What Kind Of Businesses Support Barriers To Entry

Luigi Zingales says that what America needs “is something that we might call a pro-market, not pro-business, agenda, one that defends the market system that has served America so well without supporting the businesses, whether they’re banks or car companies, that have grown, as the phrase has it, ‘too big to fail.’” And what could be more American than that? Indeed, basically everyone is suspicious of the growing nexus between big business and big government. But I’m actually fairly dubious about the contention that big business is the issue here. Zingales writes that “[b]usinesses—in particular, large businesses—often use their political muscle to restrict new entries into their industry, strengthening their positions but putting customers at a disadvantage.” I suspect this is a sentiment that many people on the left and the right will agree with, but I think it’s sort of wrong.

If I look around and see which kinds of businesses are benefiting from anti-competitive barriers to entry, I think it’s largely the small businesses. For example, in DC they don’t license 7-11 and CVS to sell beer and wine and they don’t license those chains or grocery stores to sell hard liquor. This allows for the existence of a robust small business segment running liquor stores, almost all of whom would certainly go out of business if national retail chains could compete with them. Many small businesses in America are law firms, and law firms are extensively sheltered from competition by rules against non-lawyers providing legal services. There’s also some kind of unusual rules about the ownership structure of law firms that ensures they’re generally organized as partnerships. And you see this more or less across the board. There’s a competitive market selling refrigerators in the United States, but that means there are something like half a dozen options to choose from and they’re all large firms. Free entry and robust competition in a larger country means a marketplace dominated by a handful of large firms. When you see a market segment dominated by a vast proliferation of small enterprises, you’re frequently looking at regulatory bars to expansion and competition.

The distinction is particularly relevant when it comes to the banking sector. The old rules that kept banks small, especially the 1920s-vintage rules barring banks from operating branches in more than one state, had many kinds of benefits. Certainly they prevented the emergence of super-gigantic banks as concentrated sources of political power. But this “many small banks” dynamic was less competitive. It consisted precisely of economically weak banks using their influence over state legislatures to shelter them from competition from better-run out of state banks. Being pro-business is not the same as being pro-market, but being for competition is not the same as being against big firms.