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@Lewis: " Monopolies Imperil Democracy", quick hid under the covers ! Typical Huffington Post tabloid story by Arianna's left-wing rag!!! I must be misinformed, I heard you sold you soap box. Regards, Ted
@Ted First, Arianna Huffington was a conservative Republican before she became a moderate Democrat. So, no "left-wing rag." Second, no less than Adam Smith himself--the founding father of modern capitalism--felt that monopolies threatened capitalism, too. So it's not just democracy at risk. Do you honestly believe there is any true free market competition against Google that will lead to better products and lower prices? Smith's "invisible hand" of the markets doesn't work once true monopolies are in place. That's why Smith didn't like them.
@Lewis: Google has contributed more to human inquiry than all the dictionaries and encyclopedias ever printed. Regarding Arianna, at one time she in fact was a conservative, but in the late 90's she became a left-wing communist.
Google has contributed more to human inquiry than all the dictionaries and encyclopedias ever printed.
Spoken like "the linkster!" I think you've just indicted yourself. Books are more valuable than links for human inquiry, especially when those links are driven by a commercial search engine with a conflict of interest that leads it to rank those links from paid advertisers first. By the way, if online human inquiry is your game, you could just go to Wikipedia and bypass Google and its pay-to-play search engine altogether. it's a nonprofit that has no commercial profits in mind every time you search for information. Or you could just go to the library. There you might learn what a communist really is. Hint: It ain't Arianna Huffington who has several commercial for-profit ventures.
Krugman seems to be appealing to a commonsensical but wrong idea.
He writes about companies like Apple as virtual monopolies (okay) and then says: "Cutting the tax rate on such profits won’t make them employ more people, driving up the demand for labor and hence wages; it will just let them keep more of their rents. "
In other words, cutting costs (taxes) won't spur greater production (which is what would lead to higher demand for labor).
He's relying on the fallacy that monopolies charge what the market will bear. That prices are independent of costs, so as costs (taxes) drop, prices remain constant, the demand is unmoved, and profits increase by the amount of the tax cut.
But see, e.g. Samuelson (I hear he has a Nobel prize in Economics too, in fact the first). In my edition of Economics, this is in Chapter 25:
... an important fallacy: "A firm out to maximize its profits will always charge what the 'traffic will bear'.' That means charging the highest possible price." This statement is wrong. ... To charge the highest possible price is to sell no q at all and to get no TR at all.
In case people have forgotten their Econ 101, "q" is quantity, and TR is total revenue. He goes on to state that
Common sense tells us that ... Maximum-profit will occur only where the firm's Marginal (or extra) Revenue [MR] has just come into balance with its Marginal (or extra) Cost [MC].
So if marginal costs (e.g. taxes per item sold) are reduced, marginal revenue should go down to maximize profits. That means reducing prices, which drives up quantity.
Krugman may be right that cutting taxes would have only a negligible effect on production and thus on labor demand. (I'm inclined to agree.) But that's qualitatively different from his statement that tax cuts on companies like Apple will have no effect.
It's this getting to the right conclusion for the wrong reason that's irksome.
There's a link in your second citation to a page on deadweight loss. There you can see how monopolies (or "monopolistic competition") set prices. The graph and text show that equilibrium is reached when MR = MC. Just as stated by Samuelson. This is literally textbook stuff.
Obviously you don't understand. Ted, and those like him, believe that anyone entertaining beliefs even incrementally to the left of theirs is automatically "a communist".
It's sort of comical with Ted, but try reading some of the predictable comments from readers on WSJ articles. Those people are very scary. They truly believe that people like us are subversive anti-American communists. Not the slightest tolerance for anything other than what they believe.
I hate to say this, but more and more I'm seeing the same sort of intolerance from the far left also. Nothing good about any of this.
