Monday, January 25, 2010

Big Food

New York Times editorial "Big Food" (January 24th, 2010) falsely claims that
Big companies are likely to become even bigger.
Citing no economics research, the article attempts to worry the public about the potential for monopoly power. Gibrat's Law, which states that firm size and firm growth are independent has not held up, empirically. Unfortunately for the Times, empirical work has consistently shown firm growth to decrease with firm size (for example Edwin Mansfield's 1962 American Economic Review paper, and or a more recent working paper by Piergiovanni, Santarelli, Klomp, and Thurik here).

Another problem with the New York Times article lies in the fact that even if we face a monopoly, on beer, for example, we should not expect all of our beer to "taste the same," as the article suggests.
Price isn’t the only concern. Whether you quaff a Baisha in China, a Diekirch in Luxembourg or a Paceña in Bolivia, you’re paying the same company that sold you that Bud. Call us pessimists, but chances are it won’t be long before they all taste the same.
Market segmentation by a monopolist is often optimal when consumers have different tastes and budgets. For example, if half the population would pay $100 for a red shirt but would never wear a blue shirt, while the other half would pay $100 for a blue shirt and nothing for a red, the monopoly will happily produce two types of shirts--one red, the other blue. For a more realistic example, it may be worth noting that Coca Cola Co. has four hundred different brands, and no one thinks that Poweraid tastes like Dasani water or Diet Coke.

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