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April 17, 2017

Professors Talk Changing Chicago Economics

An April 12 editorial in The Economist argues that new concern for unregulated monopolies among University of Chicago economists signals a shift away from the traditional “Chicago school” emphasis on free market economics.

The article cites a recent conference on the threat of monopolies, held at the Stigler Center at the Booth School of Business, as evidence that the economics department might be moving away from its conventional skepticism of antitrust legislation.

“Until recently, convening a conference supporting antitrust concerns in the Windy City was like holding a symposium on sobriety in New Orleans,” the article quips. “It may yet be premature to talk about a new Chicago school, but investors and bosses should pay attention to the intellectual shift, which may change American business.”

Booth School Professor Luigi Zingales, who is currently teaching a course titled “Crony Capitalism,” was cited in the article as one of the groups of new Chicago economists worried about a lack of competition.

In an interview with The Maroon, Zingales stressed the difference between concentration and competitive prices and said that even when they have competitive prices, concentrated firms may hurt consumers in less obvious ways.

Zingales used Google as an example to illustrate hidden costs of concentration. Google has a disproportionately large market share among search engines in the U.S. and worldwide.

“Some say, most of the services they provide you are free, and there is free entry, and we know that Bing is a competitor, so do we really have a competition problem in the sense that consumers are hurt?” Zingales said. “But I am among those who say, it’s not obvious that cost is zero.... More importantly, once you have a firm that has such a large concentration, it is likely to have undue influence in regulation.”

Zingales worries that high-concentration firms may influence privacy rules and keep out competition in ways that hurt consumer welfare. He explained that iron-fisted enforcement of antitrust laws until the mid-’60s eliminated any concern about concentration. At that time, the Chicago school encouraged a scaling-back of concentration-based enforcement in favor of consumer welfare and efficiency.

According to Zingales, the Stigler conference was aimed at reconsidering the current concentration of American firms. “The purpose of the conference was to ask, maybe the pendulum has shifted too much in the opposite direction. So it’s not necessarily that viewpoints have changed ideologically; it’s more that the surrounding facts are different,” he said.

Despite raising these questions, Zingales does not believe the editorial is right to signal a department-wide shift. “Chicago economists don’t all think the same way, so it’s hard to say everybody has shifted in one direction or the other,” he said.

The editorial proposed multiple explanations for weakening competition, including multiple waves of mergers, poor regulation, and the expansion of the technology industry.

Professor Allen Sanderson told The Maroon that while unusually high profits or rates of return would normally stimulate competition and self-correction, a combination of public policy and new digital markets are interfering with normal market response mechanisms.

“If government policies, including regulations and rent-seeking by incumbent firms, are blocking new potential rivals’ entry and entrenching existing firms, or much larger economies of scale in our rapidly changing high-tech world pose more of a challenge for new entrants, markets may become less contestable,” Sanderson said.

“For many years, we have also counted on low trade barriers to discipline domestic firms; that element seems to have less appeal at the moment. The present danger is that the worst instincts and reactions by both the political left and right could make it harder for market forces to create and maintain competition.”

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