The 2016 college football season kicks off with Alabama ranked No. 1, after winning its fourth national championship under Coach Nick Saban last year. Any company dominating its business like the Tide could easily face antitrust charges as a monopolist. Sports, however, illustrate the key role of competition in the economy, even when the same competitor often comes out on top.
Alabama’s run of four titles in seven years has only been equaled by Notre Dame (1943-49) in the 80-year history of the AP poll. In the game of Monopoly, play continues until one player has 100 percent of the properties, but in markets the term gets applied well below this threshold. So a charge of monopolization of the championship is plausible.
Economist John Hicks wrote that “The best of all monopoly profits is a quiet life,” because a monopolist earns profit with little stress. If Alabama were a football monopoly, Coach Saban and the team are probably wondering when they will have a leisurely stroll to a title. Instead the Tide faces fierce competition annually. While Alabama has a large football budget, according to Knight Commission figures, Auburn, LSU, Tennessee, Ohio State and Texas all outspent the Tide in 2014. Alabama fans know that championships are not automatic, as the 30 years between Bear Bryant’s last title and Coach Saban’s first title brought only one championship and six straight losses to Auburn.
Competition ensures that Alabama cannot rest on its laurels. The same applies for Olympic champions like Michael Phelps and Usain Bolt, who continue to win gold medals by besting the best competitors in the world.
Economists recognize the same role of competition. As microeconomics students will soon learn, the key factor for monopoly is barriers to entry. This asks, can new firms readily challenge the dominant firm? Absent barriers to entry, a large market share can only be maintained by offering consumers a better product or service, or a lower price.
This should affect how we view the economy. John D. Rockefeller started Standard Oil after the Civil War, and by 1890 was refining 88 percent of America’s oil. This was market dominance for sure, but Rockefeller enjoyed no barrier to entry and was challenged by over 100 new refineries. Standard succeeded by continually innovating, and their cost of refining fell from 3 to 0.29 cents per gallon between 1869 and 1897. This helped reduce the price of refined petroleum from 30 to 6 cents per gallon. The discovery of oil in Texas eventually boosted new refiners like Gulf and Texaco, which Rockefeller had no power to prevent. By 1911, when the Supreme Court broke up the company, Standard’s market share had fallen to 64 percent.
Unfortunately, antitrust lawyers often view large market share as inherently suspicious, as illustrated in the Alcoa antitrust case. Alcoa had a 90 percent share in the market for new aluminum because they kept their price low, increased efficiency, and expanded capacity. The market dominance was enough for Judge Learned Hand, who wrote in the case, “It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field.” I would characterize increasing production capacity to meet demand as serving customers.
The most prevalent and effective barrier to entry is a legal restriction, which only government can enact. The U.S. Postal Service, for example, enjoys a legal monopoly on the delivery of first class mail. Cities established and maintained cable television monopolies for years. Between the 1930s and late 1970s, the Civil Aeronautics Board (CAB) regulated commercial airlines and never approved entry for a single new airline. All 79 applications between 1950 and 1974 were shot down.
Will Alabama win another title this year, or will today’s prominent firms like Amazon, Google, and Microsoft still be significant 20 years from now? I really have no idea. But as long as rivals are free to challenge them, success can result only from sustained excellence, which improves our lives.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s alone and do not necessarily reflect the views of Troy University.