Lina Khan Needs to See ‘Shark Tank’
Kevin O’Leary would never invest in a business that had to face conditions of ‘perfect competition.’
By Richard B. McKenzie, WSJ
July 26, 2023 6:05 pm ET
On “Shark Tank,” celebrity venture capitalist Kevin O’Leary often grills contestants on their potential monopoly pricing power. It seems his fondest aspiration that contestants convince him their products will be practically alone in their markets, protected by entry barriers such as patents and proprietary know-how. Mr. O’Leary appears to see such market restrictions as a key to his investment decisions.
Federal Trade Commission Chairman Lina Khan would be aghast. Ms. Khan tightly adheres to the idea that monopolies are always bad. She believes that powerful firms can undercut their competitors through so-called predatory pricing to achieve market dominance, as she has argued Amazon has done. Once they have control of a market, the theory runs, monopolies can raise prices to boost profits.
Never mind that in reality Amazon has a gazillion dedicated customers who search out good deals from millions of sellers worldwide. Antitrust enforcers seemingly can’t abide such a large company. Ms. Khan has even proposed restricting the deals available to buyers on the platform.
This is because Ms. Khan and like-minded regulators are aiming for what they consider market nirvana: perfect competition. This is an entirely theoretical market structure characterized by numerous producers and zero entry costs. The more fragmented and easy to enter a market is, the more efficient in the eyes of an antitrust enforcer. But real-world investors like Mr. O’Leary would disagree.
Mr. O’Leary’s questioning exposes the soft underbelly of progressive antitrust theory. The cruel market reality that Mr. O’Leary understands (and that antitrust enforcers like Ms. Khan seem not to) is that highly competitive markets are the least friendly to investors and consumers. As economist Dwight Lee and I have argued, if an investor gets in on a product in such a market, with signs of future profitability but no entry costs, imitators will immediately spring up. They’ll enter without having to pay the development costs, then expand supply and depress prices to the point that only the imitators’ costs can be recovered—not the original innovators’ and investors’, which can be much higher.
No investor in his right mind would knowingly put his money in a market like that. He might as well torch the cash up front. In this way, a perfectly or even highly competitive market is the least efficient and welfare-enhancing of all market structures, including a monopoly.
Under a monopoly (pure or otherwise), protected companies can be expected to restrict output marginally to raise prices and profits as antitrust textbooks’ authors explain. What enforcers often miss, however, is that at least under monopoly, investors have a profit incentive to incur products’ development costs and produce something. The resulting innovation will surely yield more consumer value than would be generated in highly competitive markets in which production will be zero because of the absence of a requisite profit incentive.
While Ms. Khan seems to see all market protections, especially company size, as anathema to efficiency, Mr. O’Leary knows better. These protections can be value-creating, both for firms already in protected markets and for entrepreneurs, like those on “Shark Tank,” who are inspired by future profits to take risks and incur product development costs. All this yields gains for consumers, too.
When Ms. Khan attacks successful companies like Amazon, she is dampening the ability of today’s innovators to attract scarce development funds from people like Mr. O’Leary. That’s a threat to consumers.
Richard McKenzie is a professor emeritus of economics at the University of California, Irvine, a co-author of “In Defense of Monopoly: How Market Power Fosters Creative Production” and author of “Reality Is Tricky: Contrarian Takes on Contested Economic Issues.”
Kommentare