Big Business
George Stigler (the case against big business) is anti-big business. He defines big businesses as businesses that are large in size and also large relative to the industries in which they operate. He effectively argues that these types of businesses behave as monopolies to control prices and output and to encourage large government and labor unions. Further, he questions the commonly-held notion that big businesses are more operationally efficient that smaller ones.
With regards to monopoly behavior, Stigler points out that big business control profits though cooperation rather than by competing and use patent licenses to fix prices and limit the output of other companies. In a perfectly competitive market, price is determined by the true forces of market supply and demand; the seller can only control the quantity of goods it produces (Micro). In the long run, the firm maximizes profit or minimizes loss by producing the output where marginal revenue equals marginal cost. A competitive firm’s marginal revenue is the given market price. However, barriers to entry (i.e. legal, sociological, natural, technology factors) prevent perfect competition. Barriers to entry create the potential for long-run economic profit and prevent competitive pressures from pushing price down to average total cost.
There are various flavors of imperfect competition (Micro). At the extreme end of the market structure is a monopoly or a single supplier in the market. Facing a downward sloping demand curve, a monopolist will charge the maximum price that consumers are willing to pay for the quantity it produces. It produces where the marginal cost curve equals the marginal revenue curve, and not where MC equals price. Because price exceeds marginal cost, people’s choices aren’t determined in the way they would be if the market was competitive; they choose to consume less of the monopolist’s output and more of some other output. Thus, the marginal cost of increasing output is lower than the marginal benefit of increasing output, creating a welfare loss. At least in an oligopoly, there are a few competing firms. An oligopolist’s price will be somewhere between the competitive price and the monopolistic price. These types of firms face at prisoner’s dilemma. If one firm lowers its prices, competitors are likely to follow and everyone will see less profits. or, a competitor might hold its price to gain market share. They all stand to gain only by setting prices where everyone earns profits and has a stable market share. In the real world, most firms are monopolistic competitors. There are several competing firms who supply goods, but, unlike perfect competition, they face a downward-sloping demand curve for their differentiated products. The perfect competitor in long-run equilibrium produces at a point where MC – P – ATC. At that point, ATC is at its minimum. On the other hand, a monopolistic competitor produces at the point, MC – MR. Increasing output will lower average cost. Therefore, monopolistic competitors make great efforts to increase their market share.
But, as Stigler explains, big business isn’t any more efficient than small and medium-sized businesses as they engage in mass production. True, big businesses may have economies of scale in their manufacturing processes which lowers their average total costs of production. However, this is countered by their use of buying power to demand lower prices from their suppliers and their operations which do not appear to increase output per worker more than many independent competitors would. Further, big businesses have shown themselves to be inflexible in adapting to changing economic conditions (Corporations in the United States). For example, in the 1970s, U.S. auto manufacturers were slow to respond to changes in consumer demand for smaller, fuel-efficient cars. As a result, U.S. manufactures lost a considerable share of the market to foreign manufacturers.
George Stigler developed the economic theory of regulation in the late 1960s, arguing that, instead of regulation being imposed on industries in genuine democratic efforts to protect consumers, big businesses seek out government regulation in an effort to gain monopoly or cartel powers they cannot obtain by market methods (Edwards, 2002). Historically, big businesses have been responsible for creating most government regulatory agencies that will benefits their interests (Bartlett, 2002). Regulation helps erect barriers to entry for smaller businesses because it serves as an overhead cost that big businesses can more easily absorb than smaller businesses with less revenue. For example, the Federal Communications Commission makes it difficult to get into the radio, television, or telecommunications business and the Food and Drug Administration limits the pharmaceutical industry to a few big businesses that can afford the prohibitive cost of testing drugs. The Civil Aeronautics Board (CAB) was a government agency that regulated the airline industry from 1938 to 1978 (Alden). During this time, it refused to allow a new firm to enter the market despite 150 applications. After President Carter deregulated the airline industry in 1978, fourteen new firms entered the industry within five years and experts believe this produced fares that were much lower than then would have been under regulation.
Finally, Stigler believes that market power by a few companies results in negative labor tensions. During the 1970s, a time when labor was more heavily concentrated in a small number of large corporations, Congress came down more strongly on labor’s side than it did in subsequent decades (Uchitelle, 1989). The 1970s included extensive legislation that set safety and health standards in the workplace, regulated company pension plans to assure that they would be properly funded and supported hikes in minimum wages. and, union membership was twenty-four percent of the total workforce in the 1970s versus seventeen percent a decade later (Uchitelle, 1989). Of course, the higher labor costs driven by government and unions were, like the cost of other government regulations, more affordable for big businesses. The losers were small and medium business who had to cut back on employees and the workers who became unemployed.
In summary, big business means bad business. Big businesses are able to make greater profits than would be possible in a fully competitive market. In a competitive market, production rises to a level where marginal costs equal marginal revenue. but, more monopolistic markets are just concerned with maximizing profit per unit and have no concerns for socially desirable levels of production. Despite economies of scale of large organizations in production, they have negative social costs as well such as having too much control of their suppliers and being too slow to respond to market conditions. Big businesses use their monopolistic power to influence the government to erect barriers to market entry to protect them from the efficiencies of the free market. Further, labor’s fear of the concentration of jobs in big businesses encourages undesirable unionization and government labor laws. For all these reasons, big businesses ought to be dismantled as Stigler suggests.
Bibliography
Alden, L. Competition and market power. http://www.econoclass.com/imperfectcompetition.html
Bartlett, B. (2002, March 27). The Enron template. Natioal Review. http://www.nationalreview.com/nrof_bartlett/bartlett032702.asp
Corporations in the United Stats. U.S. Department of State. http://economics.about.com/od/smallbigbusiness/a/corporations.htm
Edwards, J.R. (2002, March). Do big corporations control America? The Freeman: Ideas on Liberty. Vol 52, No. 3. http://www.fee.org/publications/the-freeman/article.asp?aid=4061
Micro. http://library.thinkquest.org/C004323/low/micro2.html
Stigler, G.J. The case against big business.
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