Death of Duopoly

By NICK GILLESPIE and MATT WELCH, WSJ

Nothing in American life today seems as archaic, ubiquitous and immovable as the Republican and Democratic parties.

The two 19th-century political groupings divide up the spoils of a combined $6.4 trillion that is extracted each year from taxpayers at the federal, state, county and municipal levels. Though rhetorically and theoretically at odds with one another, the two parties have managed to create a mostly unbroken set of policies and governance structures that benefit well-connected groups at the expense of the individual.

Americans have watched, with a growing sense of alarm and alienation, as first a Republican administration and then its Democratic successor have flouted public opinion by bailing out banks, nationalizing the auto industry, expanding war in Central Asia, throwing yet more good money after bad to keep housing prices artificially high, and prosecuting a drug war that no one outside the federal government pretends is comprehensible, let alone winnable. It is easy to look upon this well-worn rut of political affairs and despair.

And Americans are, in increasing numbers. Perhaps the most important long-term trend in U.S. politics is the four-decade leak in market share by the country's two dominant parties. In 1970, the Harris Poll asked Americans, "Regardless of how you may vote, what do you usually consider yourself—a Republican, a Democrat, an independent or some other party?"

Fully 49% of respondents chose Democrat, and 31% called themselves Republicans. Those figures are now 35% for Democrats and 28% for Republicans. While the numbers have fluctuated over the years, the only real growth market in politics is voters who decline affiliation, with independents increasing from 20% of respondents to 28%.

These findings are consistent with other surveys. In January, Gallup reported that the Democrats were near their lowest point in 22 years (31%), while the GOP remained stuck below the one-third mark at 29%. The affiliation with the highest marks? Independent, at 38% and growing. In a survey released in May, the Pew Research Center found that the percentage of independents rose from 29% in 2000 to 37% in 2011.

It is generally taken for granted that the Democrats and Republicans will always be around. But that may just be the influence of what cognitive scientists call "existence bias"—the pervasive idea that the status quo is stable and ongoing. What if the same factors that have given our incumbent parties an advantage also threaten to hasten their demise?

Economists have a particular fondness for studying what Democrats and Republicans have become: the longest-lived duopoly in American history. The Nobel Prize-winning economist John Forbes Nash (the subject of the book and movie "A Beautiful Mind") was all about duopolies. He showed that two powerful competitors frequently end up locked in a stable, mutually beneficial dance of tit-for-tat—they collude, in short, to carve up a captive market.

Economists have paid less attention to the chief vulnerability of duopolies: How collusion against the interests of customers produces an inevitable revolt, sweeping one or both dominant players into the dustbin of history.

In a widely circulated 2009 paper surveying the economic literature on the topic, the late Larry F. Darby presented a list of classic duopolies, including such familiar pairings as MCI and AT&T, and Macy's and Gimbels. Tellingly, several of the players no longer existed: MCI (then known as WorldCom) became history's largest bankruptcy in 2003; Gimbels was the country's dominant department store chain in the 1930s but went out of business in 1987.

There is nothing inherently stable about two organizations dominating a particular market in the hurly-burly of modern American life. In fact, there are many reasons to suspect that such arrangements are unstable—particularly when technology allows captive consumers to flee.

It is worth taking a closer look at one case on Mr. Darby's list: Kodak and Fujifilm. For much of the 20th century, Kodak was synonymous with color photography. Memories captured on film were "Kodak moments," and the Dow Jones Industrial Average listed the company for more than seven decades. At one point it enjoyed an amazing 96% share of the U.S. market for film. Such was its dominance that the federal government sued Kodak for antitrust violations not once but twice, producing out-of-court settlements in 1921 and 1954.

Fujifilm began competing with Kodak globally in the 1970s and seriously in the U.S. after the 1984 Olympics. Though always the junior partner on Kodak's home turf, the conglomerate held its own enough that the duopoly soon attracted academic studies. Their underlying assumption was that the duopoly would be stable for the foreseeable future.

But the studies were wrong. The share price of Eastman Kodak tumbled from $60 in 2000 to below the $4 mark by 2011.

What happened? Like many duopolies, Kodak and Fujifilm treated their customers like captives, forcing them to pay for pictures they didn't want and steering them toward ever-pricier analog products. This worked as long as consumers had nowhere else to turn. But digital technology, as we know, changed all that, giving customers not just a Kodak/Fuji-free workaround, but the power to make, delete, alter and otherwise control their own creative product.

Or consider the American craft-beer revolution, which people who went to college in the 1980s or before can testify is almost impossible to believe. As in politics, a duopoly—Anheuser-Busch InBev and MillerCoors—soaks up the vast majority (around 80%) of market share. But now the legacy giants are steadily leaking market share and buzz, while upstart craft-beer makers are cashing in on the only sector of the industry showing consistent growth.

