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JOBNAME:Mosca PAGE:4 SESS:5 OUTPUT:WedJun1310:54:172018 ©ManuelaMosca2018 Allrightsreserved.Nopartofthispublicationmaybereproduced,storedina retrievalsystemortransmittedinanyformorbyanymeans,electronic,mechanical orphotocopying,recording,orotherwisewithoutthepriorpermissionofthe publisher. Publishedby EdwardElgarPublishingLimited TheLypiatts 15LansdownRoad Cheltenham GlosGL502JA UK EdwardElgarPublishing,Inc. WilliamPrattHouse 9DeweyCourt Northampton Massachusetts01060 USA Acataloguerecordforthisbook isavailablefromtheBritishLibrary LibraryofCongressControlNumber:2018935720 Thisbookisavailableelectronicallyinthe Economicssubjectcollection DOI10.4337/9781781003718 ISBN9781781003701(cased) ISBN9781781003718(eBook) TypesetbyColumnsDesignXMLLtd,Reading Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:17AM via free access ColumnsDesignXMLLtd / Job:Mosca-Monopoly_power_and_competition / Division:Prelims /Pg.Position:2/ Date:1/6 JOBNAME:Mosca PAGE:5 SESS:5 OUTPUT:WedJun1310:54:172018 Contents Acknowledgements vi Introduction 1 1 The sources of monopoly power in the history of economic thought 5 2 The universal force of competition 36 3 Monopoly power: competition is never perfect 81 4 Monopoly power, competition and reality 121 5 The concept of the state and economic policy 148 Conclusions 186 References 201 Name index 237 v Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:20AM via free access ColumnsDesignXMLLtd / Job:Mosca-Monopoly_power_and_competition / Division:Prelims /Pg.Position:1/ Date:1/6 JOBNAME:Mosca PAGE:6 SESS:5 OUTPUT:WedJun1310:54:172018 Acknowledgements I wish to thank Saiyid Abu Turab Rizvi, Giampaolo Arachi, Corrado Benassi, Elodie Bertrand, Michael Bradley, José Luís Cardoso, Alessan- dra Chirco, Muriel Dal Pont Legrand, Gilbert Faccarello, Riccardo Faucci, Amedeo Fossati, Yasunori Fukagai, Nicola Giocoli, Vitantonio Gioia, Michele Grillo, Marco Guidi, Jan Horst Keppler, Ephraim Klei- man, Atsushi Komine, Heinz Kurz, Cristina Marcuzzo, Luca Michelini, Kayoko Misaki, Antoine Missemer, Fabio Monsalve, Mary Morgan, Nerio Naldi, Antonella Nocco, Guy Numa, Raimondello Orsini, Cosimo Perrotta,EnzoPesciarelli,AnaRosadoCubero,TorstenSchmidt,Fabrizio Simon, David Teira, Gianfranco Tusset, Rob Van Horn, Masazumi Wakatabe,KiichiroYagi,andananonymousrefereeofthejournalRivista Italiana degli Economisti for their helpful comments. Special thanks for their very useful comments go to Michele Giuranno, Bruna Ingrao, Stephen Martin, Michael McLure, Donatella Porrini, Marcella Scrimi- tore, Eugenio Somaini, and Richard E. Wagner who read a draft of the manuscript. The usual disclaimers apply. vi Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:22AM via free access ColumnsDesignXMLLtd / Job:Mosca-Monopoly_power_and_competition / Division:Prelims /Pg.Position:1/ Date:1/6 JOBNAME:Mosca PAGE:1 SESS:5 OUTPUT:WedJun1310:54:172018 Introduction According to modern economics, market power (or monopoly power)1 is ‘the ability of firms to influence the price of the product or products they sell’(Martin 1989, p.16). But what’s the history of this idea? How have theeconomistsofthepastexplainedmonopolypower?Andwhatrolehas this concept played in economic interventionism? I first encountered this question many years ago (Mosca 1998) when studying the work of the engineer-economist Jules Dupuit, who had clearly described some of the causes of market power, apart from the institutional ones.2 It made me wonder where I could find a history of ideas on the sources of monopolypowerand,asIwillexplaininChapter1,itturnedoutthatthis history coincides with the theory of barriers to entry. Histories of thought that focus on entry barriers, however, go no further back than Bain (1956), even though models of monopoly and duopoly date back at least to Cournot (1838). Quite apart from the use of models, the question of the sources of market power has existed in economic theory from the very beginning.3 I myself found a treatise on it inthewritingsofDupuit.Anti-monopolypolicies,too,gobackatleastto theendofthenineteenthcentury:4wasn’titthemonopolypoweroffirms that such policies were designed to counteract? There must therefore have been some historical research focusing on this theme in the great amount of literature dealing with these policies. What emerged, instead, was a gap in the historiography. I was puzzled as to why there were no studies about the history of a category that certainly did not appear out of the blue with Bain in 1956, and I decided it was worthwhile starting to 1 Market power and monopoly power are regarded as synonyms (see Krattenmaker, Lande, Salop 1987). As claimed by Elzinga and Mills (2011, p.560), the ‘provenance of these two terms is obscure’. We consider them synonymous throughout the book, except for Chapters 4 and 5. 2 Dupuit (1854a, p.340) describes the difficulties of entering the transport network market. 