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Monopolies Inflict Great Harm on Low- and Middle-Income Americans

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  • James A. Schmitz

Abstract

Today, monopolies inflict great harm on low- and middle-income Americans. One particularly pernicious way they harm them is by sabotaging low-cost products that are substitutes for the monopoly products. I'll argue that the U.S. housing crisis, legal crisis, and oral health crisis facing the low- and middle-income Americans are, in large part, the result of monopolies destroying low-cost alternatives in these industries that the poor would purchase. These results would not surprise those studying monopolies in the first half of the 20th century. During this period extensive evidence was developed showing monopolies engaging in these same activities and many others that harmed the poor. Models of monopoly were constructed by giants in economics and law, such as Henry Simons and Thurman Arnold, to explain these impacts of monopoly. These models are of sabotaging monopolies. Unfortunately, in the 1950s, the economics profession turned its back on this evidence, these models and these giants. It embraced the Cournot model of monopoly, that found in textbooks today. In this model the monopolist chooses its price, nothing more. Gone are the decisions on whether to sabotage substitutes or to employ any of the other weapons at the disposal of sabotaging monopolies. I'll call this Cournot monopoly the toothless monopoly. Using this model, the economics profession has concluded that the costs of monopoly are small. But the toothless monopoly model is ill-equipped to study the "costs of monopoly." By relying on it, the economics profession has made major errors in its study of monopoly.

Suggested Citation

  • James A. Schmitz, 2020. "Monopolies Inflict Great Harm on Low- and Middle-Income Americans," Staff Report 601, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:87988
    DOI: 10.21034/sr.601
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    File URL: https://www.minneapolisfed.org/research/sr/sr601.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Inequality; Monopoly; Cournot; Competition; Harberger; Sabotage;

    JEL classification:

    • K0 - Law and Economics - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L0 - Industrial Organization - - General

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