their income and in so doing reduce the shares of all other factors, including labor, small business, producers of raw materials, providers of financial capital, and owners of land and natural resources.

 

[Kimura]

I like to add a blub about economic rent, which also includes land and financial rent, which are ultimately taken from productive activity through revenue extraction so to speak. This was very evident to the classical economists. A perfect example would be aristocrats whom inherited their fortunes, enjoy massive wealth and leisure, while workers subsisted on what could only be termed as slave wages. With Agriculture becoming less of a factor in the economy, and workers moves to factories, shops and urban areas, this feudal economic distortion was relegated to the dustbin of history.

You make a good point about Classical economists attitudes toward feudal "economic distortion". The Classical economists wee waging war on mercantilism and feudalism. They regarded rents as unearned. Land in their view was an an accident of nature. Improvements to land were considered capital. I believe that Adam Smith even wrote of manuring fields as an example of useful agricultural investment. They had two prime examples of land; tillable agricultural land and urban land for factories and worker housing. They respected the capitalist classes that developed the farm land (many were enthusiasts for rural projects!) and built factories, commercial districts, and worker housing. The aristocracy that inherited both land and/or money they had little use for.

Land ownership is now viewed as capital along the same lines as industrial and financial capital. Economic rent is financial rent, land rent, and monopoly rent. By its very nature, economic rents makes zero contribution to productivity and is inherently parasitic on the overall economic system in my estimation.

Realistically there is no way to separate out Classical land rent from the return on land improvements in modern national income accounts, just like there is no way to compute "normal profits" of managers and small businessmen which has been considered as a special case of labor. Arguably a self-employed worker making say $50,000 on a Schedule C is simply getting a return for his or her labor and while this is counted as business income, there is no real profit. I tried to finesse this in the OP with references to returns to management or entrepreneurship. A lot of theorists try to restrict profits to a return for risk-taking and some argue it should tend to zero. I'm not convinced by either argument. I think time has made the land argument relatively moot, but the concept of rent to "unproductive" factors of production is a useful one, especially "monopoly rent" in this case.

The problem, at the end of the day, is that capitalists are almost pathologically driven to seek economic rent to obtain a higher percentage of value than is given to workers, regardless of any type of productive contribution. As they increase wealth and their percentage of income, they can influence the political process.

I think the problem is broader; monopolists seek to maximize their income and in so doing reduce the shares of all other factors, including labor, small business, producers of raw materials, providers of financial capital, and owners of land and natural resources.

I really can't find any points of contention. All very good points. I'd like to elaborate on some of my previous posts.

I think utility maximization involves a combination of delusion and what could only be termed a fallacy of composition. People pursuing their own self-interests doesn't create any prosperity in the aggregate, especially when economic rent and lobbying enters the equation. This type of parasitical behavior will eventually devour the host. And when these economic distortions become large enough, these distortions lead to social and political instability which will further exacerbate any of the prevailing economic issues.

Also, if everyone pursues self-interest without any type of restrictions, then issues will manifest themselves at the macro level of the economy since everyone can't succeed in an equal fashion. For instance, inequality creates inefficiency from wealth accruing at the top. The end result being a drag on the economy resulting from demand deficiency in the overall society. We see this in the various boom-bust cycles. Even more problematic, if we look at this from a macro level, we see that those at the very top of the pyramid become net savers accruing rent and the the lower tiers effectively become debtors paying rent so to speak.

If we look at some modern examples, we can see a larger percentage of productivity gains going to the upper echelons of top management, then shareholders, and average workers with zero bargaining power are relegated to the living hell of stagnant wages. They are then forced to maintain any semblance of a decent lifestyle through borrowing, which turns them into debt slaves. If only Hyman Minsky were alive today.....he's probably spinning in his grave.

We are witnessing a real crisis in capitalism. We now see people referring to Marx. Out of all of the things he was dead wrong about, he got economic rent right. Adam Smith also shared similar concerns. Interesting times....

 

[Rshermr]

Outstanding, in my opinion. We need to keep in mind monopoly power, which is too often not considered when discussing capitalist economies. In my mind, I have always believed that monopoly power is what too many in a position of power ignore, either because of ignorance or because of design. And your piece puts it into perspective nicely. I particularly agree with what you had to say about the high tech arena, which was spot on. I spent over 45 years of my life in that arena, where not only are costs made up of start up costs entirely, but in many cases, even those costs are minimal as firms learned to exploit the works of other companies.
Great subject. And very easy to understand. Maybe the credit goes to the author???

