When is a powerful firm considered a monopoly?
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Listener Anthony Frizzo asks:
What is a monopoly? The [was] only one true comic book distributor in the United States, Diamond Comic Distributors. At some point, the Department of Justice investigated this, but they decided it wasn’t worth pursuing. Is it purely a monetary issue that makes this a problem?
Manufacturers of baby formulas. Grocery retailers. Airlines companies. And even comic book distributors.
Critics of big business say companies like these are becoming more powerful, leading to a host of consumer-damaging issues, such as higher prices, product shortages, and less competition in general.
Between 1997 and 2012, two-thirds of American industries became more concentrated as many companies in those industries grew larger, sometimes through mergers.
But while some of the biggest have been pejoratively labeled “monopolies,” calling them such in the eyes of the law is much more difficult.
To be considered a monopoly, a company must have the power to limit output and raise prices, explained Eleanor Fox, professor of business regulation at New York University School of Law.
“That’s a very difficult standard for a plaintiff to prove,” Fox said.
Not only that, but being a monopoly doesn’t mean what you’re doing is illegal.
Here’s an analogy that antitrust attorney Allen Grunes uses: “If you’re king of the hill, you can’t just kick anyone up the hill. There are more legal niceties, but essentially the conduct that’s illegal is kicking those going up the hill. It’s not being king of the hill.
Proving a company’s behavior is anti-competitive is also difficult because our law is conservative and the Supreme Court majority takes a “libertarian view of markets,” according to Fox.
“For a behavior to qualify as anti-competitive, it must generally increase market power and harm consumers,” Fox explained.
Another misconception people have is that to qualify as a monopoly, a company must be the only seller in the market. But the law does not require it, explained George Hay, professor of economics at Cornell University.
While “monopoly” is based on two Greek words meaning “single seller,” there are actually very few industries with a single source of product, Hay noted.
To determine whether a company has “monopoly power,” lower courts typically require a company to have a minimum market share of between 70% and 80%, according to the Justice Department.
The case of Diamond Comic Distributors
For decades, Diamond Comic Distributors has been the primary comic book distributor, acting as a go-between for Marvel Comics and DC Comics. In 1997, the Department of Justice began investigating the company for alleged anti-competitive practices. But in 2000 he found “allegations of monopolistic practices [were] unjustified.”
Although Diamond may have held a dominant share of comics distribution, the Justice Department instead placed Diamond in the context of book distribution and determined they were too small a player.
“Let’s say I [have] a new comic, and I want to be distributed. What are my options? Is the diamond my only real option? Where can I contact a book distributor? The government seemed to think at the time that anyone who distributed books could also distribute comics,” Hay said.
However, Diamond Comic’s grip has since weakened. Twenty years after the Justice Department’s decision, in June 2020, DC said it was ending its relationship with Diamond and using other distributors for its releases, including Penguin Random House.
The limits of the law
Hay said there were actually not many monopolies, but the situation was different when it came to oligopolies, which are markets with few suppliers.
For example, although he does not view the airline industry as a monopoly, he said there are only a handful of major airlines. Everyone has enough weight to exert influence.
“Antitrust laws are not good for dealing with this situation,” he said.
If a group of airlines got together in a hotel room and decided to fix prices, they could be condemned for it, he explained. But if United once said, “I’m going to raise my prices tomorrow,” and American followed suit, there’s not much antitrust law can do about it, Hay added.
“It’s called market power, not monopoly power. And there is a widespread belief that market power in the economy has increased dramatically over the past 20 years as a result of government-sanctioned mergers,” he said.
Attorney Allen Grunes, who works in Washington, DC, for Brownstein Hyatt Farber Schreck, pointed out that an action such as raising prices is not considered monopolistic behavior under federal law, although some States prohibit it.
In fact, charging as much as you can is “all-American,” Grunes said.
He also noted that antitrust agencies, such as the Federal Trade Commission and the Justice Department’s Antitrust Division, are not particularly interested in “temporary monopoly power” and are instead concerned with monopoly power that “is enduring.” and will last”.
For example, he explained that an agency probably wouldn’t go after a studio that released a hit movie and told theaters they had to show it on their best screen or all their screens to the point that other films were excluded.
Also, predatory pricing or pricing below your costs as part of a “competitor elimination strategy” is a violation of the law, but Grunes said it’s a very difficult violation to prove.
How opinions on monopolies have changed
There’s the infamous case of AT&T, which was branded a monopoly decades ago.
“AT&T in the 1970s absolutely had the power to provide less phone service and raise prices,” Fox said. “Which he did, for example, for long-distance service.”
The Department of Justice filed a lawsuit against the company in 1974, and eight years later the government forced the company out of business. The telecommunications giant ended up transforming into eight small companies.
But after Ronald Reagan took over the presidency, the law became less aggressive, Fox said. She said it was easier to view a company as a monopoly and see that a company was engaging in monopolistic behavior.
The European Union has been more aggressive than the United States in going after, for example, big tech companies, Fox said.
“The United States has really fallen behind, in my opinion, because I think American law is too conservative,” she explained. “In Europe, the norm is dominance, not monopoly.”
To combat market concentration, Hay said the government could be “more vigilant” about mergers.
“I think it’s fair to say there’s been a wake-up call. I think it’s partly a change of administration, but partly…they just didn’t realize the magnitude of the problem,” Hay said.
Grunes agreed, saying we have laws on the books that can deal with the concentration of power. If a merger can create a monopoly or significantly reduce competition, that is a basis for stopping the combination. It’s just that they haven’t been applied enough, he added, because of the difficulty involved.
“A monopoly business is not a low hanging fruit,” Grunes said. “They are resource-intensive and expensive. We must therefore be ready to devote the resources, even if the result is uncertain.
President Joe Biden is trying to beef up antitrust enforcement. He signed an executive order last year to promote competition and target practices he deemed “anti-competitive”.
And the public, not just the government, is taking notice.
In an early 2020 Pew Research survey, more than 80% of American adults said big business wields “too much power and influence in today’s economy.”
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