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ARTICLE

Antitrust Regulation: Back to the Past

All of the new antitrust initiatives should be rejected.

JANUARY 01, 1993 by D. T. ARMENTANO

D. T. Armentano is professor of economics at the University of Hartford and author of Antitrust Policy: The Case for Repeal (Cato Institute, 1991).

There is a disturbing new activism in antitrust policy that threatens to spell trouble for consumers.

Last year Attorney General William Barr proposed to apply U.S. antitrust law extra-territorially to the Japanese keiretsu system of closely linked firms. The House Judiciary Committee appears ready to recommend the repeal of the McCarran Act, the property/casualty insurance industry’s fifty-year exemption from federal antitrust law. And the Justice Department has initiated a wide-ranging antitrust investigation of pricing practices in the air carrier industry where there has been increasing concern about market concentration.

Current antitrust attitudes are somewhat reminiscent of the pre-Reagan era. Traditional antitrust enforcement (1945-1980) had been based on the theory that firms in concentrated markets could restrict competition, raise prices, and misallocate economic resources. This position was discredited when antitrust critics (such as Robert Bork) argued that market share and concentration were related to economic efficiency and not “monopoly power.” Other scholars argued that the antitrust laws themselves had been employed (by private and public plaintiffs) to protect less efficient competitors and not the competitive process. This argument and case analysis, together with some key administrative appointments, paved the way for modest changes in antitrust enforcement in the 1980s.

Reagan’s trustbusters initiated price-fixing cases consistent with the (dubious) theory that attempts at horizontal price collusion seriously threaten the competitive process. But there were fewer cases involving high market share, mergers (within more liberal guidelines), price discrimination, tying agreements, or “predatory” practices since these activities were thought to promote economic efficiency and consumer welfare.

Is there now sufficient reason to abandon the 1980s antitrust mini-revolution? Hardly. The congressional and Bush administration antitrust initiatives are misguided attacks on the competitive process—in the name of protecting it. And special interests—who would directly benefit by regulatory protectionism or increased litigation—are again spearheading the drive for a more “vigorous” enforcement of antitrust law.

Any rational antitrust policy depends upon resolving the ambiguity over the meaning of “competition.” Some free-market economists hold that competition is an unfettered market process of discovery and adjustment under conditions of uncertainty that involves both business rivalry and cooperation. The more traditional academic position, however, is that competition exists only if firms have relatively small market shares, entry is “easy,” firms do not cooperate (collure), and if economic profits tend toward zero. The first view sees little value in any antitrust intervention—other than to ensure that markets are legally open. The second view envisions a robust regulatory agenda where trustbusters act to preserve a “competitive” market structure and “competitive” firm behavior.

The traditional competitive model is irrelevant in a dynamic business world with imperfect information. Antitrust attempts to micro-manage market structure or firm behavior to comply with that model’s arbitrary assumptions would be destructive of efficiency and competition. Especially pernicious would be attempts to interfere with inter-firm cooperative arrangements—which trustbusters routinely mislabel as “collusive.” Contrariwise, business cooperation is essential in achieving the economic efficiencies that will keep firms competitive in tomorrow’s international marketplace.

 

Business Cooperation, Efficiency, and the Competitive Process

The new antitrust initiatives continue to misconstrue the relationship between business cooperation, efficiency, and the competitive process. In the Japanese keiretsu system, for example, many large firms have formed “industrial groups” with informal patterns of cooperation between suppliers, manufacturers, distributors, and banks. Some of these cooperative arrangements have produced substantial efficiencies in the use of resources, especially information, and have made the member firms better overall competitors. Yet the wrong-headed antitrust concern here is that these efficient inter-firm alliances create “entry barriers” for U.S. exporters while they lead to lower import prices here. Instead of allowing similar patterns of cooperation in the U.S., the antitrust regulators appear anxious to threaten efficient foreign suppliers with litigation.

The current attempt to repeal the insurance industry’s antitrust exemption is a similarly misconceived attack on cooperation. Critics of the industry’s performance have argued that the exemption allows collusive agreements that restrain trade and increase rates to policy holders. But with over 3,500 firms of different sizes, low market concentration, and easy entry, any talk of effective price collusion strains credibility. The antitrust exemption is required so that the firms can share loss-experience data and cooperate in the underwriting of large risks.

Currently the most important antitrust risk is in the air carrier industry. The 1978 deregulation led directly to an expansion of service, lower prices, and to a reorganization of routes, equipment, and corporate assets—all without any antitrust meddling. But now important sentiment exists to use antitrust to re-regulate market structure and firm behavior. Critics hold, among other things, that the computer reservations system (CRS) owned by the major carriers must be additionally regulated (or divested) and that the industry’s overall pricing system is likely collusive and illegal.

The antitrust regulation of technology would not be intelligent public policy. Several of the larger carriers (led by American and United) invested heavily ($200 million) to develop a CRS which now provides information efficiencies to the traveling public. Any antitrust divestiture of the CRS would create strong disincentives for future technological investment; it would also provide unearned windfall benefits to the smaller carriers. Level playing field and fair trade arguments are as irrational in antitrust as they are in international trade. Economic welfare is not advanced by protecting less efficient suppliers from an improved technology or by expropriating the benefits of risky entrepreneurship.

The Justice Department has also initiated an investigation of the pricing process employed by the air carriers. Changes in fares are announced through an electronic clearinghouse (Airline Traffic Publishing Co.) before they are actually put into effect; fares are then adjusted upward or downward depending upon how rivals react to the announcements. The trustbusters are apparently concerned that this system of pricing encourages subtle “price signaling” which may well be a form of price collusion prohibited by law.

Is this pricing process anti-competitive? Yes, if the relevant benchmark is the traditional competitive model where demand and supply information is fully known and firm behavior is never interdependent. No, if competition is a discovery and adjustment process under conditions of uncertainty with imperfect information.

Firms certainly intend to communicate (signal) information to passengers and rivals when they announce fares. In addition, firms intend to discover information from the reactions of rivals and readjust their own prices accordingly. Market uncertainty and interdependence create a market process where air carriers must search constantly for the price and service combinations that maximize their competitive advantage. But this trial-and-error process does not restrain trade, as is evidenced by the current price wars and by the financial history of the industry since deregulation.

All of the new antitrust initiatives should be rejected. Federal and state trustbusters have neither the incentive nor the information to manage industrial structure or firm behavior intelligently. The visible hand of antitrust should only be used to remove legal barriers to business rivalry and cooperation. Issues such as firm size, market share, pricing behavior, technological change, and inter-firm cooperation should be left to the invisible hand of the market process.

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January 1993

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