Professional Culture and Market Power
Jan26
Culture & Current Events6
Rembrandt - Syndics of the Drapers' Guild

Professional Culture and Market Power

Tl;dr: A great deal of market power is created and exercised, not by monopolistic companies, but by professional monocultures on the labor side, even in very competitive product markets.

I. The Puzzle of Market Power

Arbitrage is the main motive force in economic theory: if there’s a profit opportunity out there, we can count on someone to exploit it. And in reasonably competitive markets, unmet consumer needs are profit opportunities.

This was, most famously, Milton Friedman’s argument as to why discrimination gets competed out in a free market. If no other businesses are willing to serve blacks, for example, that means you can make a hefty profit by doing so, which – eventually – forces others to compete by doing so too.

The usual definition of market power is the ability to charge a price above marginal cost. Friedman’s parable lets us extend it: A seller has market power to the extent that he is able to ignore effective consumer demand, whether that consists in keeping prices too high for a given product (as in the usual definition), failing to implement a clearly viable improvement in the product, or failing to serve an otherwise profitable segment of the market. The monopoly rent takes the form of extra profits in the first case, and the ability to indulge in preferences in the second two. A seller without market power must sell at marginal cost, must implement any clearly demanded features, and cannot discriminate, on pain of business failure.

And yet: there is quite a lot of industry coordination, things that might look anticompetitive and cartel-like. This has been true in large and small ways for a very long time in many industries, but most recently it’s rocketed into the spotlight because of companies indulging ideological preferences.

Regardless of whether something like banning Trump was a good idea or not, justifiable or not, it’s clearly an exercise of market power – jointly, if not individually. You’d expect at least one major social media company to carve out a niche catering to the very large contingent of Trump supporters. But the one platform that tried to do so was, essentially, run off the internet by the various platforms it depended on. Again, regardless of whether this was desirable, justifiable, or anything else, it’s clearly an exercise of market power. So how do they do it?

These platforms certainly aren’t monopolies, despite some etymologically and economically confused insistence to the contrary. The various tech giants all provide reasonably close alternatives to one another, and compete intensely on features. The astounding innovation in web technologies and consumer electronics over the past few decades, innovation which has mostly benefited the consumer in the form of free online services, suggests that there is no cartelization, much less a product monopoly.

The fear of future crackdowns by an incensed incoming administration might go some of the way toward explaining this example. But there are numerous examples, by no means all political or ideological:

  1. The leftward turn of higher education has, similarly, created a vacant niche not only for right-leaning centers of higher learning, but also for the sort of liberal education that universities have traditionally provided. There has been some institutional differentiation – most notably the University of Chicago’s stand for free expression – but on the whole, every institution of higher learning has moved in ideological lockstep. There’s a clear opportunity to fill the abandoned niche: hire cancelled academics at below-market rates, and market to families dissatisfied with the politicization of education. So why doesn’t a philanthropist or venture capitalist do it? Besides Chicago, why have no schools marketed themselves to students and faculty as a haven for free speech?
  2. RIP Flash This month, all four major browser vendors completely removed support for Flash, on the heels of Adobe’s own abandonment. While there were many good reasons to abandon Flash, there’s still a lot of Flash content on the internet. And while there’s been some work on shims for Flash content, no browser to my knowledge – not even among the small ones – has moved to peel away users from other browsers by filling the newly created “Still Runs Flash” niche. Whatever Flash’s flaws, the demand does exist, and the abandonment of an economically viable niche – for better or for worse – is a clear joint exercise of market power.
  3. All the major online dictionaries have been caught updating definitions to support manufactured controversies, invariably to favor the left side of the controversy. Regardless of the merits of any of these particular controversies, there is clearly a viable market niche for a dictionary to market itself as one that doesn’t make politically motivated updates, and the failure to fill that niche is a joint exercise of market power.
  4. By way of contrast, news media has not moved in lockstep, but has – instead – polarized, with viable right- and left-leaning news sources. What’s different about news media than, say, tech or education? It’s certainly no more competitive in terms of the product offered. So why is there less market power to exercise there?

So where else might this market power come from? If there’s market power to indulge in ideological discrimination, what else is that power used for, and why isn’t it used to charge monopoly prices?

