Knowledge And Decisions

There are two fairly obvious alternative explanations of why one firm or a few firms sell the bulk of the output in a given industry. One is that they in some way exercise “control” over others — either by being able to exclude potential competitors or by intimidating them from competitive pricing by threats to ruin them financially. An opposing explanation is that firms differ in efficiency — whether in production, in the quality of the product, in shipping costs, or in the general quality of their respective managements. Those who argue that concentrated industries represent monopolistic control, in some sense, deny production efficiencies, product quality differences or differences in management. For example, management quality differences are simply assumed away in analyses which proceed as if each firm or plant represents the “best current practice” in its production,⁶³ or that “managerial competence” can be “held equal,”⁶⁴ by observers. Economies of scale are sometimes defined narrowly as individual plant economies — ignoring managerial differences among multiplant corporations, as expressed in such things as how wisely each plant is located, so as to minimize shipping costs of raw materials and finished products and the costs of an efficient labor supply, a favorable economic and political climate, etc. Economies are simply pronounced to be negligible with such phrases as “only 2.7 percent” of production and transportation costs.⁶⁵ But given an average profit rate of 10 percent, a relatively small difference in such costs can translate into the difference between a profit rate that keeps the business viable and one low enough to reduce stockholders’ return to less than they could get by depositing their money in an insured savings and loan association — obviously not a situation that can continue in the long-run. Observers are the last people who can declare what is negligible with someone else’s money.

The alternative hypothesis is that some industries are concentrated because some firms’ products are simply preferred by consumers, either because of their quality, price, convenience or other appeal. If this is true, then the slightly greater profitability of industries with few sellers is not because the whole industry is more profitable (as it would be under collusion), but because some particular firms have a higher profit rate which arithmetically brings up the average, while it economically does not make the rest of the industry any more profitable than under competitive conditions. The data in fact show no profit advantage to a firm of a given size in being in a “concentrated” versus a nonconcentrated industry.⁶⁶

The weakness of the case for believing that industries with few sellers have monopolistic practices or results is indicated by (1) the absence of any evidence generally accepted as convincing by either the legal or the economics profession, (2) the arbitrary definitions and sweeping assumptions included in such evidence as is offered, and (3) the policy position of “deconcentration” advocates that the burden of proof must be put on defendants in concentrated industries to show that they are not harmful to the economy.⁶⁷

Much of the legal and economic analysis of industries where one or a few firms produce and sell most of the output give great weight to the supposed homogeneity of the product, which should presumably preclude any rational basis for a consumer preference that would lead to such disproportionate market shares. However, on closer scrutiny this supposed homogeneity usually turns out to mean that brand-new, perfect specimens of each product as already located are identical or similar. The difference between “similar” and “identical” can involve substantial costs of knowledge, as can the process of locating the product. Among the major ways in which apparently similar products differ is in their durability — that is, their performance long after they have ceased to be brand new — and in their respective quality control, which determines what percentage of the specimens will have flaws, as well as in their distributional availability to the consumer in convenient retail outlets.

In such cases, so-called “expert” testimony can be the most misleading kind of testimony. The expert has, by definition, already paid more cost for knowledge than the average consumer, and so has far lower present or prospective incremental knowledge costs than the consumer. The mere fact that he can render a judgment on the product means that he has already located a place from which to obtain a specimen. That he knows how to produce equivalent results from “similar” products means that he has sufficient knowledge of both products to make them interchangeable to him, although not necessarily to a consumer familiar with only one, and who may perhaps have substantial prospective knowledge costs in changing to the use of the other.