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Mançur Olson on Oligopoly and Social Norms

Mançur Lloyd Olson Jr.—

At least after they reach a certain point, distributional coalitions have an incentive to be exclusive. In the case of collusive oligopolists or others that operate in the marketplace, the reason is simply that whatever quantity an entrant would sell must either drive down the price received by those already in the cartel, or alternatively force existing members to restrict their sales further. When it is created, the cartel must, for reasons explained above, normally enlist all the sellers in the market if it is to succeed, but once it has done this there is a compelling incentive to exclude any entrant. Indeed, existing members even have a reason to hope that some of their number die or depart so that those who remain can each sell more at the monopoly price.

If the number of physicians increases, for example, the earnings of physicians must decline if other things are equal, and in country after country one finds that the professional organizations representing physicians work to limit entry into the profession. As the high income levels of physicians in many countries testify, these efforts often succeed. The educational credentials and qualifying examinations usually required of those who would enter the practice of medicine are, of course, explained as necessary to protect the patient against incompetence. But note that the examinations are almost always imposed only on entrants. If the limits were mainly motivated by the interest of patients, older physicians would also be required to pass periodic qualifying examinations to demonstrate that they have kept their medical knowledge up-to­-date. Among lawyers and other professionals in many countries there are similar limitations on entry. In legal systems without much limitation on the initiation of litigation, however, additional lawyers can raise the demand for their colleagues by increasing the likelihood of legal disputes, and this makes control of entry less important.

In the case of those distributional coalitions that seek their objectives by political action, the reason for exclusion is that there will be more to distribute to each member of the coalition if it is a minimum winning coalition. A lobby, or even a military alliance seeking spoils, will have less to distribute to each member if it admits more members than are necessary for success. Just as a cartel must include all of the sellers, so the coalition operating politically or militarily must include enough members to win. In a world of uncertainty, the size of the minimum winning coalition may not be known in advance, in which case the coalition must, over a range, trade off lower payoffs per member against greater probabilities of success. There will nonetheless always be some point beyond which it must be in the interest of the existing members to exclude new entrants. In the terms of the dichotomy introduced in The Logic of Collective Action, distributionally oriented lobbies as well as cartels must be exclusive instead of inclusive groups.

A governing aristocracy or oligarchy can provide an interesting illustration of the exclusivity of special-interest groups that use political or military methods. Imagine a country or historical period in which some subset of the population, such as the nobility or the oligarchy, dominates the political system. This subset has an incentive to choose public policies that distribute more of the social output to its own members. Except in the case where the aristocracy or oligarchy would increase its security if new members (for example, powerful rivals) were added, it will be exclusive: every unnecessary entrant into the favored subset reduces what is left for the rest. The relevance of this argument is evident from the exclusiveness of governing nobilities throughout history. Any number of devices and emblems have been used to mark off ruling aristocracies from the rest of the population with the utmost clarity. The exclusivity is perhaps most dramatically evident when a ruling group is secure enough to pass its powers on to its descendants. In these cases there is, of course, great resistance to admitting anyone other than the children of the nobility or ruling group into the ruling group. Such exclusivity is so general that some people think of it as only “natural,” and find any explanation of it unsatisfying.

Let us nonetheless ask what institutions for marriage or child­rearing we would expect to emerge. If the sons and daughters of the ruling group marry outsiders, and both the sons and daughters and the spouses of these sons and daughters are in the ruling group in the next generation, the ruling nobility will tend to double in size in the next generation. In the next generation there will then tend to be half as much for each member. One possible solution is to allow only descendants of one sex and their families to be in the ruling class in the next generation, and probably some discriminatory rules against women in certain societies are explained in this way. But those members of the ruling group that have only or mainly daughters have reason to oppose such rules; even apart from natural concern about their daughters, they would lose their share of the future receipts of their ruling group. So how can all families in the ruling group bequeath their share of the group’s entitlement to descendants without making the value of a share in the entitlement decline by half or more with each successive generation?

They can do this through rules or social pressures that enforce endogamy: if the sons and daughters of the ruling group are induced to marry one another, the growth of the ruling group can be constrained in ways that preserve a legacy for all the families in it. Again, the evidence that nobilities and aristocracies have resisted marriages to commoners and lower ranks generally is abundant, and from many diverse societies. In a similar spirit, the abhorrence in earlier times of royalty marrying commoners can be understood as a rule that helped to limit the losses that a multinational class such as European royalty would have suffered had their numbers expanded exponentially.

From The Rise and Decline of Nations by Mançur Olson. Introduction by Edward L Glaeser. Published by Yale University Press in 2022. Reproduced with permission.

Mançur Lloyd Olson Jr. was an American economist and political scientist who taught at the University of Maryland, College Park. Edward L. Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard University.

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