 

[oldfart]

I think utility maximization involves a combination of delusion and what could only be termed a fallacy of composition. People pursuing their own self-interests doesn't create any prosperity in the aggregate, especially when economic rent and lobbying enters the equation. This type of parasitical behavior will eventually devour the host. And when these economic distortions become large enough, these distortions lead to social and political instability which will further exacerbate any of the prevailing economic issues.

I think utility maximization is a terrible way to arrive at a theory of derived demand.

1. Utility is defined in a way that is essentially circular reasoning, like "survival of the fittest". Fitness is defined as the ability to survive, so of course the fittest survive, until the environment changes. Likewise if utility is that which we maximize, everyone maximizes utility. Proof by definition is attractive, but it makes the inquiry meaningless.

2. No one has ever been able to demonstrate that useful, non-trivial "social welfare functions" can be aggregated from individual utility function. A famous paper from the 50's demonstrated the problem with perverse effects, such as people who value a good because it is unattainable for most others. I don't know of a formal proof, but I suspect that the aggregation problem is insoluble.

3. Calling it "utility" adds respectability to a concept that is at best value neutral and often distinctly unappetizing. Sixteen year old males seek to maximize chances for sex within the following fifteen minutes while many of the rest of us are maximizing chances to display cruelty, avarice, lust, and any other mortal sins and deviant psychologies we can come up with.

Also, if everyone pursues self-interest without any type of restrictions, then issues will manifest themselves at the macro level of the economy since everyone can't succeed in an equal fashion. For instance, inequality creates inefficiency from wealth accruing at the top. The end result being a drag on the economy resulting from demand deficiency in the overall society. We see this in the various boom-bust cycles. Even more problematic, if we look at this from a macro level, we see that those at the very top of the pyramid become net savers accruing rent and the the lower tiers effectively become debtors paying rent so to speak.

I agree!

If we look at some modern examples, we can see a larger percentage of productivity gains going to the upper echelons of top management, then shareholders, and average workers with zero bargaining power are relegated to the living hell of stagnant wages. They are then forced to maintain any semblance of a decent lifestyle through borrowing, which turns them into debt slaves. If only Hyman Minsky were alive today.....he's probably spinning in his grave.

Again, well put. My familiarity with Minsky is limited to his work on bubbles and the "Minsky moment". Have I missed some of his work?

We are witnessing a real crisis in capitalism. We now see people referring to Marx. Out of all of the things he was dead wrong about, he got economic rent right. Adam Smith also shared similar concerns. Interesting times....

I think that capitalism is always in crisis. I would posit that any institutional arrangement over time will result in an unacceptable concentration of power UNLESS COUNTERBALANCED WITH INTENTIONAL POLICIES. The tendency is for regulated industries to "capture" their regulators, for monopoly power to feed on itself, for economic power to convert part of that power into political power which is then used to gain more economic power. I don't think this is a particularly Marxist insight, but to those who act like the current temporary institutions are somehow ordained by God and immutable, Marxist is an often-used term of derision.

 

[EdwardBaiamonte]

I think that capitalism is always in crisis. I would posit that any institutional arrangement over time will result in an unacceptable concentration of power UNLESS COUNTERBALANCED WITH INTENTIONAL POLICIES. The tendency is for regulated industries to "capture" their regulators, for monopoly power to feed on itself,

dear, you said capitalism is always in crisis because of capture. If you have capitalism there is little or nothing to capture. Capitalism is never in crisis because it is self-correcting.

To get you started: under capitalism business and government are separate, under crony liberalism or socialism they are joined to one degree or another and capture is common or normal. Not so hard is it??

 

[EdwardBaiamonte]

We are witnessing a real crisis in capitalism..

please give us your best example if this
or admit as a liberal you lack the IQ to do so. Thanks

 

[Rshermr]

I think someone is trying to kill this thread. Someone who posts drivel, and is unable to pursue conversation. But then, some are paid to do so. Just bore the hell out of anyone who reads their posts, which is normal.

 

[MikeK]

[...]

So is this an adequate explanation of what is happening today? And if so, what can be done to reverse it? What say you?

My limited agility in the field of economic theory leaves me open to what I've come to believe is an uncomplicated, quick and dirty solution to the entire problem, which is to impose a limit of twenty million dollars on personal assets with (IRS) confiscating all wealth in excess of that amount. This radical action would instantly transform distribution of the Nation's wealth resources from vertical to horizontal.