Netscape or Internet Explorer, Crest or Colgate, stuffing or potatoes: When given real choice, especially the choice to go elsewhere, consumers will drop even the most beloved of brands for options that enhance their experience and increase their autonomy. We have all witnessed and participated in this revolutionary transfer of loyalty away from those who tell us what we should buy or think and toward those who give us tools to think and act for ourselves. No corner of the economy, of cultural life, or even of our personal lives hasn't felt the gale-force winds of this change.

Except government.

Think of any customer experience that has made you wince or kick the cat. What jumps to mind? Waiting in multiple lines at the Department of Motor Vehicles. Observing the bureaucratic sloth and lowest-common-denominator performance of public schools, especially in big cities. Getting ritually humiliated going through airport security. Trying desperately to understand your doctor bills. Navigating the permit process at city hall.

Whatever examples you come up with, chances are good that the culprit is either a direct government monopoly (as in the providers of K–12 education) or a heavily regulated industry or utility where the government is the largest player (as in health care).

Unlike government, Kodak doesn't have a guaranteed revenue stream. If consumers abandon its products, sales will be zero, and the company will disappear. The history of private-sector market dominance is filled with such seemingly sudden disappearing acts: Big-box music retailers and bookstores were supposed to bestride the land like colossi at the turn of our new century, but Virgin megastores have all but disappeared, and Borders has just gone bankrupt.

There is a positive correlation between an organization's former dominance and its present-day inability to cope with change. As the technology business consultant Nilofer Merchant has aptly put it, "The Web turns old industries on their head. Industries that have had monopolies or highly profitable duopolies are the ones most likely to be completely gutted when a more powerful, more efficient system comes along."

Fortunately, a more efficient system is finally on the doorstep of America's most stubborn, foot-dragging, reactionary sector—government at the local, state and especially federal levels—and its officially authorized, customer-hating agents, the Democrats and Republicans.

As the number of independents rises, voters who are free from party affiliations are more inclined to view political claims with due skepticism. By refusing to confer legitimacy on the two accepted forms of political organization and discourse, they hint strongly that another form is gathering to take their place.

Something potentially revolutionary is afoot in our politics. The Bush-Obama era of bailout economics and perennially deferred pain has produced a political backlash. When blue-state California was allowed in May 2009 to pass judgment on a multipart budget-fix referendum that had received nearly unanimous support from the state's politicians and interest groups, the measures lost by an average of 30 percentage points, despite opponents having been vastly outspent.

Eight months later, unknown Republican Scott Brown won Teddy Kennedy's old Senate seat in overwhelmingly Democratic Massachusetts. Congressmen mostly canceled their traditional August town hall meetings in 2010 after getting too many earfuls in 2009.

For the first time in recent memory, participants in the political process, many of them newly engaged, are openly imagining and pushing for a world other than the one they currently live in. Voters are seizing control over the means of production, meeting up with strange new subgroups, and having a blast in the process. The future—even the present—belongs not to the central re-election committee but to the decentralized single-issue swarm. Wherever both parties have colluded in erecting a roadblock to the desires of American voters, there are citizen groups creating angry and effective coalitions to confront the status quo.

The decentralized and effectively leaderless Tea Party is the most potent example of this permanent non-governing minority. The movement has focused like a laser beam on what all but a few Washington politicians won't dare to touch: actually cutting spending and debt. Whether the group will be able to maintain its emphasis on stanching the nation's flow of red ink while avoiding divisive social issues is an open question. But there's no denying that the Tea Party's biggest impact has come by backing challengers to entrenched Republican candidates.

A similar phenomenon is visible in rising opposition to the drug war. Last fall, people from the far right, the far left and everywhere in between banded together in California to push an outright marijuana-legalization law. The initiative, derided as crazy by California's political class, pulled an impressive 46.5% of the vote.

And in the school-choice movement, politicians such as New Jersey's Republican Gov. Chris Christie and Newark's Democratic Mayor Corey Booker may agree on nothing else but ending the public school monopoly on K-12 education.

Such new configurations do not mean that the Democrats and Republicans will disappear anytime soon. Unlike Kodak and Fujifilm, they have a guaranteed revenue stream, and they get to write their own rules for survival. But the demonstrated ability of disgruntled voters to create whole new ways of doing things has made our political duopolists less secure and complacent.

At a time when governments at every level have run out of money, the smart politicians will figure out how to unbundle policy options and speed up the sort of innovation that has made most areas of our lives better than they were 40 years ago.

And the dumb politicians? They'll go the way of Kodak.

— Adapted from "The Declaration of Independents: How Libertarian Politics Can Fix What's Wrong with America" by Nick Gillespie and Matt Welch, to be published by PublicAffairs on June 28. Copyright © by Nick Gillespie and Matt Welch.