II. Professional Acculturation

Looking for market power in monopolies and cartels, as is usual, obscures where exactly this sort of market power – often, though not exclusively, ideological – comes from. It’s not exercised by the various companies at all: our various tech giants, dictionaries, and browser makers are mostly just along for the ride, exercising no real market power of their own.

Most of this market power in fact comes from the labor side. Not from unions, but from acculturation into a profession. Take the higher education example from earlier. There’s a clear demand from students for a non-religious and non-far-left university. There’s a clear supply of faculty for the same. But the leftward drift of higher education is driven, not primarily by faculty or students, but by administrators. Higher education administration is a highly ideological professional monoculture. Whatever faculty, students, or funders might prefer, when decisions get implemented, they get implemented by administrators. And if universities all hire administrators from the same pool of radical functionaries, it’ll be difficult to fill any market niche at variance with that culture.

Or take the non-ideological example. A big part of acculturation into web-stack culture over the past two decades has been the article of faith that Flash is bad, and open web standards are good. I happen to agree with this. But this acculturation is so strong, that I doubt you could even assemble a competent team of programmers big enough to launch a browser aimed to fill the Flash niche now. Yes, competition and market demand kept Flash on life support until January 2021 – no one wanted to be the first browser to abandon Flash, for economic reasons – but as soon as one took the lead, the economic advantages of being the last browser to abandon Flash weren’t enough for any of them, and each eagerly followed.

The potential market power exercised through professional acculturation becomes greater the more specialized, and the more integral, a certain profession becomes. The more specialized training is necessary to enter a profession, the more opportunity there is for acculturation, especially in ways that differ from the culture of the ultimate consumers. And if the entire labor pool has been acculturated in the same way, there’s no opportunity to fill certain market niches, no matter how many separate and independent companies there are competing.

This is one way to identify where such power is likely to be exercised. University administrators are a small and specialized pool. Web stack programmers are a small and specialized pool. Journalists, to some extent, are too, but less so. And so, you do see ideologically differentiated reporting, where you don’t see ideologically differentiated university administration, despite the market for each being in all likelihood equally viable.

Incidentally, the effort to create exactly such a journalism monoculture with the potential to vacate an ideological market niche is probably the impetus behind the effort, still fringe and constitutionally DOA but within the Overton window now, to license journalists. The common economic interpretation of licensure as a way to extract rents should thus not be understood as limited to economic rents, but – importantly – ideological rents through acculturation as well.

III. The Significance of Cultural Market Power

This sort of market power is power on the labor market side, but of a different kind than labor unions. Unions were a standard cartel, just for labor: cartelize the thing being sold, in order to extract monopoly rents in the form of higher wages. Professional acculturation is different: the rents being extracted aren’t economic, but cultural or ideological. Where a union simply increases labor costs, a professional monoculture can affect the product side. It can make discrimination viable; it can vacate viable market niches.

Second, the professional monoculture has the advantage of not being formally organized or consciously administered like a union. It doesn’t have to be. Ultimately it faces the same economic pressures for defection as a cartel does, but – where a cartel exists for the sake of economic rents, and thus has to swim against the current of economic motives – acculturation hooks into the human propensity for socialization into non-instrumental ends. Unions have tried with some success to create a culture of labor solidarity, but because the rents being sought by university administrators aren’t economic in the first place, the temptation to defect culturally is less concrete than the temptation to cross a picket line. From the outside, the market power exercised by acculturated professionals appears “headless” and organic, as opposed to the formally organized union administration.

This is why such extensive market power can be exercised by, for example, tech companies on ideological margins despite being engaged in intense product competition on technical margins. We do not see predatory pricing, collusion, or cartelization among the tech giants. What we do see are those giants acting as vehicles for the ideological rents being sought and extracted by the specialized labor cultures they employ. Economically this counts as market power just the same, but the mode of exercise is quite different.

More broadly, the idea of cultural market power suggests a novel reinterpretation of the old Marxist chestnut that capitalism leads to increasing market concentration and thus to more concentrated market power. Usually this is interpreted as a statement about economies of scale, which – despite the existence of manufacturing and tech giants – has never really threatened market competition in any of these industries. Manufacturing, tech – even supposed “natural monopolies” with network effects – have never lacked sufficient competition, potential or actual, to force the industry to hew closely to consumer demand on the product side.

