Category Archives: monopoly

Don’t Cry for the Former Taxi Monopoly

23 Friday Mar 2018

Posted by in competition, monopoly, Technology, Uncategorized

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It would be odd to argue that innovation is not unequivocally positive, that its costs will exceed its benefits. Certainly there are downsides: human capital invested in the methods and technologies supplanted by an innovation is devalued, jobs may be lost, retraining becomes necessary, and even consumers must get used to new ways of doing things, which is not costless. But most of these costs are temporary. And when an innovation eliminates an incumbent’s monopoly, the former monopolist’s profit ends up back in the pockets of consumers.

People do seem to focus excessively on the downside of innovation without carefully tallying the benefits. For example, this article focuses on the loss of New York City taxi pickups since ride sharing services like Uber and Lyft began to have an impact in 2014. Mark Perry reproduces a chart from that article, which is featured above. The number of monthly taxi rides in NYC has fallen by about one-third since then, from an average of 13+ million to about 9 million in 2017. In fact, Perry reports that the market for taxi medallions has tanked since then as well, with plunging medallion prices and many medallions sold out of bankruptcy and foreclosure. But don’t be too quick to shed tears for a monopoly lost.

The same chart shows the massive upside to ride sharing, as discussed here by Warren Meyer. The size of the total market has nearly doubled, from about 13 million per month to roughly 24 million (adding the two lines together). And it was a quick transition! That’s what happens when real competition is introduced to a market: prices fall and quantity increases, with an attendant increase in the welfare of consumers. That increase always exceeds the loss suffered by the former monopolist or cartel (as the case may be), which was earning excessive profits at the expense of consumers before the innovation had a market impact. And many former taxi drivers have made the switch to ride sharing providers, and they seem to prefer it for the flexibility and autonomy it offers. Yes, the best innovations benefit workers as well as consumers.

Competition can bloom when government opens markets to competitors or when an innovation creates new alternatives for consumers. In the case of ride sharing, both were necessary. For many years, NYC restricted the supply of taxi medallions, which kept taxi fares artificially high. The formal approval of ride sharing services in the city was not uncontested. But once it was approved, consumers took advantage of superior dispatching and payment technologies enabled by their smart phones, as well as security features and rating systems, not to mention lower fares. Again, these developments have contributed massively to consumer well-being, which is ultimately the point of all economic activity. Traditional taxis have to try to keep up. The ride sharing industry has inflicted the kind of creative destruction for which consumers are quite grateful.

Does Google Dominance Threaten Choice, Free Speech and Privacy?

29 Tuesday Aug 2017

Posted by in Censorship, Free Speech, monopoly

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I’ve long been suspicious of the objectivity of Google search results. If you’re looking for information on a particular issue or candidate for public office, it doesn’t take long to realize that Google searches lean left of center. To some extent, the bias reflects the leftward skew of the news media in general. If you sample material available online from major news organizations on any topic with a political dimension, you’ll get more left than right, and you’ll get very little libertarian. So it’s not just Google. Bing reflects a similar bias. Of course, one learns to craft searches to get the other side of a story,  but I use Bing much more than Google, partly because I bridle instinctively at Google’s dominance as a search engine. I’ve also had DuckDuckGo bookmarked for a long time. Lately, my desire to avoid tracking of personal information and searches has made DuckDuckGo more appealing.

Google is not just a large company offering internet services and an operating system: it has the power to control speech and who gets to speak. It is a provider of information services and a collector of information with the power to exert geopolitical influence, and it does. This is brought into sharp relief by Julian Assange in his account of an interview he granted in 2011 to Google’s chairman Eric Schmidt and two of Schmidt’s advisors, and by Assange’s subsequent observations about the global activities of these individuals and Google. Assange gives the strong impression that Google is an arm of the deep state, or perhaps that it engages in a form of unaccountable statecraft, one meant to transcend traditional boundaries of sovereignty. Frankly, I found Assange’s narrative somewhat disturbing.