3 For a theory of monopoly before the time of Adam Smith (1723–1790), see De Roover (1951). 4 It is well known that the first antitrust legislation was introduced in Canada in 1889, followed by the ShermanAct in the USA in 1890. 1 Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:24AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 00d-IntroductionMMforTS /Pg. Position: 1 / Date:1/6 JOBNAME:Mosca PAGE:2 SESS:5 OUTPUT:WedJun1310:54:172018 2 Monopolypowerandcompetition write one.5 Dealing with the question of monopoly power made it unavoidable to deal also with competition, which is widely studied in the secondary literature. The first aim of this book is therefore to attempt to reconstruct from a historical perspective the theory of market power and the relationship it has with the theory of competition.6 The reason for the choice of four Italian marginalists (Pareto, Pantaleoni, De Viti de Marco and Barone) will be thoroughly explained in the first chapter, while their links and influences will be highlighted in the other chapters. I will argue that these economists should be considered by historiography as a close-knit group constituting Italian marginalism.Thatisthesecondaimofthisbook.IshouldfirstclarifywhyIcall these Italian economists ‘marginalist’ and not ‘neoclassical’. In fact, all four belong to the era of the construction of the neoclassical paradigm, being part of the generation following that of the first marginalists.7 Nevertheless, calling them simply neoclassical would be even less effective for placing them in their period with any degree of precision, because the term neoclassical is still used today to classify microeconomists. It would perhaps be more exact to call them founders of the neoclassical paradigm, or early neoclassical economists. But I will call them marginalists, since the word marginalism was coined in order ‘to cover the acceptance by economists of both marginal utility and marginal productivity’,8 and, as we know, the latter concept was incorporated into economic theory not by the first generation of marginalists, but by the onewearestudyinghere.9InthisdecisiononterminologyIalsohavethe 5 Duringtheresearch,oneofthecausesofmarketpower,namelyeconomies of scale when they lead to natural monopoly, required separate study due to its complexity and its implications. This issue was therefore the subject of an independent study (Mosca 2008). 6 I started dealing with the relation between competition and market power in a work on the Italian late classical liberal economist A. Marescotti (Mosca 2005b). 7 Barucci (1972, p.512) sets 1890 as the date marginalism completed its first inroads into Italy; Screpanti and Zamagni (2005, Ch. 6) gave the title ‘The Construction of Neoclassical Orthodoxy’ to the chapter on the period from the end of the 1800s to the early 1920s. 8 Howey(1973,p.15);accordingtohim,thewordwascoinedbyHobsonin his Work andWealth (1914). 9 Inthecomingchapters,wewillmentiontheroleplayedbyoneofourfour economists (Barone) in founding the theory of marginal productivity. Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:24AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 00d-IntroductionMMforTS /Pg. Position: 2 / Date:1/6 JOBNAME:Mosca PAGE:3 SESS:5 OUTPUT:WedJun1310:54:172018 Introduction 3 supportofthosewhofeelthetermneoclassicalisnotatallappropriateto describe the marginalist theory.10 Deciding the angle to adopt for a research study on the history of thoughtisalwayscomplex;Ifollowedthecriterionofplacingimportance onwhatwasrelevantfortheeconomistsexamined.Istartedfromasound basis of history of analysis; that is, from their ‘pure economics’:11 the third aim of this book is precisely to expand the existing awareness of howextraordinarilyrichandinnovativetheirtheoreticalcontributionwas. However, I will not limit my analysis to the reconstruction and interpret- ation of abstract theories; but will also treat the ideal and political value conveyed by these theories as an integral part of the study, along with the hoped-for effects they were intended to achieve. As we shall see, in the specific case of the four economists at the centre of this research, these external aspects were not only present, but also pervasive and often dominant. The fourth aim of this work is therefore to make an in-depth reconstruction of the historical and political context in which their theories were generated, also focusing on the way they have been applied. This corresponds to my belief that reconstructing exclusively internal history could give the impression that these four economists wrote only for the sake of the advancement of economic analysis: a purely rational reconstruction12 in fact conceals the motives behind the formulation of the theory, although its normative implications may give somepointers.Itisonlyawell-contextualisedapproachthatenablesusto know the aims those theories sought to achieve, and that also provides a key to understanding theoretical passages that are difficult to interpret.13 I wrote this book with the impossible desire to be judged by the authors I’ve dealt with, and with the illusion of hearing them say I’ve 10 InAspromourgos’words, ‘it would be best if the term were now entirely expungedfromthelanguage’(1986,p.269).HealsocitesSchumpeter’scriticism of the term neoclassical (p.266). See also Colander (2000). 