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Market Power: Why You Pay More For Products And Services, Get Less, And Earn Less

During his review of the book, "Saving Capitalism: For the Many, Not the Few" by Robert B. Reich, Paul Krugman discussed "market power." This is how monopolies (and oligopolies) affect the prices consumers pay for products and services in the marketplace. Mr. Krugman cited several examples of monopolies (and near monopolies) which consumers (and labor unions) should be aware of. First some background:

"Market power has a precise definition: it’s what happens whenever individual economic actors are able to affect the prices they receive or pay, as opposed to facing prices determined anonymously by the invisible hand. Monopolists get to set the price of their product; monopsonists—sole purchasers in a market—get to set the price of things they buy. Oligopoly, where there are a few sellers, is more complicated than monopoly, but also involves substantial market power."

How economists approached the concept of market power:

"Milton Friedman, in a deeply influential 1953 essay, argued that monopoly mattered only to the extent that actual market behavior differed from the predictions of simple supply-and-demand analysis—and that in fact there was little evidence that monopoly had important effects.Friedman’s view largely prevailed within the economics profession... It’s increasingly clear, however, that this was both an intellectual and a policy error. There’s growing evidence that market power does indeed have large implications..."

Some examples of market power to the detriment of consumers:

"... most Americans seeking Internet access are more or less at the mercy of their local cable company; the result is that broadband is both slower and far more expensive in the US than in other countries. Another striking example involves agriculture, usually considered the very model of a perfectly competitive sector... Monsanto, now dominates much of the sector as the sole supplier of genetically modified soybeans and corn. A recent article in The American Prospect points out that other examples of such dominance are easy to find, ranging from sunglasses to syringes to cat food."

Read about more examples. This blog has discussed in detail the monopolist behaviors by Internet service providers, the lack of competition in key markets, proposed legislation to encourage competition to help consumers, blocking efforts by other politicians, and why consumers in the United States pay more and get slower speeds for broadband. Now you have an idea why the big banks have threatened to withhold campaign donations and lobby against credit unions. The big banks want less competition, so they can raise prices.

If you're feeling squeezed by high prices, you are. Middle-class workers are being squeezed where companies with market power both charge higher prices than otherwise for products and service, and offer lower wages (bold added):

"Other evidence points indirectly to a strong role of market power... there is an extensive empirical literature on the effects of changes in the minimum wage. Conventional supply-and-demand analysis says that raising the minimum wage should reduce employment, but as Reich notes, we now have a number of what amount to controlled experiments, in which employment in counties whose states have hiked the minimum wage can be compared with employment in neighboring counties across the state line. And there is no hint in the data of the supposed negative employment effect. Why not? One leading hypothesis is that firms employing low-wage workers—such as fast-food chains—have significant monopsony power in the labor market; that is, they are the principal purchasers of low-wage labor in a particular job market."

Yet, many politicians claim that raising the minimum wage raises unemployment. Now you know that, a) these politicians are protecting the oligarchs and monopolists; and b) why that isn't true. Think of it this way: in a free country, labor unions are a right by employees to band together to gain some power in  the marketplace; just as corporations band together in industry associations employing lobbyists. No wonder most corporations (and their bought politicians) oppose unions.

It doesn't have to be this way. Most people:

"... tend to think of the drastic decline in unions as an inevitable consequence of technological change and globalization, but one need look no further than Canada to see that this isn’t true. Once upon a time, around a third of workers in both the US and Canada were union members; today, US unionization is down to 11 percent, while it’s still 27 percent north of the border. The difference was politics: US policy turned hostile toward unions in the 1980s, while Canadian policy didn’t..."

Hopefully, this has connected the dots for people wanting to understand what is happening in the economy and why. Thanks to both Mr. Reich and Mr. Krugman. What are your thoughts about market power? About Mr. Reich's book? About Mr. Krugman's book review?


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