Monopolization

These concerns are heightened by Google’s market dominance. There is no doubt that Google has the power to control speech, surveil individuals with increasing sophistication, and accumulate troves of personal data. Much the same can be said of Facebook. Certainly users are drawn to the compelling value propositions offered by these firms. The FCC calls them internet “edge providers”, not the traditional meaning of “edge”, as between interconnected internet service providers (ISPs) with different customers. But Google and Facebook are really content providers and, in significant ways, hosting services.

According to Scott Cleland, Google, Facebook, and Amazon collect the bulk of all advertising revenue on the internet. The business is highly concentrated by traditional measures and becoming more concentrated as it grows. In the second quarter of 2017, Google and Facebook controlled 96% of digital advertising growth. They have ownership interests in many of the largest firms that could conceivably offer competition, and they have acquired outright a large number of potential competitors. Cleland asserts that the Department of Justice (DOJ) and the FTC essentially turned a blind eye to the many acquisitions of nascent competitors by these firms.

The competitive environment has also been influenced by other government actions over the past few years. In particular, the FCC’s net neutrality order in 2015 essentially granted subsidies to “edge providers”, preventing broadband ISPs (so-called “common carriers” under the ruling) from charging differential rates for the high volume of traffic they generate. In addition, the agency ruled that ISPs would be subject to additional privacy restrictions:

“Specifically, broadband Internet providers were prohibited from collecting and using information about a consumer’s browsing history, app usage, or geolocation data without permission—all of which edge providers such as Google or Facebook are free to collect under FTC policies.

As Michael Horney noted in an earlier Free State Foundation Perspectives release, these restrictions create barriers for ISPs to compete in digital advertising markets. With access to consumer information, companies can provide more targeted advertising, ads that are more likely to be relevant to the consumer and therefore more valuable to the advertiser. The opt-in requirement means that ISPs will have access to less information about customers than Google, Facebook, and other edge providers that fall under the FTC’s purview—meaning ISPs cannot serve advertisers as effectively as the edge providers with whom they compete.”

Furthermore, there are allegations that Google played a role in convincing Facebook to drop Bing searches on its platform, and that Google in turn quietly deemphasized its social media presence. There is no definitive evidence that Google and Facebook have colluded, but the record is curious.

Regulation and Antitrust

Should firms like Google, Facebook, and other large internet platforms be regulated or subjected to more stringent review of past and proposed acquisitions? These companies already have great influence on the public sector. The regulatory solution is often comfortable for the regulated firm, which submits to complex rules with which compliance is difficult for smaller competitors. Thus, the regulated firm wins a more secure market position and a less risky flow of profit. The firm also gains more public sector influence through its frequent dealings with regulatory authorities.

Ryan Bourne argues that “There Is No Justification for Regulating Online Giants as If They Were Public Utilities“. He notes that these firms are not natural monopolies, despite their market positions and the existence of strong network externalities. It is true that they generally operate in contested markets, despite the dominance of a just few firms. Furthermore, it would be difficult to argue that these companies over-charge for their services in any way suggestive of monopoly behavior. Most of their online services are free or very cheap to users.

But anti-competitive behavior can be subtle. There are numerous ways it can manifest against consumers, developers, advertisers, and even political philosophies and those who espouse them. In fact, the edge providers do manage to extract something of value: data, intelligence and control. As mentioned earlier, their many acquisitions suggest an attempt to snuff out potential competition. More stringent review of proposed combinations and their competitive impact is a course of action that Cleland and others advocate.  While I generally support a free market in corporate control, many of Google’s acquisitions were firms enjoying growth rates one could hardly attribute to mismanagement or any failure to maximize value. Those combinations expanded Google’s offerings, certainly, but they also took out potential competition. However, there is no bright line to indicate when combinations of this kind are not in the public interest.

Antitrust action is no stranger to Google: In June, the European Union fined the company $2.7 billion for allegedly steering online shoppers toward its own shopping platform. Google faces continuing scrutiny of its search results by the EU, and the EU has other investigations of anticompetitive behavior underway against both Google and Facebook.

