Antitrust Policy

In response to an earlier post, several readers suggested that I explain my position on antitrust policy in more detail.  Here goes.

The standard argument for antitrust is correct as far as it goes; other things equal, competition is better than monopoly or oligopoly.  But this does not provide a convincing justification for antitrust.

To begin, the amount of monopoly power that would exist without antitrust appears modest.   Cartel members often cheat by undercutting the monopoly price.  Innovation usually erodes monopoly power.  Free trade provides competition even when the number of domestic firms is small.

Even when monopoly or cartelization exist, moreover, antitrust has undesirable side effects.

1. Some mergers improve economic efficiency by allowing economies of scale or scope.  Vigorous antitrust enforcement, therefore, can prevent mergers that would be beneficial on net.

2. The threat of takeover is an important tool for eliminating bad management.  Antitrust, however, reduces the likelihood of takeover.

3. Some firms use antitrust as a substitute for vigorous competition.  Rather than improving their products or cutting costs, they complain to antitrust authorities about their competitor’s allegedly anti-competitive behavior.

4. Antitrust policy generates uncertainty.  In the absence of antitrust, firms consider mergers and other business decisions based only on the merits.  Under antitrust, firms must also forecast the response of antitrust authorities.

5. In some instances, the basic premise of antitrust – that a monopoly price is bad – is debatable.  For goods whose production generates externalities like pollution, or for goods whose consumption might be excessive due to addiction or myopia, letting price be “too high” has some benefit.

6. Assuming antitrust reduces monopoly profits, it also reduces the incentive for innovation.  One reason for monopoly is the introduction of new products.  In most cases, however, imitation eliminates such monopolies quickly. If innovators and entrepreneurs believe profits will be limited by antitrust, however, their incentive to develop new products declines.

7. Antitrust distracts attention from the cases where governments, not markets, create market power.  Examples include public schools, professional licensure, and the Post Office.

8. Antitrust, like other policies, suffers from “mission creep.”  Antitrust originally targeted cartelization, monopoly, and price-fixing.  Over time, however, antitrust has expanded to include a wide range of business practices that are generally benign or efficiency enhancing (vertical restraints).

9. Relatedly, determining the extent of market power is open to substantial interpretation.  The key problem is defining what constitutes the market.  Consider Pop-Tarts.  One might define the relevant market as pastry-like food that is warmed in a toaster; in this case the market consists of Pop Tarts.  Or one might define the market as breakfast food, in which case it includes cereal, toast, eggs, McMuffins, re-warmed pizza, and more.  An antitrust authority looking to justify its existence will inevitably err in the excessively narrow direction.

If antitrust limited itself to the most obvious and egregious abuses, such as naked price-fixing, the benefits might exceed the harm.  But even this is problematic if monopoly profits help generate innovation.  Moreover, ideal antitrust enforcement does not exist; rather, the history of antitrust illustrates well the mission creep and overextension that often characterize government intervention.

Comments

[William Sjostrom]

I think you have two errors here. One is supposing that naked price fixing is necessarily abusive (think, e.g., of Telser's empty core models). The other is supposing that antitrust inhibits, rather than helps, naked price fixing. Barbara McCutcheon's 1997 JPE piece showed that antitrust can help cartels solve the renegotiation problem, which might explain the results in Sproul's 1993 JPE piece that antitrust does not lower prices, and may well raise them.

[Mark E Hoffer]

Speaking of "Anti-Trust", and being new to your weblog, I was wondering if you thought that the Federal Reserve would be an appropriate target for prosecution due to violation of the various "Anti-Trust" laws that are currently extant.
Putting aside, of course, any built-in "immunities" they may have from such.

Thank you very much, in advance, for your thoughts.