Arnold Harbeger acknowledges the adverse effects of monopoly markets, such as disparity in income distribution, misallocation of resources, and aggregate consumer welfare reduction. The author argues literature has heavily dwelled on monopolistic practices such as exact pricing, market sharing, basing point, price leadership, and patent suppression that have directed fingers towards monopolies. However, Harberger believes the impacts of monopolies on welfare loss have been exaggerated. The author does not counter-argue other economist logic on monopoly effects; instead, he plays down the overestimated data on welfare effects. Harberger’s study follows a logical pattern to present the impact of welfare loss caused by the monopoly to be less than a tenth percent of the national income.
The author compares two economic periods to prove the American Industry is not entirely a monopoly capitalist. One period selected for the study is relatively equilibrium without a vicious shift in demand and supply. The second one contains a variation of book values and actual value due to inflation and deflation. The author uses a sample of eight industries in the late twenties with cases of resource misallocation and presents consumer welfare improvement of 225 million dollars. The figure translates to less than1.5 dollars for every adult or child in the US. The estimate assumes that costs remain constant (Harberger, 1994). However, Harberger’s arguments accommodate increasing costs changes, which can lower the estimate. The author’s idea is warranted since the American industry tends to experience increased costs as years progress. The study also accounts for the value of intangibles that people frequently omit when analyzing the capitalization of monopoly profits. After considering the value of intangibles, the welfare loss courtesy of resource allocation rose to approximately 81 million dollars, a tenth of the national income.
Harberger proves the conservative view of welfare loss by analyzing the effects of mergers and acquisitions on welfare. An American consumer’s actual impact may be overstated in the capital book, creating the impression of a massive effect on welfare loss. Mergers are overstated to cause high profits rates and resource misallocation in the American industry. However, mergers and acquisitions account for less than a quarter of corporations in the United States. The study also considered advertising cost as quasi-monopoly profits other than an accounting cost. Harberger’s investigation revealed that advertising expenditure falls below 2% percent of all the sample industries. Advertising expenses of monopolies can only raise the welfare cost by 1.5 dollars per head and not more than a 6.1 % increase (Harberger, 1994). The author suggests people assume the rising costs of industries and take the notion of associating monopoly with profit. Additionally, the author uses intermediate products’ supply and the profits generated by cartels to overstate welfare loss. However, data still demonstrates a value that is 0.1% of the national income.
Harberger does not intend to rubbish economists’ efforts who try to lower losses brought about by monopolies but emphasize the impact of monopolies on Americans’ welfare. The monopoly market does not entirely interfere with consumer welfare by misallocating resources though it may affect income distribution. Existing literature that focuses on the opposing sides of the monopoly has misled many people exaggerating welfare loss. The author suggests that resource misallocation caused by taxes, subsidies, agricultural policy, tariffs, and trade union practices may cause severe welfare losses. The article presents the author’s comparison and argument that all link to the conclusion of a free monopoly capitalist American economy.
Harberger, A. C. (1994). Monopoly and resource allocation. Essential Readings in Economics, 44(2), 77-90. https://doi.org/10.1007/978-1-349-24002-9_5