@MSF Perhaps, but there's something absurd regarding the idea that tax cuts will lead to any massive increase in labor for today's tech giants. These are not labor intensive businesses for the most part like automobiles once were. (Now autos aren't even as labor intensive.) By way of comparison, at its peak in 2004, Blockbuster employed 84,300 people worldwide. Today, Netflix employs 3,500. I don't think a big tax cut would lead it to employ many more. That's the thing I don't think many people realize. The connection between industry and labor has largely been broken by big data technology. Many jobs can be reduced to an algorithm or binary code--and not just in the tech sector. That technology can be applied in many industries. Once you pay for the handful of programmers to write that code, the profits are largely gravy that taxes one way or the other don't affect much. Cutting taxes isn't going to cause a massive hiring spree.
@msf: You are well aware that I highly appreciate your insight and perspective, but surely you can get your eyes away from that textbook long enough to observe outfits such as Valeant and Turing Pharmaceuticals (the latter being Martin Shkreli's gift to humanity).
Does your textbook even consider situations like those?
Monopolies are not exempt from laws of supply and demand. It's just how those laws work with monopolies that's different. Monopolies set price to maximize profits (MR = MC), while companies in a perfectly competitive market set price = MC.
Turing simply increased price to maximize profit. The question one might ask is why didn't it raise prices even higher? Assuming the price was set "properly", then a higher price would have diminished profits - profits forgone on lost sales (due to higher prices) would have exceeded increased revenue on the remaining sales.
Don't like supply and demand in the health industry? There are many ways to change things. Apply an excess profit tax (with tax revenue used to subsidize purchases). Put a regulatory cap on price or profit per unit. Be creative.
BTW, I didn't need to open a textbook to look this up. It was just easier to open a book than to find a link to a supporting page. I think someone once said "Books are more valuable than links for human inquiry."
I agreed with the conclusion (tax cuts will not lead to massive hiring). It was the appeal to wrongheaded common sense that I found disturbing.
@MSF I think you're right for the most part as even in monopolistic industries people can often substitute with other goods. The problem is what happens when the marginal utility of a product is essentially unlimited. Such is the case with life saving drugs that are still on patent. Demand is as they say inelastic. Of course, there is a limit even there as if people can't afford the drug and insurers won't pay, they simply die. Not a very pleasant thought, but such is the case in an unregulated monopolistic market. Here's another example of what happens when demand far outstrips supply:
>> He's relying on the fallacy that monopolies charge what the market will bear. >> the appeal to wrongheaded common sense that I found disturbing.
Not seeing where he does this, but it's an astonishing thing to charge in any case, rather than imagine any benefit of the doubt for journalistic shorthand discussion.
Could be wrong, but I myself bet that PK would not only concur in your explication but would point you to where he has a full grasp of the subtleties involved, quite elaborating on Samuelson. See for example the middle dozen slides here starting with How a Monopolist Maximizes Profit:
In my simplistic world, it would be good to link tax cuts to employment - after the fact. In other words, show me you (or your company) have created more direct employment (number of people AND total wages provided) and then (and only then) you will be given a tax benefit for the following year. N
It cannot be done piecemeal year by year, alas. Businesses (and governments) need to plan; also Carrier hires 500 people in order ultimately to shut a plant down and relocated in another country (something like that, I think that is technically inaccurate), QualComm hires 500 people to build a plant over a year or two that ultimately will be heavily robotic, blah blah. Think of all the ways to game this.
>> Could be wrong, but I myself bet that PK would not only concur in your explication but would point you to where he has a full grasp of the subtleties involved, quite elaborating on Samuelson. See for example the middle dozen slides here starting with How a Monopolist Maximizes Profit:
Not only the middle slides, but even the early slides like pp. 6 and 7, that look like p. 24, and also like a graph in the deadweight loss page that I mentioned above (cited in your second reference).
I didn't say that Krugman didn't understand this, I stated that his blog circumvented this with an appeal to a "common sense" argument that is wrong. His "argument", such as it is, that Apple won't hire more workers if its costs drop ("cutting taxes on profits") because, well, it just won't.
