Antitrust

Rothbardian Monopoly Theory

Economist Murray N. Rothbard (1926–1995) made several important contributions to monopoly theory that have been ignored by mainstream industrial organization theorists. His views on monopoly and on the impossibility of “competitive prices” and “monopoly prices” (in a free market) challenge the mainstream neoclassical position and are at variance with those of his fellow Austrian economists as well.

Rothbard argues that it may be confusing (and even absurd) to define monopoly as “the control over the entire supply of some commodity or resource,” a common definitional approach in neoclassical and Austrian circles. This definition is inappropriate since the slightest consumer-perceived difference between different units of some commodity or resource (with respect to location for example), would then mean that each seller is a “monopolist.”1 But even if this were an appropriate definitional approach, the entire notion of monopoly price in a free market is untenable according to Rothbard. He argues that any acceptable theory of monopoly price is itself conditional on an independent determination of a competitive price against which the monopoly price might be compared. For Rothbard, however, any independent determination of a competitive price in a free market is impossible. Free markets contain only free-market prices.2

Competitive prices in the orthodox literature have usually been associated with marginal cost pricing, particularly under conditions of long-run equilibrium. For Rothbard, however, such prices are meaningless and irrelevant since they are associated with a static equilibrium condition that could never actually exist, and would not necessarily be optimal even if it did exist. In any actual market situation, all sellers have some influence over price, and market information is never perfect. In all real markets, sellers face a sloped demand curve, not the perfectly elastic demand curve associated with atomistic competition. Thus, all market pricing is free-market pricing whether it is accomplished by many small sellers or by a few firms with significant market share. Competitive prices are as fictitious as the medieval notion of the “just” price.

It has been common to define a monopoly price as that price accomplished when output is restricted under conditions of inelastic demand, thus increasing the net income of the supplier. Rothbard argues, however, that there is no objective way to determine that such a price is a monopoly price or that such a restriction is antisocial. All we can know is that all firms attempt to produce a stock of goods that maximizes their net income given their estimation of demand. They attempt to set the price (other things being equal) such that the range of demand above their asking price is elastic. If they discover that they can increase their monetary income by producing less in the next selling period, then they do so.

Rothbard maintains that to speak of the initial price as the competitive price, and the second-period price as the monopoly price makes no objective sense. How, he asks, is it to be objectively determined that the first price is actually a competitive price? Could it, in fact, have been a “sub-competitive” price? Presumably even atomistic firms can make mistakes and produce too much.3 If they do they must restrict production in the next period and market price may increase; but this does not mean that the second price is a monopoly price. Indeed, the entire discussion makes no rational sense since there are no independent criteria that would allow such determinations. All that can be known for sure, Rothbard argues, is that the prices both before and after any supply change are free-market prices.

In addition, the negative welfare implications concerning alleged monopoly prices would not follow even if such prices could exist. Since the inelasticity of demand for Rothbard is “purely the result of the voluntary demands” of the consumers, and since the exchange (at the higher price) is completely voluntary anyway, there is no unambiguous way to conclude that any supply restriction reduced social welfare.

Rothbard has been severely critical of orthodox utility and welfare analysis.4 The conventional wisdom in antitrust, among both reformers and traditionalists, has been to assert that business agreements such as price-fixing ought to be prohibited since they tend to reduce consumer welfare and lower social efficiency. For Rothbard, however, the costs and benefits associated with exchange are personal and subjective, and do not lend themselves to any cardinal measurement or aggregation. He holds that there is no unambiguous manner by which the costs for consumers and the benefits for producers (or vice versa) might be totaled up across various markets, and then compared to make a determination as to whether a business agreement is socially efficient or not. Indeed, the entire notion of social efficiency is a myth for Rothbard.5 Individual consumer and producer utility and surplus may exist, but these notions cannot be mathematically manipulated to allow any regulatory rule-of-reason judgments.

Rothbard’s criticism of conventional and Austrian monopoly theory allows him to conclude that monopoly can be best defined as a grant of special privilege from government that legally reserves “a certain area of production to one particular individual or group.”6 This definition of monopoly is historically relevant and unambiguous in Rothbard’s judgment. It is historically relevant since it is the original meaning of the term in English common law, and much of this sort of monopoly still survives today. It is unambiguous since such an approach allows a clear distinction to be made between free-market prices and monopoly prices. Free markets—that are either rivalrous or cooperative in varying degrees—can only give rise to free-market prices. On the other hand, monopoly prices can arise whenever government legally restrains trade. Presumably an unambiguous antimonopoly policy would conclude that all such privileges, including orthodox antitrust policy itself which restrains free trade, be abolished.

