Freeman

IT JUST AIN'T SO

Antitrust Protects Competition?

Consumers Determine the Success or Failure of Every Entrepreneur's Quest for Profit

APRIL 01, 2000 by JOSEPH T. SALERNO

Conservative William Safire’s column “The Curse of Bigness” (New York Times, December 13, 1999) is dedicated to “exploding myths” allegedly spread by MCI, WorldCom, Sprint, and other large firms seeking government approval for prospective mergers that will serve to magnify their market power. Satire opens innocuously enough with the comfortable platitude that “Competition is the driving force of free enterprise.” It becomes almost instantly clear, however, that he misconstrues the real meaning and role of competition, for in the very next sentence he warns that “Concentrated power is the greatest danger to capitalism.”

Evidently Safire follows Karl Marx in believing that an unregulated market economy is fundamentally prone to increasing concentration of industry in the hands of a few gigantic firms. If “the rising momentum toward concentration throughout American big business” is left unchecked, it may well culminate in “two oil companies, two telecommunications combines and two bank-brokerage-insurance leviathans?” These “superpowers” will then find it “infinitely easier” to “fix prices or squelch innovation.” No thoroughgoing Marxist, Safire admonishes us that “what we do not want” is a return to “regulation, with government as the cartel-keeper.”

So who, then, is to save us from this merger mania and guide our economy safely between the Scylla of private monopoly and the Charybdis of government cartels? Why the vigilant “government watchdogs” of the Federal Trade Commission and the Justice Department, of course. To assist these gallant protectors, Satire seeks to demolish several recent “anti-antitrust” myths that have been contrived to muzzle them.

Unfortunately, Satire’s attempt to expunge those alleged myths is itself an exercise in mythmaking based on the discredited dogmas of yesteryear. At its root, Satire’s case for antitrust is fallacious because it invokes an unrealistic and irrelevant notion of competition based on the number of firms producing and selling an identical good or service. Before criticizing the specific objections Satire raises to the argument against antitrust, a few words on the true nature and role of competition are in order.

To begin with, the size and number of firms in a particular industry are not the essence of competition but merely an outcome of it. The essence of competition is the rivalry among entrepreneurs who seek to earn profits and avoid losses by producing at the lowest possible cost those goods most urgently demanded by consumers. However, since production takes time, and because consumer tastes, technological knowledge, and the quantities and qualities of available resources are constantly changing, each entrepreneur must continually forecast and attempt to adapt production to uncertain future market conditions. On the basis of these forecasts, the entrepreneur invests his capital in the purchase of resources—various kinds of labor, natural resources, and capital goods—and transforms them into consumer goods. He does this because he anticipates that the selling price of the output will exceed the sum of the prices he paid for the inputs including interest on his invested capital. The entrepreneur earns a profit if he is correct in his expectation. If his forecast is mistaken, he suffers a loss.

What is important to understand is that the success or failure of every entrepreneur’s quest for profit is determined solely and completely by consumers at the moment when, confronted by the array of competing products, they choose which and which not to purchase. In their eagerness to acquire the goods they desire most at the lowest possible prices, consumers do not care one whit about the size of producers and their record of past success. A giant established firm is no less likely than a small upstart firm to suffer losses if it supplies a good that most consumers consider inferior to similar products or whose costs of production turn out to surpass its selling price because of inefficient production techniques. The competitive process determines precisely the optimum size as well as the number of firms producing any given product. It does so by exerting unrelenting pressure on entrepreneurs, in the form of prospective profit and loss, to continually seek out the lowest-cost techniques for combining and transforming scarce resources.

The irresistible power of the competitive market process to revolutionize the structure of long-established industries at a moment’s notice is manifested time and again in U.S. business history. The steel, bookselling, and computer industries are three recent, dramatic examples.

In sum, competition, correctly understood, is a hardy and inexorable process that needs no antitrust watchdog to protect it from the “curse of bigness.” Antitrust policy can only stifle and distort the real-world competitive process.

We can now briefly address some of Safire’s rebuttals of “myths” disseminated by the opponents of antitrust. One such “myth” is that “Technology is changing so fast that a little pipsqueak company can bring a giant to its knees.” According to Safire, however, “every time that happens, a thousand small cap operations are driven out of business or absorbed by the giant out to cover its posterior.” This statement, while true, misses the point.

Giants like IBM and U.S. Steel were indeed brought to their knees by competition from small companies that were the first to recognize the commercial potential of a new technology. In probably many more instances, superior entrepreneurial forecasting and the economic efficiency of large firms have driven small firms from the field. So what? The competitive process operates to produce a size of firm that tends to ensure the lowest costs of production.

Some 299 other automobile firms competed with Ford Motor Co. in 1910, most of which were driven out of business after Henry Ford pioneered the moving assembly line, which rendered the mass production of autos commercially viable. But it was not Ford’s market power that did these competitors in. It was the consumers who chose to ignore the products of these tiny garage-shop operations and purchase the Model T in great quantities, because the economies of scale from mass production permitted Ford to more than halve the price between 1910 and 1914 from $780 to $360. Yet despite its tremendous success, when consumers tired of the clunky old black Model T with its old-fashioned mechanical brakes in the 1920s, an upstart company, General Motors, jumped into the competitive fray. By 1927, the competition from GM’s colorful and modern Chevrolet forced Ford to shut down and retool. The market determined that one rival provided more effective competition for Ford than hundreds had previously.

A related “myth” that Safire seeks to debunk is that “Mere size is no sin; each case should be handled on its own merits.” According to Safire, even if it is true that some large firms are sinless, “it is the momentum of merger mania that cries out to be reversed.” To the contrary, any firm that has attained dominance in the market not only has committed no sin against competition but has been immaculately conceived, so to speak, within the competitive process itself. Furthermore, competition itself reverses so-called “merger mania” when it is ascertained via the profit test that its results no longer conduce to optimum consumer satisfaction. Or has Satire forgotten the “down-sizing” phenomenon of the 1990s that undid many of the conglomerate mergers of the 1980s?

—Joseph T. Salerno
Pace University

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April 2000

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