It’s also worth noting that antitrust has significant downsides: it is costly and disruptive, not only for the firms involved, but for their customers and taxpayers. Alan Reynolds has a cautionary take on the prospect of antitrust action against Amazon. Antitrust is a big business in and of itself, offering tremendous rent-seeking benefits to a host of attorneys, economists, accountants and variety of other technical specialists. As Reynolds says:

“Politics aside, the question ‘Is Amazon getting too Big?’ should have nothing to do with antitrust, which is supposedly about preventing monopolies from charging high prices. Surely no sane person would dare accuse Amazon of monopoly or high prices.“

Meanwhile, the proposed Amazon-Whole Foods combination was approved by the FTC and the deal closed Monday.

Speech, Again

Ordinarily, my views on “speech control” would be aligned with those of Scott Shackford, who defends the right of private companies to restrict speech that occurs on their platforms. But Alex Tabbarok offers a thoughtful qualification in asking whether Google and Apple should have banned Gab:

“I have no problem with Twitter or Facebook policing their sites for content they find objectionable, such as pornography or hate speech, even though these are permitted under the First Amendment. A free market in news doesn’t mean that every newspaper must cover every story. A free market in news means free entry. But free entry is exactly what is now at stake. Gab was created, in part, to combat what was seen as Facebook’s bias against conservative news and views. If Gab or services like cannot be accessed via the big platforms that is a significant barrier to entry.

When Facebook and Twitter regulate what can be said on their platforms and Google and Apple regulate who can provide a platform, we have a big problem. It’s as if the NYTimes and the Washington Post were the only major newspapers and the government regulated who could own a printing press.

In a pure libertarian world, I’d be inclined to say that Google and Apple can also police whom they allow on their platforms. But we live in a world in which Google and Apple are bound up with and in some ways beholden to the government. I worry when a lot of news travels through a handful of choke points.“

This point is amplified by Aaron M. Renn in City Journal:

“The mobile-Internet business is built on spectrum licenses granted by the federal government. Given the monopoly power that Apple and Google possess in the mobile sphere as corporate gatekeepers, First Amendment freedoms face serious challenges in the current environment. Perhaps it is time that spectrum licenses to mobile-phone companies be conditioned on their recipients providing freedoms for customers to use the apps of their choice.“

That sort of condition requires ongoing monitoring and enforcement, but the intervention is unlikely to stop there. Once the platforms are treated as common property there will be additional pressure to treat their owners as public stewards, answerable to regulators on a variety of issues in exchange for a de facto grant of monopoly.

Tyler Cowen’s reaction to the issue of private, “voluntary censorship” online is a resounding “meh”. While he makes certain qualifications, he does not believe it’s a significant issue. His perspective is worth considering:

“It remains the case that the most significant voluntary censorship issues occur every day in mainstream non-internet society, including what gets on TV, which books are promoted by major publishers, who can rent out the best physical venues, and what gets taught at Harvard or for that matter in high school.“

Cowen recognizes the potential for censorship to become a serious problem, particularly with respect to so-called “chokepoint” services like Cloudflare:

“They can in essence kick you off the entire internet through a single human decision not to offer the right services. …so far all they have done is kick off one Nazi group. Still, I think we should reexamine the overall architecture of the internet with this kind of censorship power in mind as a potential problem. And note this: the main problem with those choke points probably has more to do with national security and the ease of wrecking social coordination, not censorship. Still, this whole issue should receive much more attention and I certainly would consider serious changes to the status quo.“

There are no easy answers.

Conclusions

The so-called edge providers pose certain threats to individuals, both as internet users and as free citizens: the potential for anti-competitive behavior, eventually manifesting in higher prices and restricted choice; tightening reins on speech and free expression; and compromised privacy. All three have been a reality to one extent or another. As a firm like Google attains the status of an arm of the state, or multiple states, it could provide a mechanism whereby those authorities could manipulate behavior and coerce their citizens, making the internet into a tool of tyranny rather than liberty. “Don’t be evil” is not much of a guarantee.

What can be done? The FCC’s has already voted to reverse its net neutrality order, and that is a big step; dismantling the one-sided rules surrounding the ISPs handling of consumer data would also help, freeing some powerful firms that might be able to compete for “edge” business. I am skeptical that regulation of edge providers is an effective or wise solution, as it would not achieve competitive outcomes and it would rely on the competence and motives of government officials to protect users from the aforementioned threats to their personal sovereignty. Antitrust action may be appropriate when anti-competitive actions can be proven, but it is a rent-seeking enterprise of its own, and it is often a questionable remedy to the ills caused by market concentration. We have a more intractable problem if access cannot be obtained for particular content otherwise protected by the First Amendment. Essentially, Cowen’s suggestion is to rethink the internet, which might be the best advice for now.

