Coercive Monopolies in Technical Markets (Intro)

From: Jeff Bone (
Date: Fri Apr 13 2001 - 12:06:16 PDT wrote:

> Guess what? Unexpected philosophical conseuqences are what it's all about.
> You'll never get away from the fact that balancing acts--between openness and
> privacy, freedom and responsibility, and all the rest--are just that,
> balancing acts. Equilibrium is always temporary. Hence the need for librium.
> T

Here's the summary: most critiques of antitrust by laissez-faire
advocates proceed from the premise that the market itself ---
specifically the capital market --- works to self-regulate and
prevent the possibility of naturally occurring coercive monopolies.
The argument tends to be that, whenever in history we have *had*
coercive monopolies, they are the result of other kinds of gov't
interference --- franchises, subsidies, etc. (Cases: railroads,
phone and other public utilities, various kinds of mining monopolies,
etc.) The theory is that these subsidies &c in fact *create*
coercive monopolies, and that antitrust is a bandage on a
self-inflicted wound. The free-marketers argue that without this
gov't protected freedom from competition, capital markets would
invest in competitive interests any time a dominant player's prices
made it effective to do

I buy that argument --- mostly --- for tangible, production-oriented
markets. It works well when your economics speak about buying
plants, hiring workers, procuring raw material, producing goods, and
distributing product. The problem is that this clearly does not work
in the presence of several other variables which are particularly
important to technical markets: integration costs, switching costs,
network effects, lock-in, interrelatedless of various products,
distribution chain integration, interoperability, etc. In technical
markets, these things quickly add up to huge barriers-to-entry; this
inhibits the availability of capital for competitive interests...
and the cycle continues, with the net result that coercive monopolies
are naturally possible in technical markets. I leave open the
question of whether such monopolies are naturally self-limiting;
whether the "Microsoft situation" will eventually fix itself is
debatable, the more interesting question being whether our existing
laws encourage development of such monopolies, and how to avoid them
in the future.

It's worth going back to the initial premise of the laissez-faire
thinkers: coercive monopolies result from gov't interference in the
normal progress of economics. In most cases of technical monopolies,
it's not immediately obvious what the particular gov't interference
that enabled the monopoly might be. Or is it?

It's become my belief that various forms of gov't franchise, combined
with particular weaknesses in our law and its underlying philosophy,
act to enable coercive monopolies in technical markets.
Particularly, our intellectual property laws (patents, copyright,
etc.) act as a form of gov't franchise to accelerate and solidify the
naturally-occurring lock-in you get in technical markets.
Particularly pernicious: government-mandated standardization on
certain technologies, when those things are proprietary and protected
by gov't IP franchise.

In the coal business, all you need to compete with BigCoalCo is a new
source of coal; in the soap business, all you need to compete with
BigSoapCo is a new soap formula; but in the operating systems
business, for instance, to compete in the enterprise desktop market
today you have to have --- Windows. (Note that Linux, despite its
market capture success, cannot truly be viewed as a competitor as it
is not competing with Windows on an economic basis: it's free.)
Imagine if our gov't were to grant exclusive license to BigCoalCo for
all coal production; clearly, that's a bad idea! Yet our current IP
laws have just that effect. Something is rotten in Denmark.

It is clear that Microsoft's monopoly is fundamentally different from
the previous monopolies that (perhaps wrongly) led to the Interstate
Commerce Act and the Sherman Antitrust Act. The surprising
consequence of asking how Microsoft (and similar technical
monopolists) achieved its monopoly is the discovery of (yet another)
smoking gun, more evidence of the weaknesses inherent in applying our
existing notion of property rights and laws to intangible assets.

So here's the start of the argument: in order to avoid coercive
monopolies in technical markets, we must seriously rethink the "why"
and "how" of property laws for intangible assets. That pains me
greatly as an advocate of strong property rights. In order to
understand why we must do this, we have to have a better economic
model, one more suited to the digital economics of our current world.
The days of factory economics based on raw materials, production
costs, capital costs, distribution costs, and so on are over. The
new model must take into account such things as increasing returns,
network effects, and integration / switching costs.

Ta for now,


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