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New and Larger Costs of Monopoly and Tariffs

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  • James A. Schmitz

Abstract

Fifty-eight years ago, Harberger (1954) estimated that the costs of monopoly, which resulted from misallocation of resources across industries, were trivial. Others showed that the same was true for tariffs. This research soon led to the consensus that monopoly costs are of little significance?a consensus that persists to this day. This paper reports on a new literature that takes a different approach to the costs of monopoly. It examines the costs of monopoly and tariffs within industries. In particular, it examines the histories of industries in which a monopoly is destroyed (or tariffs greatly reduced) and the industry transitions quickly from monopoly to competition. If there are costs of monopoly and high tariffs within industries, it should be possible to see those costs whittled away as the monopoly is destroyed. In contrast to the prevailing consensus, this new research has identified significant costs of monopoly. Monopoly (and high tariffs) is shown to significantly lower productivity within establishments. It also leads to misallocation within industries: Resources are transferred from high- to low-productivity establishments. From these histories, a common theme (or theory) emerges as to why monopoly is costly. When a monopoly is created, ?rents? are created. Conflict emerges among shareholders, managers and employees of the monopoly as they negotiate how to divide these rents. Mechanisms are set up to split the rents. These mechanisms are often means to reduce competition among members of the monopoly. Although the mechanisms divide rents, they also destroy them (by leading to low productivity and misallocation).

Suggested Citation

  • James A. Schmitz, 2012. "New and Larger Costs of Monopoly and Tariffs," Economic Policy Paper 12-5, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmep:12-5
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    References listed on IDEAS

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    1. Klaus Abbink & Jordi Brandts & Benedikt Herrmann & Henrik Orzen, 2010. "Intergroup Conflict and Intra-group Punishment in an Experimental Contest Game," American Economic Review, American Economic Association, vol. 100(1), pages 420-447, March.
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    6. Boldrin,Michele & Levine,David K., 2010. "Against Intellectual Monopoly," Cambridge Books, Cambridge University Press, number 9780521127264, December.
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    9. James A. Schmitz Jr., 2005. "What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 582-625, June.
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    Cited by:

    1. Herkenhoff, Kyle & Raveendranathan, Gajendran, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," IZA Discussion Papers 12836, Institute of Labor Economics (IZA).

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