11 This is how they defined the new economic theory, and it is also the title of a book by Pantaleoni (1889), who in the Preface writes: ‘This manual is intended as a succinct statement of the fundamental definitions, theorems and classifications that constitute economic science, properly so called, or Pure Economics.Thus,allquestionspertainingtoeconomicart,orPoliticalEconomy, are beyond its scope’(1898, p. vii). 12 We refer here to Blaug’s distinction between rational reconstruction and historical reconstruction, on which see Maas (2013), among others. 13 Thinkforinstanceof‘TheMinistryofProductionintheCollectivistState’ byBarone(1908b),whichcouldbeinterpretedasbeinginfavourofsocialism,if itwerenotforitsauthor’swell-knownpoliticalposition.SeeBradleyandMosca (2014). Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:24AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 00d-IntroductionMMforTS /Pg. Position: 3 / Date:1/6 JOBNAME:Mosca PAGE:4 SESS:5 OUTPUT:WedJun1310:54:172018 4 Monopolypowerandcompetition givenafaithfulreconstructionoftheirthought.Thisbookisforhistorians of economic thought, of economic analysis and of economic policy, for industrial economists, microeconomists, economic historians, and historians in general. PLAN OF THE BOOK Chapter 1 sets the research field and explains the motivations. Chapter 2 deals with the theory of competition in the work of the four identified Italian marginalists. Chapter 3 is devoted to their ideas on monopoly power. Chapter 4 examines the application of these theories and ideas to various aspects of reality. Chapter 5 analyses their vision of the state and of economic policies. The last chapter then offers some concluding thoughts on the results that have emerged from our enquiry. Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:24AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 00d-IntroductionMMforTS /Pg. Position: 4 / Date:1/6 JOBNAME:Mosca PAGE:1 SESS:3 OUTPUT:WedJun1310:54:172018 1. The sources of monopoly power in the history of economic thought1 1.1 INTRODUCTION When was the notion of market power defined? And how has it been explained in the history of economic thought? In this chapter, we distinguish four different fields of enquiry in which to seek a history of ideas on the causes of market power.The first concerns the history of the formalmodelsofprofitmaximisationinimperfectlycompetitivemarkets; the second, competition policies in a historical perspective; the third, the theory of competition in economic thought; and the fourth, the development of the notion of entry barriers.This chapter is of a historiographical character and places this book within the existing panorama of the secondary literature. Moreover, it has been written in the conviction that in the study of economic thought one cannot restrict oneself to simply narrating a history, one must also have some very good reasons for doing so. 1.2 FIELDS OF ENQUIRY The four possible fields of enquiry in which to seek the origins of the notion of monopoly power are to be found within the pre-history and history of industrial economics and competition policies. This is true insofar as market power is the characteristic feature of all imperfectly competitive markets, so the natural place to look to follow its historical 1 A previous version of this chapter was presented to the Conference ‘Histoiredesthéoriesenéconomiepublique’(Paris,10–12December2008),ina seminar at the Dipartimento di scienze economiche e matematico-statistiche, University of Salento (Lecce, 14 January 2009), at the 73rdAnnual Meeting of JSHET, Keio Gijuku University (Tokyo, 30–31 May 2009) and at the 36th Annual Conference of HES, University of Colorado at Denver (Denver, 26–29 June 2009). It was also published as a working paper (Mosca 2009); some ideas presented here are also included in Mosca (2008) and Mosca (2016a). 5 Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:26AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 01-Chapter1MMforTS /Pg. Position: 1 / Date: 16/4 JOBNAME:Mosca PAGE:2 SESS:7 OUTPUT:WedJun1310:54:172018 6 Monopolypowerandcompetition development is in these fields. Nevertheless, as we shall see, also the historiography of the theory of competition will provide various ideas for a history of the sources of market power. 