But we can take the statement another way. If – as Adam Smith noted – the division of labor is limited by the extent of the market, increasing market integration and development should lead to increased specialization. And if that specialization leads to the development of insular and distinctive professional cultures, the advance of the market might indeed lead to an increased exercise of market power: not by firms individually, or even jointly in their own interests, but jointly at the behest of the specialized cultures upon whom they rely to produce their product.

Finally, and more practically, locating this sort of market power with professional monocultures and not with firms highlights the futility of the reflexive anti-tech right-wing. Unleash the FTC on Facebook and Twitter, split them up into as many tiny competitive units as you like, but they’re still all drawing on that same labor pool, being acculturated by the same institutions. Whether as a single big fish or a school of them, they’ll all continue to move in sync at exactly those points that draw the ire of the Hawleys of Congress. Even granting Hawley’s premises, the problem is emphatically not simple anticompetitive behavior on the part of tech companies.

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6 Comments

  • 1

    IK

    Mar 24, 2021 at 5:20 | Reply

    It’s almost as if markets are not the only way we can explain all phenomena we observe in the real world.

  • 2

    SRP

    Mar 26, 2021 at 18:25 | Reply

    I’m not sure how useful it is to look at this as “market power.” Ordinarily such a term implies concerted action of some sort, rather than an equilibrium outcome in a fragmented market. If all programmers really like free coffee at work so that the optimal compensation package has lower wages and more coffee, that is not an example of market power. An office where coffee was unavailable for technical reasons would have higher costs than one where coffee was available.

    Similar logic ought to apply to product attributes that are amenities or disamenities to the work force. One might need to pay a compensating differential to get people to produce something in conflict with their values, so on the margin reducing that conflict might lead to an interior solution–offset from the value at customers’ maximum willingness to pay but also offset from worker’s minimum willingness to be paid.

    (As most U.S. universities are non-profits and do not compete as firms do, although they do compete, it isn’t obvious that the administrator theory is germane at all.)

    • 2.1

      Cameron Harwick

      Mar 29, 2021 at 13:12

      You raise a good point that the dividing line between market power and compensating differentials gets a bit fuzzy when we’re talking about nonmonetary benefits. In theory the difference would be that compensating differentials imply market wages being partly in the form of nonmonetary amenities, whereas market power implies above-market wages, whether in monetary or nonmonetary forms. You’re right that these might be hard to distinguish in practice, and that the latter would require coordination to restrict output.

      I do think, however, that ideological preferences provide the sort of necessary coordination, even if they’re not centrally coordinated like a union. If I happen to not like coffee, so much the worse for me, but my colleagues won’t punish me for it. Whereas they very much will punish for deviation from a strongly held ideological norm. And in that sense, ideological preferences are more like a union than they are like preferences for coffee.

  • 3

    Polymorphic Wetware

    Aug 22, 2021 at 7:46 | Reply

    Hmm, do you think this argument can be summed up in a shorter form? Something like, “Echo chambers. They make people all the same, and drive out those who are different. Then those identically minded people enforce their views en-masse wherever they work. And if enough of them are concentrated in one field, they create another copy of their echo chamber.”

    I’m trying to see if I understand this by seeing if I can translate it into a more layman-friendly form. The average person isn’t familiar with the concept of economic rent, but they have heard of echo chambers. Do you think this is accurate despite stripping away a lot of potentially important details? The simpler something is, the easier it is for people to remember it and share it with others, and that’s an important part of persuading lots of people.

    • 3.1

      Cameron Harwick

      Aug 22, 2021 at 14:34

      I think that’s basically right, though the reply to that would be: shouldn’t we expect competition to break open the echo chambers? All the stuff about economic rent is trying to answer that question.

    • 3.2

      Polymorphic Wetware

      Aug 28, 2021 at 1:31

      As far as I can tell, the answer is also very simple: smaller places are easier to turn into echo chambers, and some fields are very small indeed because of how specialized they are. You don’t get a lot of species diversity on small islands in ecology, and you don’t get a lot of diversity of thought in small niches in human society.

      That’s why both monocultures are so fragile that the only survivors left are the ones that were unusually good at keeping out invaders, whether through physical isolation on an especially distant island, or by mentally isolating their members from the outside world as cults do. The Lindy Effect in action, in other words.

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