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7Rothbard, Man, Economy, and State, pp. 590–91.

8Ibid., pp. 604–05.

9Ibid., p. 607.

10Murray N. Rothbard, Toward a Reconstruction of Utility and Welfare Economics (New York: Center for Libertarian Studies, 1977).

11Murray N. Rothbard, “The Myth of Efficiency,” in Mario Rizzo, ed., Time, Uncertainty, and Disequilibrium (Boston: D.C. Heath, 1979), pp. 90–95.

12Rothbard, Man, Economy, and State, p. 591.

• 1Dominick T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure, 2nd ed. (Oakland, Calif.: Independent Institute, 1990).
• 2Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978); Yale Brozen, Concentration, Mergers, and Public Policy (New York: Macmillan, 1982); Fred L. Smith, Jr., “Why Not Abolish Antitrust?” Regulation 7 (January/February 1983): 23–28; Frank H. Easterbrook, “The Limits of Antitrust,” Texas Law Review 63 (August 1984): 1–40; Fred S. McChesney, “Law’s Honor Lost: The Plight of Antitrust,” Antitrust Bulletin 31 (1986): 359–82; William Shughart II, The Organization of Industry (Homewood, III.: Richard D. Irwin, 1990); and Fred S. McChesney and William F. Shughart II, The Causes and Consequences of Antitrust (Chicago: University of Chicago Press, 1995).
• 3See, for example, Bruce L. Benson, M.L. Greenhut, and Randall G. Holcombe, “Interest Groups and the Antitrust Paradox,” Cato journal 6 (Winter 1987): 801–18; or William Baumol and Janusz Ordover, “Use of Antitrust to Subvert Competition” journal of Law and Economics 28 (May 1985): 247–65.
• 4See, for example, Thomas J. Dilorenzo and Jack C. High, “Antitrust and Competition, Historically Considered,” Economic Inquiry 26 (July 1988): 423–35.
• 5See, for example, Phillip Areeda, Antitrust Analysis: Problems, Text, Cases, 2nd ed. (Boston: Little, Brown, 1974); or F.M. Scherer, Industrial Market Structure and Economic Performance, 2nd ed. (Boston: Houghton Mifflin, 1980).
• 6In the Matter of the Borden Company, 381 FTC 130 (1958); Borden Company v. FTC, 381 F. 2nd 175 (1967).
• 7Many of the arguments I develop and cases I discuss in this book will be familiar to readers of my Antitrust and Monopoly. New readers who find these ideas stimulating—or infuriating—may wish to pursue some of them in greater depth elsewhere. I intend, with this revised edition of Antitrust: The Case for Repeal, to reach a wider audience and to promote a greater public understanding of the case against antitrust regulation. Such an understanding still appears necessary.
• 8Many of the arguments I develop and cases I discuss in this book will be familiar to readers of my Antitrust and Monopoly. New readers who find these ideas stimulating—or infuriating—may wish to pursue some of them in greater depth elsewhere. I intend, with this revised edition of Antitrust: The Case for Repeal, to reach a wider audience and to promote a greater public understanding of the case against antitrust regulation. Such an understanding still appears necessary.
• 9The alleged paradox can be explained in several ways. One approach is to challenge the “public interest” origins of antitrust policy. If the laws were originally meant to protect less efficient business organizations from competition rather than to promote the interests of consumers, then there is no paradox. From that perspective, antitrust regulation is just another historical example of protectionist rent-seeking legislation, the overall effect of which is to lessen economic efficiency.
• 10It can also be argued that there has traditionally existed serious theoretical confusion over the meaning of “competition.” That confusion may have misled the courts and the administrators of antitrust law. For example, when a firm lowers its price, is that competition or an attempt to monopolize? When a firm gains market share, is that evidence of efficiency or a threat to competition? When business mergers are restricted by law, is competition enhanced or restrained? When a firm engages in expensive research and innovation that competitors cannot easily duplicate, is that monopolization? Faulty theorizing on these issues could explain a public policy attack on economic efficiency in the name of preserving competition.
• 11The structure-conduct-performance perspective became the primary intellectual justification for traditional antitrust policy in the 1950s and 1960s. Within that framework, several classic antitrust cases were brought to curb price discrimination, tying agreements, increasing industrial concentration, and the “exclusionary” practices and high market share of United Shoe Machinery and International Business Machines.
• 12The structure-conduct-performance perspective became the primary intellectual justification for traditional antitrust policy in the 1950s and 1960s. Within that framework, several classic antitrust cases were brought to curb price discrimination, tying agreements, increasing industrial concentration, and the “exclusionary” practices and high market share of United Shoe Machinery and International Business Machines.