There’s been a lot of debate lately about whether tightening of anti-trust legislation might be a useful response to inflation. Underlying this question is that of the relationship between monopoly and inflation more generally. The dominant view among mainstream/neoclassical economists seems to be that there is no such relationship. That view is stated by one of the most prominent mainstream theorist, Larry Summers as follows
There is no basis in economics for expecting increases in demand to systematically larger price increases for monopolies or oligopolies than competitive industries.
Summers goes on to describe the opposite view as ‘anti-science’.
Readers of this blog will be devastated to learn that Summers is dead wrong. It’s quite straightforward to show, in a simple neoclassical model, that imperfect competition amplifies the inflationary effects of demand shocks. Here’s a paper I’ve just written with my colleague Flavio Menezes https://t.co/9FIactnJo7 which makes this point using the concept of the strategic industry supply curve. The same result can be presented, less elegantly in our view, using the standard tools of comparative statics to be found in any intermediate microeconomics test.
We also show that, contrary to a suggestion by Elizabeth Warren, imperfect competition is likely to dampen the impact of cost shocks. There isn’t, however, any equivalence here. Warren’s background is in law, and she isn’t making a claim just observing that monopoly power might be a problem. The distinction between cost shocks and demand shocks is unlikely to have been relevant to her, whereas it should have occurred immediately to a leading theorist like Summers.
I’m not sure about the lessons from all this. For me, it’s to think carefully before making dogmatic statements from authority. If all experts agree on something, we should say so, but be careful to make sure we are right.