Ultimately, active consumer sovereignty is the best solution to the dominance of firms like Google and Facebook. There are other search engines and there are other online communities. Users must take steps to protect their privacy online. If they value their privacy, they should seek out and utilize competitive services that protect it. Finally, perhaps consumers should consider a recalibration of their economic and social practices. They may find surprising benefits from reducing their dependence on internet services, instead availing themselves of the variety of shopping and social experiences that still exist in the physical world around us. That’s the ultimate competition to the content offered by edge providers.

Administrative Cost Causers

20 Monday Feb 2017

Posted by in monopoly

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messy-desk

Certain enterprises seem plagued by declining productivity and increasing costs, or what is sometimes called the “cost disease”. This includes such areas as education, health care, and infrastructure development. Prompted by a fascinating post by Scott Alexander at Slate Star Codex, John Cochrane boils things down to administrative bloat, sometimes caused by regulation. He also identifies a lack of competition as a cause of the bloat. To that I would add institutional arrangements like third-party payments that create gaps between the scheduled prices established by payers and the user’s willingness to pay. Ryan Bourne at the CATO Institute also comments on Alexander’s post; he presents a framework for analysis but demurs from weighing-in on the causes because the U.S. lacks a proper index of public sector output. He mentions Cochrane’s post, but essentially ignores his contribution to the discussion, which I believe is essential to understanding the phenomenon described by Alexander.

The facts are: 1) costs in K – 12 education have tripled since 1970 (but not the student population), while student achievement has remained flat; as a consequence, productivity in education has declined by two-thirds! Alexander notes, “College is even worse.” 2) The cost of health care has increased by 400% since 1970. While longevity has increased and treatments for many ills have improved, we have not enjoyed a 400% improvement in health care delivery and outcomes, and other developed countries achieve the same outcomes at much lower cost; 3) the cost of new infrastructure has increased drastically in the U.S. Alexander cites the cost of the new subway extension in New York City ($2.2 billion per kilometer) at a cost of about 10 – 50 times that of equivalent projects in other parts of the world. These are just a few examples.

What explains these rampant cost increases? Economists are often tempted to attribute such phenomena to “Baumol’s disease“, which holds that sectors in which productivity is relatively static will experience increasing costs due to advances in productivity in other sectors. A classic example is an orchestra. In the act of playing a particular piece of music, an orchestra today has about the same productivity as an orchestra of 200 years ago (though technology can make musicians more productive in other ways). But as productivity grows for workers in the rest of the economy, their real wages will increase. Musicians, and potential future musicians, will then face a steeper tradeoff in their decision to proceed with musical careers. This tendency will increase their reservation wages as musicians. Moreover, consumers achieving more affluence from their work in other sectors — higher real wages — may demand more concerts, and some of those benefits will flow to members of the orchestra.

Have the orchestra’s costs increased without any corresponding increase in real productivity? Well, that argument isn’t quite cinched, since the real wages of the orchestra members and the real revenue derived from their productivity have both increased. Nevertheless, Alexander presents data showing that the real pay of public school teachers, hospital workers, and most physicians (excepting some specialists) has been stagnant, so at least those crucial labor inputs do not account for the increasing costs. While the pay of construction workers has undoubtedly increased, it cannot plausibly account for the cost increases in infrastructure development. But here is Alexander:

“I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses.”

So what might explain the “cost disease” plaguing these sectors? Alexander discusses, and dismisses, several possible theories, and finally settles on a very partial cause: regulation. From personal experience, I can attest to the bizarre commitment of large pools of talent to regulatory compliance. And there is validity to the argument that this bloat is related to legal risks, which organizations attempt to mitigate by creating layers of controls. Cochrane agrees that the real answer is sometimes related to regulation, but the explanation is much broader:

“The ratio of teachers to students hasn’t gone down a lot — but the ratio of administrators to students has shot up. Most large public school systems spend more than half their budget on administrators. Similarly, class sizes at most colleges and universities haven’t changed that much — but administrative staff have exploded. There are 2.5 people handling insurance claims for every doctor. Construction sites have always had a lot of people standing around for every one actually working the machine. But now for every person operating the machine there is an army of planners, regulators, lawyers, administrative staff, consultants and so on.”