That's an appeal to "common sense". And it's wrong. Apple will maximize its profits. Shift the red line (marginal cost) down on p. 24, and the pt. A intercept moves to the right. Production quantity increases. Workforce increases. That's not what he wrote: "won’t make them employ more people".
@davidrmoran I would think in a natural monopoly as Krugman describes one it wouldn't be in pricing of the goods where society suffers the most. It would be in the quality of the goods and in how that company treats labor, the environment and would-bed regulators. Monopolists can cut corners and make crappy products because they're no other options. They also aren't of course reducing consumer costs as much as they could if they had real competition from a like-sized competitor, but enough so a smaller competitor doesn't stand a chance. With regard to crappy products, think about what it was like dealing with your phone company or cable company in the old days. In fact the break up of Ma Bell was good for consumers and ultimately good for capitalism. It was a win-win in many respects. The spun-off Baby Bells ended up being winning investments and they developed newer and better telephone technology. I wonder if wireless tech in the U.S. would be anywhere near where it is today were it not for that breakup of AT&T's stranglehold.
@MSF I think you're right for the most part as even in monopolistic industries people can often substitute with other goods. The problem is what happens when the marginal utility of a product is essentially unlimited. Such is the case with life saving drugs that are still on patent. Demand is as they say inelastic. Of course, there is a limit even there as if people can't afford the drug and insurers won't pay, they simply die. Not a very pleasant thought, but such is the case in an unregulated monopolistic market. Here's another example of what happens when demand far outstrips supply:
IMHO there's no question that price gouging is not good for society. As you say, that's what happens (supply and demand) in an unregulated market (even a competitive one). The bottled water example isn't quite an unregulated market, as the USA Today article says that this price gouging is illegal. Problem is that fines are a cure after the fact, and shown here not to be an effective deterrent.
At least it's something, unlike what seems to be the case in the drug industry.
I'll admit that the way I've been discussing (monopolistic) supply and demand is the economic equivalent of doing physics on a frictionless surface. A convenient simplification, but not a perfect description of the real world. In the real world, even monopolies advertise and are generally sensitive to public perception. That's because they risk being regulated even if they are not currently regulated. That is a political, real world factor that affects pricing also.
Not so much for Apple, I suspect. Perhaps the opposite there - setting a $1K price for a phone may actually increase demand as it engenders a certain cachet. Me, I'm with the flip phone crowd (thank you Star Trek).
Monopolists can cut corners and make crappy products because they're no other options. ... With regard to crappy products, think about what it was like dealing with your phone company or cable company in the old days.
Western Electric manufactured phones designed to last 40 years - that may not be considered a plus in a disposable society where we're expected to buy new phones every two years, but does address the issue of quality. Here the problem might be the opposite - too much quality at too high a price.
Side note: I knew someone at Western Electric with a fierce temper. He tells a story about having gotten very upset on a call and having thrown his phone so hard against the wall that the phone cracked. The engineers didn't believe that was possible and wanted to inspect the phone.
My Western Electric rotary dial phone is still sitting securely on my desk. Still has the best sound quality, the best ringer, and will outlast everything else in the place. It will even work without batteries during a power outage (assuming it's connected to the phone company and not the cable company).
@MSF I see your point, but I'm thinking more of what it's like to call Verizon/Comcast and say I'm unhappy with the triple play and there's no Netflix, Sling, Vonage, HBO Direct, Hulu, etc. to throw in their face. I've noticed since the great un-bundling, the service and willingness to negotiate have markedly improved. I also notice how many people are ditching their landline altogether and just going wireless. I don't think consumers had nearly as much leverage back then as they do today.
Suffers a bit from a nearly imperceptible "delay" when conversing. Unless you talk a lot on your phone, this is a nice way to save $50-$75 a month on your phone bill.
