In what sense does Google “hold back” its products?
In this series of short posts I give you my personal opinion (as it is at the moment) and my reasons for this opinion about how good or bad I believe different monopolies to be. I am planning six mini-case studies of monopolies. When I talk about a monopoly in this post I simply mean a firm that has some power over its price: it can choose a lower price and sell a bit more (but not super much more) or a higher price and sell a bit less (but not super much less). A firm with such a power will typically – see a previous post – choose a higher price and sell less than would be Pareto-efficient. And this way such a firm will typically make “abnormally” high profits. While all this is probably true in all six cases, I am, for various reasons, in fact not equally worried about every one of these. I want to discuss the following six “monopoly” cases: Coca-Cola (or Red Bull), Google, Facebook, Scientific Publishers such as Elsevier (possibly also publishers of €100 textbooks such as Pearson), the OPEC cartel of a set of oil producers, and pharmaceutical companies (such as Novartis). This one is about Coca-Cola, and applies equally to Red Bull.
What if you, as a producer or at least seller of some good, face a “flat” demand function? With “flat” demand function I mean any demand function that has a non-infinite slope, that is any demand function where you can vary the price a bit and this does not immediately lead to a demand of more than you can provide (at a slightly lower price) or a demand of zero (at a slightly higher price). This means that in such a case you could choose a price, and different prices will have different consequences for you but also for your consumers.
To fix ideas consider the following situation. You are in charge of a student organization and you are trying to do a bit of fundraising. You are thinking of showing a movie in a university lecture hall at reasonable ticket prices to students. You have convinced the university that they let you have a largish lecture hall with 500 seats for free. You only have to pay for the cleaning cost, which say amounts to €200. You also have to pay for the right to show a movie, which say amounts to €500. You have otherwise convinced some of the other members of the student organization to help with ticket sales, advertising, and other matters, for free. The key question for you is now, what to charge the students for the tickets?
There has been a fair amount of debate about corporate taxes in the econ blogosphere. The debate was framed early on by a cute little exercise on Greg Mankiw’s blog which was supposed to show that, in a small-open economy with perfect competition, a 1 dollar cut in capital taxes raises wage income by more than 1 dollar.
Paul Krugman and others have rightly pointed out that Mankiw’s toy example, its cuteness notwithstanding, provides little to no insight into the real policy debate now going on in the US, because (i) the US is not a small open economy and (ii) there is evidence that much of corporate profits are monopoly rents rather than returns to capital, which casts doubt on the relevance of perfect competition models.
Indeed, there’s a new paper documenting that mark-ups (difference between price and marginal costs) have increased in practically every industry in recent decades. The paper has not yet gone through peer review, so it’s probably wise not to jump to conclusions from it. Nevertheless, it’s useful to think about potential implications.
One of the basic results in public finance is that taxes on rents produce no deadweight loss. So if corporate profits are just monopoly rents, we can tax them away at zero social cost. Right?