The machine would continue to pump, only much faster because of vastly increased circulation. There would be no billionaires but many more millionaires, and the monster known as greed would eventually succumb to atrophy as our unemployment level diminished and our presently crumbling infrastructure emerged as a rebuilt model of glowing perfection.

That would be the Second American Revolution.

 

[MikeK]

I think someone is trying to kill this thread. Someone who posts drivel, and is unable to pursue conversation. But then, some are paid to do so. Just bore the hell out of anyone who reads their posts, which is normal.

Use the Ignore feature. It works very well.

 

[EdwardBaiamonte]

impose a limit of twenty million dollars on personal assets with (IRS) confiscating

of course, a liberal will lack the IQ to consider that we are far far far better off because Gates Jobs Edison and Ford did not stop working when their fortunes hit $20 million.

 

[Moonglow]

Ford was a socialists.

 

[EdwardBaiamonte]

Ford was a socialists.

more importantly, if the idiot liberals promised to steal all his money above $20 million he would have promised to close his company.

 

[EdwardBaiamonte]

I think someone is trying to kill this thread. Someone who posts drivel, and is unable to pursue conversation. But then, some are paid to do so. Just bore the hell out of anyone who reads their posts, which is normal.

Use the Ignore feature. It works very well.

yes it works well when you're an idiot liberal who is afraid to debate. Show me a conservative/libertarian who is afraid to debate and makes a million lame excuses not to engage in debate.

 

[Moonglow]

Ford was a socialists.

more importantly, if the idiot liberals promised to steal all his money above $20 million he would have promised to close his company.

surely so, maybe, but Ford was a good enough man to make sure he made a product that the mass populace could afford and pay his workers top wages.
3 things to a happy life;
1. A good cook
2. A good digestion.
3. A good bank account

 

[EdwardBaiamonte]

surely so, maybe, but Ford was a good enough man to make sure he made a product that the mass populace could afford

too stupid of course!! Republican capitalism forces all manufacturers to do that. If they fail they go bankrupt. Get it??

 

[william the wie]

The monopoly rents argument while valid has pretty tight limits on application. In 1959 when the St. Lawrence Seaway opened because of its greater throughput we almost saw NYC and Chicago go under and eventually we did see Detroit go under. The Illinois canal made Chicago the connector of the great lakes and Mississippi while the Erie canal was the Great Lakes and Atlantic connector. Prior to 1959 monopoly rents were seen from the Western Shore of Lake Superior to the Atlantic coast. now they are fading. The same is true about IP monopoly rents due to the product life cycle as newspaper chains worldwide can testify to and broadcast TV is likely to follow the same route. The value of IP is dropping all of the time as witness CDs and DVDs.

So while valid this argument has ever shorter shelf lives.

 

[oldfart]

The monopoly rents argument while valid has pretty tight limits on application. In 1959 when the St. Lawrence Seaway opened because of its greater throughput we almost saw NYC and Chicago go under and eventually we did see Detroit go under. The Illinois canal made Chicago the connector of the great lakes and Mississippi while the Erie canal was the Great Lakes and Atlantic connector. Prior to 1959 monopoly rents were seen from the Western Shore of Lake Superior to the Atlantic coast. now they are fading. The same is true about IP monopoly rents due to the product life cycle as newspaper chains worldwide can testify to and broadcast TV is likely to follow the same route. The value of IP is dropping all of the time as witness CDs and DVDs.

So while valid this argument has ever shorter shelf lives.

You make a really good point! I hadn't given much thought to the lifespan of the underlying property. It seems to me that there are three trends which work in the opposite direction, lengthening the period the assets can generate monopoly rents and creating new property to generate those rents.

First is the legal system. It's no accident that intellectual property law has developed from a stodgy old "patent law" specialty into the cutting edge of the legal profession. Now the trick is to be able to parse Supreme Court decisions from last week to determine what naturally occurring DNA is non-patentable and what unique laboratory created DNA is. This with one justice writing in his separate opinion that he agrees with the majority in result, but doesn't understand enough of the science to join in supporting the reasoning!

My younger son is a PhD research chemist for PPG. He "watches paint dry". His first project for them was to try to find an alternative to a Japanese company's process patent because PPG thought it was cheaper to develop the alternative than pay the licensing fee. Of course the Japanese patent is published through the USPTO so it's easy to check out and then tweak into something "different". But all this is expensive, very expensive. It's a game that multi-billion dollar multinationals can play, but little companies with mere hundreds of millions are effectively locked out. They can't afford the litigation. This is the norm in commercial law today; it doesn't matter how strong your case is, it matters if you have the resources and determination to spend the money required to "bury" the opposition in expensive litigation. So we now have monopoly rent to legal positions!