@msf- I'm with you all the way on the quality and longevity of Western Electric equipment, most of which was designed by Bell Labs in New Jersey. However, the Bell System played major tax avoidance games with WE. WE, owned by the Bell System, sold almost all of the equipment used by the Bell operating companies, at absolutely outrageously inflated prices. The allowed the operating companies to take major depreciation and tax write-off allowances. You'd think that this would leave WE with a huge profit and tax liability, but they somehow had that pretty well covered also- I don't remember the details at this point.
A fair number of companies still play this game to this very day- now enhanced by transferring the profit center/headquarters to someplace such as Ireland, where they rent a small room with a mail drop and a telephone. It probably annoys them that they have to pay someone to open the mail and answer the phone.
break/break "My Western Electric rotary dial phone is still sitting securely on my desk."
Yes, mine also. In SF we have:
One of these:
One of these:
My favorite:
One of these:
A couple of these: (that's not our phone number, btw)
At Guerneville, one of these:
They all work, and in fact are in everyday use. Additionally, there are a number of DTMF phones as well, and one fairly modern wall speaker-phone.
When I worked at Bell Labs at the WE plant in North Andover Mass. we were told it was or had been the lead manufacturing facility for Ma Bell, though I don't know that that meant most of these phone were made there, perhaps more switching hardware.
More and more houses don't have copper anymore to carry the 48V (+/-) to power the phone, either removed or inactivated.
I've still got one like the second picture (yellow like the first picture, though). Unfortunately it's designed for wall mount so it's pretty useless now. Purchased it for $20 at Sears (another institution fading into oblivion).
Your favorite would be mine as well. The next one down looks like some phones I used to see in my mother's office. (They were virtual antiques even then.)
The boring desktop 415 phone is the model I'm using now.
----
It wasn't only pricing games that AT&T played. They stacked the deck by tailoring technical requirements so narrowly to their own (WE) equipment that competitors at the time (i.e. ITT and Northern Telecom/BNR) couldn't meet them. Eventually the legal system caught up with this.
That yellow wall phone graced my home in the mid-late 70s. An additional benefit was I could uncoil that long cord (something like 8-10') and hang the receiver over the antenna bar on the back of a very nice AM radio at night. It acted as an exceptionally powerful AM signal "booster" for some strange reason (I'm sure Old Joe understands.). Pulled in WBZ Boston loud & clear evenings - even in the Detroit metro area. Great talk radio from BZ in those days. Whatever happened to them?
Thanks OJ!
PS: Had to sit a can of soup or something to hold the receiver hanger down if using the receiver that way so that the phone would still ring.
@hank- The AM radio most likely had a small "loop antenna" inside it, usually wired onto a backplate or backboard of some type. Draping the phone cord over the radio caused it to act as a radio-frequency coupler (a very primitive transformer, so to speak), and the phone, also attached to the outside phone lines (even when on-hook) acted as a great AM antenna. AM receivers really like long-wire antennas, and you got lucky on that setup!
@msf- Yes, that wall phone (ours is yellow) is out in the garage. The one like you saw in your mother's office came from my father's office when the Southern Pacific upgraded their system. You know they were antiques if the SP was still using them!
Not widely known: Speaking of the SP communications upgrade, when they finally started to bring their systems into the modern word they actually did pretty good- they installed lots of high-capaicty microwave along their right-of-way as part of the system. When the SP later got into financial trouble, that capacity was sold, and became the backbone of the early Sprint network.
When I worked at Bell Labs at the WE plant in North Andover Mass. we were told it was or had been the lead manufacturing facility for Ma Bell, though I don't know that that meant most of these phone were made there, perhaps more switching hardware.
Merrimack Valley (MV) location. If memory serves, that was Area 40, later Area 54 (after Bell Labs increased its number of "Areas"). Area 40 was transmission equipment.