Cochrane shines a light on perhaps the most important reason for administrative bloat: an absence of competition:

“These are all areas either run by the government or with large government involvement. …with not much competition. In turn, however, they are not by a long shot ‘natural monopolies’ or failure of some free market. The main effect of our regulatory and legal system is not so much to directly raise costs, as it is to lessen competition (that is often its purpose). The lack of competition leads to the cost disease.

Though textbooks teach that monopoly leads to profits, it doesn’t. ‘The best of all monopoly profits is a quiet life’ said Hicks. Everywhere we see businesses protected from competition, especially highly regulated businesses, we see the cost disease spreading. And it spreads largely by forcing companies to hire loads of useless people.“

The quote of Sir John Hicks is particularly informative. Protection from competition means that profits are less risky. The protected monopolist’s profits might be limited by social contract, but they are subject to less business risk. Hicks’ observation suggests that monopolists are likely to take a more langourous approach to cost control.

There is another characteristic shared by public education, health care and infrastructure: not only do those enterprises face minimal, if any, competition, but there is a disconnection between the users of those services and the payers. The cost of public education to taxpayers often bears no relationship to their use of the system. The cost of health care is often borne by third-party payers, rather than patients. The users of public infrastructure are seldom asked to cover its costs. So while monopoly is worse than competition, third-party payments free users of the responsibility to make decisions at the margin, short-circuiting the role of consumer incentives in controlling costs. This could manifest in increasing marginal costs, but it is very likely to enable or even require administrative bloat to take place.

Free of competition, and with customers who do not face tradeoffs between usage and price, providers will manage both their services and costs based on rules established by third-parties, and worse, by multiple layers of payers (as when government subsidizes insurers, when employers offer insurance coverage, and when government subsidizes those employers for doing so). Third-party payers are sometimes lacking in information or direct control (e.g., taxpayers). Payers often face incentives that do not promote efficient delivery of services for which they are obligated to pay. The standards by which costs are justified are seldom subjected to a true market test.

If Cochrane is right, that cost disease is driven by administrative bloat, which in turn is often a consequence of regulation, a lack of competition, and third-party payments, then several general solutions suggest themselves: first, regulate lightly; second, promote competition; third, rely on direct, non-subsidized payments by users whenever possible. In education, these guidelines mean giving public schools more autonomy and allowing parental choice. For health care, they mean an end to mandates and regulatory burdens on insurers, employers and providers, allowing consumer choice in selecting health coverage, ending prohibitions on competition in the insurance marketplace, and eliminating tax subsidies. In infrastructure, the guidelines support streamlining the review process for infrastructure projects, avoiding subsidies to over-invest, relying more heavily on user fees to pay for infrastructure, and expanding the role of private developers and operators of infrastructure facilities.

Health Care Devolution and Monopoly

02 Thursday Jun 2016

Posted by in Health Care, monopoly, Obamacare

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Risk Pool

Obamacare and its boosters are trying to come to grips with several new blows. Last month, United Health Care (UHC) announced that it would not participate in the Obamacare exchanges in the 2017 plan year. The announcement offers confirmation that the Affordable Care Act (ACA) is plagued by adverse selection on the exchanges it authorized, and the spiral will only get worse. This is emphasized in “Five Things ACA Supporters Don’t Want You To Know“: other carriers are struggling and will be forced to accept UHC’s adverse risk pool;  premiums must increase; more carriers will bail out; and quality of coverage will continue to decline because the ACA effectively punishes more comprehensive coverage.