1.2.1 The History of Formal Models The first field of enquiry concerns the attempts to calculate equilibrium prices and quantities in imperfectly competitive markets. The history of these attempts has been reconstructed by many scholars,2 who all agree on the fact that it began with the work of Cournot (1838), followed by Dupuit (1844), Bertrand (1883), Launhardt (1885), Auspitz and Lieben (1889), Edgeworth (1897), Bowley (1924), Hotelling (1929), Chamberlin (1933) and J. Robinson (1933).3 These formal models do not consider entry of new firms, and do not pay much attention to the causes of marketpower,oftentakingthemasgiven.4Thesearethereasonswhythe historiography that focused on profit maximisation models in imperfectly competitive markets has little to say about the causes of monopoly power in economic thought. 1.2.2 The History of Competition Policies The second field of enquiry concerns the history of the theory behind the two main competition policies, namely antitrust policy and regulation.5 2 See, among others, Schumpeter (1954), West (1978), Stigler (1982), Niehans (1990), Ekelund and Hébert (1999), Puu (2002, pp.1–5). 3 The reason I stop at the 1930s is explained further on in section 1.3. 4 Modigliani for example writes that ‘the impossibility of entry is fre- quently at least implicitly assumed in the analysis of oligopoly, following the venerable example of Cournot, with his owners of mineral wells’(1958, p.216). And according to Ekelund and Hébert, among all the ‘pioneers’ they cite, ‘Dupuit alone examined in detail the sources of monopoly’ (1999, p.19, my italics); I have already mentioned this in my Introduction. Clearly, in the models of monopolistic and imperfect competition the cause of market power is explicitly indicated in product differentiation (Hicks 1935). See section 1.2.4.2. 5 ‘The main instruments of competition policy are: antitrust policy, the policyfortheefficiencyoffinancialmarkets,regulation,theproductionofpublic services, the policy for innovations and patents’(Grillo and Silva 1989, p.501); here we restrict ourselves to considering the two main ones. Unless stated otherwise, the translations of quotations are my own. Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:26AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 01-Chapter1MMforTS /Pg. Position: 2 / Date: 6/6 JOBNAME:Mosca PAGE:3 SESS:5 OUTPUT:WedJun1310:54:172018 Thesourcesof monopolypower 7 1.2.2.1 The history of antitrust Since the specific purpose of the firms at which antitrust legislation is directed is that of obtaining and enhancing their own market power, it would be reasonable to expect to find the history of the discovery of the causes of monopoly power by analysing the theories that have inspired antitrust legislation over the years.The developmental history of antitrust policy has been the subject of a great many studies: some of them affirm that in the first decades of its activities antitrust was moved more by political and social considerations than by economic ones;6 others argue the presence of a strong influence of economic theory right from its very beginnings.7 This latter position8 would involve the possibility of reconstructing the development of the ideas on the causes of market power by means of a comprehensive review of the theories behind the antitrust legislation; however, even if one were to accept the most extreme version of this position, we still wouldn’t find the history we are looking for, for various reasons. The first of these is that antitrust does not consider the existence of market power illegal per se,9 but restricts its interest to those cases in which firms, to obtain it, adopt anticompetitive practices.10 So, we in this historiography cannot find a general interest in the causes of monopoly 6 Peritz (1990) cit. in Giocoli (2009). Stigler (1982) was still sceptical about the influence of the economists on antitrust policy. 7 See, for example, Hovenkamp (1989b), Kovacic (1992) and Meese (2003). 8 In the words of Hovenkamp, ‘Antitrust policy has been forged by economicideologysinceitsinception’([1989b]1991,p.136);and‘Theantitrust laws are […] eternally wedded to prevailing economic doctrine’(p.157). 9 However, there are practices considered violations per se that it is held necessarilyprocuremarketpower(andinfactdonotrequireanenquiryintotheir existence); e.g. antitrust has almost always considered price agreements illegal per se, holding them to be clearly a cause of market power. For EU competition policy, the exercise of market power is, in principle, an abuse of a dominant position, although cases where this rule has been applied are rare. I thank S. Martin for this suggestion. 10 These practices consist of: collusive behaviour, mergers and takeovers, monopolisation(intheUnitedStates)orabuseofdominantposition(inEurope). Within the latter, practices excluding rivals take on especial significance. Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:34:26AM via free access Columns Design XML Ltd / Job: Mosca-Monopoly_power_and_competition / Division: 01-Chapter1MMforTS /Pg. Position: 3 / Date: 1/6