Comments
huffingtonpost.com/entry/google-monopoly-barry-lynn_us_59a738fde4b010ca289a1155
Regards,
Ted
He writes about companies like Apple as virtual monopolies (okay) and then says: "Cutting the tax rate on such profits won’t make them employ more people, driving up the demand for labor and hence wages; it will just let them keep more of their rents. "
In other words, cutting costs (taxes) won't spur greater production (which is what would lead to higher demand for labor).
He's relying on the fallacy that monopolies charge what the market will bear. That prices are independent of costs, so as costs (taxes) drop, prices remain constant, the demand is unmoved, and profits increase by the amount of the tax cut.
But see, e.g. Samuelson (I hear he has a Nobel prize in Economics too, in fact the first). In my edition of Economics, this is in Chapter 25: In case people have forgotten their Econ 101, "q" is quantity, and TR is total revenue. He goes on to state thatSo if marginal costs (e.g. taxes per item sold) are reduced, marginal revenue should go down to maximize profits. That means reducing prices, which drives up quantity.
Krugman may be right that cutting taxes would have only a negligible effect on production and thus on labor demand. (I'm inclined to agree.) But that's qualitatively different from his statement that tax cuts on companies like Apple will have no effect.
It's this getting to the right conclusion for the wrong reason that's irksome.
There's a link in your second citation to a page on deadweight loss. There you can see how monopolies (or "monopolistic competition") set prices. The graph and text show that equilibrium is reached when MR = MC. Just as stated by Samuelson. This is literally textbook stuff.
Obviously you don't understand. Ted, and those like him, believe that anyone entertaining beliefs even incrementally to the left of theirs is automatically "a communist".
It's sort of comical with Ted, but try reading some of the predictable comments from readers on WSJ articles. Those people are very scary. They truly believe that people like us are subversive anti-American communists. Not the slightest tolerance for anything other than what they believe.
I hate to say this, but more and more I'm seeing the same sort of intolerance from the far left also. Nothing good about any of this.
@Old_Joe Spot on.
Does your textbook even consider situations like those?
Turing simply increased price to maximize profit. The question one might ask is why didn't it raise prices even higher? Assuming the price was set "properly", then a higher price would have diminished profits - profits forgone on lost sales (due to higher prices) would have exceeded increased revenue on the remaining sales.
Don't like supply and demand in the health industry? There are many ways to change things. Apply an excess profit tax (with tax revenue used to subsidize purchases). Put a regulatory cap on price or profit per unit. Be creative.
Old joke (many obvious variants): How much are those cars? $10M. $10M, no one will buy buy it for that price. Maybe so, but all I have to do is sell one.
http://www.barrypopik.com/index.php/new_york_city/entry/if_i_could_sell_just_one
(pencil variant).
BTW, I didn't need to open a textbook to look this up. It was just easier to open a book than to find a link to a supporting page. I think someone once said "Books are more valuable than links for human inquiry."
I agreed with the conclusion (tax cuts will not lead to massive hiring). It was the appeal to wrongheaded common sense that I found disturbing.
https://usatoday.com/story/money/2017/08/30/best-buy-says-42-96-bottled-water-near-houston-big-mistake/616110001/
>> the appeal to wrongheaded common sense that I found disturbing.
Not seeing where he does this, but it's an astonishing thing to charge in any case, rather than imagine any benefit of the doubt for journalistic shorthand discussion.
Could be wrong, but I myself bet that PK would not only concur in your explication but would point you to where he has a full grasp of the subtleties involved, quite elaborating on Samuelson. See for example the middle dozen slides here starting with How a Monopolist Maximizes Profit:
http://www.uni-giessen.de/fbz/fb02/fb/professuren/vwl/goetz/lehre/copy2_of_downloadsordner/mikrooekonomie-i/foliensaetze/chapter-13
Maybe you will find fallacies here too and can cause serious standard textbook emendation !
