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Monopolies Inflict Great Harm on Low- and Middle-Income Americans

Staff Report 601 | Published May 15, 2020

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James A. Schmitz, Jr. Senior Research Economist
Monopolies Inflict Great Harm on Low- and Middle-Income Americans


Today, monopolies inflict great harm on low- and middle-income Americans. One particularly pernicious way they harm them is by sabotaging low-cost products that are substitutes for the monopoly products. I'll argue that the U.S. housing crisis, legal crisis, and oral health crisis facing the low- and middle-income Americans are, in large part, the result of monopolies destroying low-cost alternatives in these industries that the poor would purchase. These results would not surprise those studying monopolies in the first half of the 20th century. During this period extensive evidence was developed showing monopolies engaging in these same activities and many others that harmed the poor. Models of monopoly were constructed by giants in economics and law, such as Henry Simons and Thurman Arnold, to explain these impacts of monopoly. These models are of _sabotaging monopolies_. Unfortunately, in the 1950s, the economics profession turned its back on this evidence, these models and these giants. It embraced the Cournot model of monopoly, that found in textbooks today. In this model the monopolist chooses its price, nothing more. Gone are the decisions on whether to sabotage substitutes or to employ any of the other weapons at the disposal of sabotaging monopolies. I'll call this Cournot monopoly the _toothless monopoly_. Using this model, the economics profession has concluded that the costs of monopoly are small. But the toothless monopoly model is ill-equipped to study the "costs of monopoly." By relying on it, the economics profession has made major errors in its study of monopoly.

Related article by James A. Schmitz, Jr. and David Fettig: [_Monopolies: Silent Spreaders of Poverty and Economic Inequality_]( published August 14, 2020 on _Promarket_, the publication of the Stigler Center at the University of Chicago Booth School of Business.