The Oligopoly and Crony Employeeism

I posted this chart because my friend Arnold posted it on his Facebook. But, it’s a metaphor for everything in America these days.  Massive companies dominate every industry.  I’d urge everyone to read Professor John Cochrane’s essay on economic growth.  If you want to listen to him talk about it, here is a link to a podcast.  Here is one excerpt:

Higher productivity typically comes from new companies, which displace old companies —and displace the profits of their owners, and the healthy pay and settled lives of their managers and workers. Southwest enters and either displaces the legacy carriers—Pan Am and TWA—or forces wrenching changes for survivors such as American and United. A&P displaced mom and pop stores. Walmart displaced A&P. Amazon may displace Walmart. Nobody likes the process. Everyone needs the results.

Why aren’t we seeing new airlines, new insurance companies, new banks, new anything?

There are a few reasons.  One is that as companies grow, there are internal economies of scale and scope they can take advantage of that smaller companies cannot.  When I was in MBA school, one of the things I learned in microeconomics is that the bigger you can get, the more you can drive marginal costs down.  The lower your marginal costs, the easier it is to fight off competition.

However, there is something else afoot in America that is a game changer.   Government size, tax policy and regulation.  Small companies cannot afford to compete.  If the mega corporation has a cozy relationship with a government bureaucrat, the government bureaucrat can make life difficult for the upstart company.  Just look at the problems Uber and Airbnb are encountering for evidence.  Look at the problems raw milk farmers have.

Dodd-Frank and Sarbanes-Oxley have made the hurdles so high it’s practically impossible to innovate and go public.  Obamacare has squelched innovation in insurance.  Since the forced decision by the FCC on net neutrality, have we seen competition in broadband?  No, we have seen consolidation and some companies exiting the business.

By the way, Warren Buffett owns a large controlling interest in two out of the ten companies. He is smart, knowing that they will just get bigger due to regulation. If you are really curious about how all this works, you need to read Professor George Stigler’s work. He outlines it here.

Government regulations wind up killing competition rather than encouraging it.   You can look to our nation’s capitol, and state capitols for enemy number one as to why there are no new competitors bubbling up to make our lives better and easier-and the cost of goods and services cheaper.

Thanks for the link Insty. I changed the title when my PhD econ professor friend corrected me on Monopsony. So, Crony Employeeism worked better.

  • MartynW

    And not to put too fine a point on it, most of the megacorporations are probably hoping Hillary wins.

    • Rich K

      In 24 hours we will know if all their billions in donations worked.
      God Help us All.
      If not, Buy Guns and ammo.

  • ThoreausVillager

    The article is correct. A major reason why we don’t have new companies challenging the big incumbents in industries like airlines, insurance, banks, etc. is because of the regulatory burden. It drives artificial economies of scale and creates large barriers to entry. The company I work for, a manufacturer, is a large incumbent, and we haven’t had any startup competition in any of the product categories we compete in for the last decade or more due to the reasons i listed above.

    • Gringao

      Bernie Marcus, founder of Home Depot, says it would be impossible to start his company today, too much regulation. Between Dodd-Frank, labor laws and such, no one can do it anymore. We’re poorer for it.

      • Micha_Elyi

        I was at the customer service counter at a local Walmart the other day. The wall behind the counter was almost completely papered over with government licenses and mandated disclosure posters. Too much regulation, indeed.

        • Walmart is in a lot of highly regulated businesses. Pharmacy, banking, lending, glasses, etc.

    • Micha_Elyi

      Hard to imagine a capital-intensive line of business with as many upstart competitors as the airlines.

      • ThoreausVillager

        Sure, in developing countries that are less regulated. They aren’t exactly popping up here in the US (unless you’re talking about contract regionals that are tied to the big guys).

  • Gringao

    The perfect Machiavellian Machine: Preach fire and brimstone about corporate greed, all the while lining your pockets with corporate pelf and running interference for your corporate benefactors while you fleece the proles.

  • rocinante

    Yeah, but the spirit of innovation still lives on. Tesla makes cars in a very tightly regulated market. There are private companies going to outer space. The education market which is very tightly regulated has competitors. Craigslist has decimated the newspaper industry. The craft brewing industry is alive and well and competing with Inbev all the time. Frackers have destroyed the power of OPEC rather spectacularly.

    You want a loan, you don’t have to go to a bank. Go on the Internet and find lenders within your industry group, your ethnicity that probably give you better service than the large banks. The medical tourism industry competes against the medical insurance rather well.

    I understand that government regulations are a major hindrance but American innovation always seems to come up with extraordinary competitors against heavy odds.

    • MartynW

      Thanks! I needed that.

      • rocinante

        Oh come on, you don’t need me to tell you about America. Why do people come to America instead of going to the more awesome countries like Venezuela, Cuba and North Korea? They could go there for their awesome health insurance, education and labor camps but they actually run, swim and smuggle themselves into America. Some even die in the attempt.

        America despite all of its failures remains the place you can succeed. Please don’t tell that to a bureaucrat because they would legislate that out of existence.

    • Rich K

      We can only hope the Queen does not put a stop to all that you say but I’m not assuming anything with her cabal of cronies.

    • I wouldn’t point to Tesla as a poster child for Innovation. See thoughts on them.

      • rocinante

        Elon Musk is an innovator. Indeed he has taken adtvantage of all that the government has to offer through tax breaks, subsidies and other inducements. He has taken advantage of them rather generously, but you have to be rather mad to enter into the car industry especially now. The barriers to entry are phenomenal and you need very deep pockets to enter into the field.

        Yes his cars do blow up but he does have a major impact on the industry. BMW and Mercedes are building fully electric cars. The batteries in the Tesla are amazing pieces of engineering as is the software. He has left his stamp on the industry in a very short time, which is nothing short of amazing.

  • Michael J. Lotus

    Outstanding post, Jeff.
    This is precisely what is killing us.
    Correct diagnosis like this is the only hope of ever finding an effective cure.

  • Rich K

    Which is why all the mega monsters of biz and finance are backing Queen Hillarat.

  • JLPandin

    Government “protects” me from rapacious corporations. Meanwhile, rapacious corporations get richer. And who is protecting me from government?

  • Seph

    Great post, Jeff. Thank you.
    That was a good Econtalk episode too.

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  • erp617

    The left was appalled by the “robber barons” and passed anti-trust laws against them. Apparently Soros et al. who own the media literally (GE>NBC>Comcast> … ) as well as figuratively (the Democrat party) doesn’t qualify as a monopoly.

  • sirpatrick

    I always think of Sarah Palin when I read articles such as this as she was the first one in the political realm to mention the rent seeking ,crony capitalists several years ago and was excoriated for for it.

    • johnbpowers

      But she’s so stupid! Just ask anyone in the media. She’s not smart like Joe Biden.

  • Golden Rule

    You omit Kraft-Heinz, whose United States brands include:

    Back to Nature Meals
    Bagel Bites
    Bakers Chocolate
    Capri Sun
    Cool Whip
    Corn Nuts
    Country Time
    Cracker Barrel Cheese
    Crystal Light
    Grey Poupon
    Jack Daniel’s Sauces
    Kraft Barbeque Sauce
    Kraft Foodservice
    Kraft Mac and Cheese
    Kraft Natural Cheese
    Kraft Salad Dressing
    Kraft Singles
    Lea & Perrins
    Maxwell House
    Miracle Whip
    Mr. Yoshida’s
    Oscar Mayer
    Shake N Bake
    Stove Top
    TGI Fridays
    Weight Watchers Smart Ones

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