I didn't say that Krugman didn't understand this, I stated that his blog circumvented this with an appeal to a "common sense" argument that is wrong. His "argument", such as it is, that Apple won't hire more workers if its costs drop ("cutting taxes on profits") because, well, it just won't.
That's an appeal to "common sense". And it's wrong. Apple will maximize its profits. Shift the red line (marginal cost) down on p. 24, and the pt. A intercept moves to the right. Production quantity increases. Workforce increases. That's not what he wrote: "won’t make them employ more people".
At least it's something, unlike what seems to be the case in the drug industry.
I'll admit that the way I've been discussing (monopolistic) supply and demand is the economic equivalent of doing physics on a frictionless surface. A convenient simplification, but not a perfect description of the real world. In the real world, even monopolies advertise and are generally sensitive to public perception. That's because they risk being regulated even if they are not currently regulated. That is a political, real world factor that affects pricing also.
Not so much for Apple, I suspect. Perhaps the opposite there - setting a $1K price for a phone may actually increase demand as it engenders a certain cachet. Me, I'm with the flip phone crowd (thank you Star Trek).
Side note: I knew someone at Western Electric with a fierce temper. He tells a story about having gotten very upset on a call and having thrown his phone so hard against the wall that the phone cracked. The engineers didn't believe that was possible and wanted to inspect the phone.
My Western Electric rotary dial phone is still sitting securely on my desk. Still has the best sound quality, the best ringer, and will outlast everything else in the place. It will even work without batteries during a power outage (assuming it's connected to the phone company and not the cable company).
XLink Bluetooth - Connects your cellphone to your existing (traditional) telephones / answering machine. https://www.amazon.com/Xtreme-Technologies-BT-Bluetooth-Gateway/dp/B00135XU7Q/ref=sr_1_1?ie=UTF8&qid=1504221038&sr=8-1&keywords=xlink+bluetooth
Suffers a bit from a nearly imperceptible "delay" when conversing. Unless you talk a lot on your phone, this is a nice way to save $50-$75 a month on your phone bill.
A fair number of companies still play this game to this very day- now enhanced by transferring the profit center/headquarters to someplace such as Ireland, where they rent a small room with a mail drop and a telephone. It probably annoys them that they have to pay someone to open the mail and answer the phone.
break/break
"My Western Electric rotary dial phone is still sitting securely on my desk."
Yes, mine also. In SF we have:
One of these:
One of these:
My favorite:
One of these:
A couple of these: (that's not our phone number, btw)
At Guerneville, one of these:
They all work, and in fact are in everyday use. Additionally, there are a number of DTMF phones as well, and one fairly modern wall speaker-phone.
More and more houses don't have copper anymore to carry the 48V (+/-) to power the phone, either removed or inactivated.
I've still got one like the second picture (yellow like the first picture, though). Unfortunately it's designed for wall mount so it's pretty useless now. Purchased it for $20 at Sears (another institution fading into oblivion).
Your favorite would be mine as well. The next one down looks like some phones I used to see in my mother's office. (They were virtual antiques even then.)
The boring desktop 415 phone is the model I'm using now.
----
It wasn't only pricing games that AT&T played. They stacked the deck by tailoring technical requirements so narrowly to their own (WE) equipment that competitors at the time (i.e. ITT and Northern Telecom/BNR) couldn't meet them. Eventually the legal system caught up with this.
Thanks OJ!
PS: Had to sit a can of soup or something to hold the receiver hanger down if using the receiver that way so that the phone would still ring.
Not widely known: Speaking of the SP communications upgrade, when they finally started to bring their systems into the modern word they actually did pretty good- they installed lots of high-capaicty microwave along their right-of-way as part of the system. When the SP later got into financial trouble, that capacity was sold, and became the backbone of the early Sprint network.
This AT&T video from 1959 seems to confirm that.
Only visited MV once. I also had a chance to see where WE manufactured switching systems in Oklahoma City.