Second, and overlapping is branding. Take your patent law firm, make an appointment with the guy down the hall in trademarks and copyrights, tweak the game plan, rinse and repeat. Look at what McDonald's did; trademark everything! (I raise you a Hamburgler and six Fry Guys!) Throw a few million a month into advertising for brand recognition for a few decades and see how many new competitors are in a position to take a run at your market position.

Third is lobbying; not Congress but the staffers who actually write the legislation and the regulatory agencies that write the rules. Throw in a nice job offer when they retire from public service. Hell, Abramoff was promising them jobs a year or two BEFORE they left government. How sympathetic was the treatment his clients got? "The return on investment will always be higher on the dollar spent on lobbying."

The common denominator of these strategies is money. They take lots of money. Large organizations have more money and use it to get more money. The twist is that now the way to get more money is to create monopoly power and create a self-reinforcing feedback. Is it getting better or worse? Good question.

 

[Rshermr]

The monopoly rents argument while valid has pretty tight limits on application. In 1959 when the St. Lawrence Seaway opened because of its greater throughput we almost saw NYC and Chicago go under and eventually we did see Detroit go under. The Illinois canal made Chicago the connector of the great lakes and Mississippi while the Erie canal was the Great Lakes and Atlantic connector. Prior to 1959 monopoly rents were seen from the Western Shore of Lake Superior to the Atlantic coast. now they are fading. The same is true about IP monopoly rents due to the product life cycle as newspaper chains worldwide can testify to and broadcast TV is likely to follow the same route. The value of IP is dropping all of the time as witness CDs and DVDs.

So while valid this argument has ever shorter shelf lives.

You make a really good point! I hadn't given much thought to the lifespan of the underlying property. It seems to me that there are three trends which work in the opposite direction, lengthening the period the assets can generate monopoly rents and creating new property to generate those rents.

First is the legal system. It's no accident that intellectual property law has developed from a stodgy old "patent law" specialty into the cutting edge of the legal profession. Now the trick is to be able to parse Supreme Court decisions from last week to determine what naturally occurring DNA is non-patentable and what unique laboratory created DNA is. This with one justice writing in his separate opinion that he agrees with the majority in result, but doesn't understand enough of the science to join in supporting the reasoning!

My younger son is a PhD research chemist for PPG. He "watches paint dry". His first project for them was to try to find an alternative to a Japanese company's process patent because PPG thought it was cheaper to develop the alternative than pay the licensing fee. Of course the Japanese patent is published through the USPTO so it's easy to check out and then tweak into something "different". But all this is expensive, very expensive. It's a game that multi-billion dollar multinationals can play, but little companies with mere hundreds of millions are effectively locked out. They can't afford the litigation. This is the norm in commercial law today; it doesn't matter how strong your case is, it matters if you have the resources and determination to spend the money required to "bury" the opposition in expensive litigation. So we now have monopoly rent to legal positions!

Second, and overlapping is branding. Take your patent law firm, make an appointment with the guy down the hall in trademarks and copyrights, tweak the game plan, rinse and repeat. Look at what McDonald's did; trademark everything! (I raise you a Hamburgler and six Fry Guys!) Throw a few million a month into advertising for brand recognition for a few decades and see how many new competitors are in a position to take a run at your market position.

Third is lobbying; not Congress but the staffers who actually write the legislation and the regulatory agencies that write the rules. Throw in a nice job offer when they retire from public service. Hell, Abramoff was promising them jobs a year or two BEFORE they left government. How sympathetic was the treatment his clients got? "The return on investment will always be higher on the dollar spent on lobbying."

The common denominator of these strategies is money. They take lots of money. Large organizations have more money and use it to get more money. The twist is that now the way to get more money is to create monopoly power and create a self-reinforcing feedback. Is it getting better or worse? Good question.

Thanks so MUCH for boiling part of the MONOPOLY issue into something understandable. Those who do not want to believe monopoly is a problem are brain dead, or simply bought and paid for. They will argue that monopoly in any commercial form is of no concern. Your explanation helps those who would actually like to THINK by providing the raw materials to do so: Facts and explanations of cause and effect.
Nice.

At some point, we should discuss the monopoly issue as it relates to the drug industry and health care costs in general. Anyone game to try to define the issue??