Those insurers would have bailed sooner if not for subsidies they’ve been receiving from the federal government on individuals with incomes up to various multiples of the poverty line. However, the funding of a portion of those subsidies was ruled unconstitutional in federal appeals court in May. A deposition from a senior IRS official indicates that the Obama Administration was warned in early 2014 that it had no authority to make the payments, advice that it summarily dismissed. That’s on top of new lawsuits by insurers who say they were shorted by a wide margin on “risk corridor” payments owed to them by the federal government under Obamacare. The risk corridors, which supposedly cover a portion of aggregate losses on health exchange business, will expire after this year, just one the reasons to expect large premium hikes for next year.

As insurers drop out of the Obamacare exchanges, consumers will be forced to deal with a less competitive landscape. About half of the so-called coops on the exchanges had failed by the end of last year. A consequence of this attrition is that the range of coverage available to consumers will shrink:

“One BlueCross BlueShield subsidiary in Virginia has already filed plans to get out of the bronze plan, according to Inside Health Policy, and other insurers will follow suit if BCBS succeeds. That will destabilize the markets further, as one analyst told Leslie Small at Fierce Health Payer, because most of the younger and healthier participants in these risk pools have chosen bronze plans – and would likely bail out rather than pay higher premiums for insurance that they hardly ever use.“

Obamacare also fosters monopolization in the delivery of medical care. A pernicious effect is that local health-care markets are increasingly dominated by a single so-called “non-profit” hospital organization:

“Researchers at Johns Hopkins and Washington and Lee Universities report that seven of America’s 10 most profitable hospitals are officially not for profit. … That status entitles them to huge state and federal tax breaks — whose value has doubled in recent years — for ‘charity care and community benefit.’ …  A for-profit outlet will pay taxes and returns to investors. Nonprofits wind up paying huge sums to executives — and plowing cash into gaining more market share.“

Non-profit status does not preclude monopolistic behavior. These institutions possess:

“… enormous leverage when setting prices and negotiating reimbursement from private insurers — whose hands are tied because they need those hospitals to be part of their network to attract paying customers. … As Dr. Marty Makary of Johns Hopkins wrote in The Wall Street Journal back in 2014: ‘When you’re the only game in town, you call the shots.’“

It’s no coincidence that Obamacare rewards consolidation of health care providers through so-called Accountable Care Organizations (ACOs). That’s helped to drive the disappearance of independent physician practices in recent years. Those physicians are Increasingly employed by hospitals at which they can meet standardized quality measures more easily. The medical establishment maintains that ACOs will “bend the cost curve”… someday. But in the meantime, it’s not happening: the quality measures don’t provide good measures of health outcomes, and they inhibit innovation.

“For one thing, outcomes themselves are not easy to measure. An 80-year-old goes to the doctor with back pain. What is the best outcome? No pain? That’s probably impossible to achieve with even the highest quality care. Less pain? Maybe. But what does that mean and how do you measure it from patient to patient?

Then there is the matter of adjusting those scores for the severity of the disease and the social and economic status of the patient. This matters because low-income patients often struggle to manage their follow-up care or may be unable to afford medications. Such ‘risk adjustment’ is even harder to do with older adults with multiple chronic conditions.“

Even worse, while Obamacare seeks to broaden the market for health care to include those for whom good health coverage is otherwise out of reach, there is evidence that it is not truly improving access to health care. First, the kinds of policies that have been mandated provide relatively “thin” coverage, with high deductibles and copayment rates. Even when subsidized on the exchanges, many of the insured find actual health care payments to be prohibitive. Little wonder that emergency room utilization (where care must be provided regardless of ability to pay) has climbed under Obamacare, contrary to the early assertions of proponents. Second, many of the newly insured are covered by Medicaid, but low physician reimbursement rates have diminished the number of physicians willing to serve that market. Finally, while Obamacare increases the demand for provider services, it does not bring forth its own supply. A provider shortage is expected to continue to grow more severe over the next ten years.

The dual markets for health coverage and health care itself are becoming less competitive under Obamacare. The central planning inherent in the law effectively tossed the most potent forces available for reducing health care costs and expanding coverage: market competition and innovation. Higher prices represent only one avenue for the release of pressures created by mandates; shortfalls in access and the quality of care are others. While the medical establishment and regulators insist that safeguards are in place, it’s a safe bet that monopoly and central planning will have their usual dire effects.