The Failure of Antitrust Policy
All Antitrust Law Should Be Repealed
JUNE 01, 1994 by D. T. ARMENTANO
The recently proposed mega-mergers in the telecommunications industry may usher in a more activist period of antitrust regulation. This would be unfortunate since antitrust is a generally failed and discredited policy. The laws, allegedly enacted to protect consumers, have been used historically to harass efficient corporations that have increased market output and lowered market price.
How could a public policy allegedly designed to help consumers have come to hurt them instead? One explanation is that antitrust regulation was never intended to protect consumers. It was intended to shield some firms from the efficiency of other firms and, like tariffs, was fundamentally protectionist. This public-choice perspective on the origins of antitrust law is reinforced by recent historical research and by the fact that more than 90 percent of all antitrust litigation involves one private firm suing another. If it looks, walks, and quacks like a special-interest duck, it’s probably a special-interest duck.
A second way to resolve the antitrust paradox is to argue that the regulators, the courts, and the academics that rationalized antitrust enforcement were fundamentally confused about certain basic economic concepts such as “competition” and “monopoly power.” When a firm lowers its price, is that “competition” or is it an attempt to monopolize? When a firm gains market share, is that evidence of relative efficiency or is it an attempt to monopolize in restraint of trade? Is advertising pro-competitive or anti-competitive? Is research spending and innovation an important element of competition, or is it a “barrier to entry” that restricts competition and harms consumers? Clearly, theoretical ambiguities could contribute to a massively misdirected antitrust enforcement effort. Again, the antitrust paradox would be resolved.
Bad Theory, Bad Policy
To understand how theoretical confusion can lead to inappropriate public policy, that is, how bad theory can lead to bad policy, it might be useful to focus attention on the dominant micro-economic models and the generally accepted welfare analysis. The perfectly competitive equilibrium model dominated microeconomic theory in the 1940s, ’50s, and ’60s, and departures from that model’s assumption or economic performance were often used to rationalize antitrust intervention. Generations of students who studied antitrust economics (or “industrial organization” as the subject came to be called) were told that “competitively” structured markets tended inevitably toward an equilibrium condition where price, marginal cost, and minimum average cost were all equal and where, by definition, consumer welfare was maximized.
According to this approach, consumer welfare could not be maximized if products were differentiated or if firms advertised; if some firms achieved economies of scale and scope that other firms could not achieve; or if high market share (or collusion) resulted in some “control” over market price. Firms with “monopoly” power “misallocated resources” (relative to perfect competition) and became legitimate candidates for antitrust prosecution.
The theoretical predictions of antitrust economics were accompanied by empirical research and by statistical (mostly regression) analysis. Early industrial organization economists were enthusiastic supporters of antitrust regulation because they believed that there were strong statistical correlations between market share and rates of return. Presumably “dominant firms” in concentrated markets tended to earn long-run monopoly profits; consumers could be made better off by an antitrust policy aimed at reducing market “concentration.” Thus micro-economic theory and hard empirical evidence were alleged to have rationalized a vigorous antitrust (especially anti-merger) enforcement effort.
Three important strands of criticism of the tradionalist industrial organization paradigm developed in the 1970s and they help explain a modest change in antitrust enforcement in the 1980s. First, “new learning” critics (mostly Chicago-school economists) challenged many of the older empirical conclusions concerning mergers, market concentration, and profitability. With appropriate adjustments for time and sample size, much of the alleged correlations between market concentration and profit disappeared. Second, revisionist case analysis demonstrated that antitrust regulation was often employed against firms that had increased their outputs and lowered their prices. Third, the basic theoretical paradigm itself–the static equilibrium models and their welfare analysis–was subject to important criticism. The best of that criticism was based on insights associated prominently with members of the Austrian School of Economics.
Austrian economists generally held that real-world departures from perfect competition were not necessarily examples of market failure, nor could such departures rationalize antitrust intervention. Products should be differentiated if consumer tastes are differentiated; firms should advertise if information isn’t perfect; lower costs achieved by innovative firms should keep high-cost firms out of markets. All of these practices were elements of a rivalrous discovery process and were not resource misallocating. That they were inconsistent with the perfectly competitive equilibrium condition was irrelevant since that condition itself was entirely irrelevant for policy purposes.
Further, Austrian economists held that the empirical studies that attempt to measure monopoly power or social welfare loss were fundamentally misleading. The divergence of price from some measure of accounting cost was a disequilibrium condition and represented nothing sinister. Indeed, such divergencies were necessary in order to provide information and incentives to entrepreneurs to move resources to their highest valued use. Business organizations that made above-normal profits were simply more efficient at managing risk, discovering preferences, and reducing costs over the long run.
In addition, Austrian economists argued that the condemnation of the dominant firm in the industrial organization literature was thoroughly contrived. The source of that contrivance was the equation of the dominant firm with the textbook monopoly. Yet the textbook monopolist misallocated resources by definition, that is, because of strict equilibrium assumptions that ruled out the entry of other suppliers. In the absence of equilibrium assumptions–or legal barriers to entry–it was not even possible to define a monopoly price unambiguously, much less explain why such firms would have incentives to operate inefficiently. The dominant firm antitrust cases demonstrated that such organizations gain and hold market share by lowering prices and increasing outputs, precisely the opposite conduct and performance predicted by conventional monopoly theory.
Finally, costs and benefits for Austrian economists were always personal and subjective; they simply did not lend themselves to interpersonal aggregation or comparison. This basic Austrian insight obliterated all rule of reason and welfare analysis in antitrust regulation. For example, the conventional rule of reason approach assumes that regulators can promote the public welfare by permitting mergers whose social benefits outweigh their social costs, or by condemning price agreements whose social costs likely exceed benefits. For radical Austrian subjectivists, however, such utilitarian cost/benefit calculations were simply impossible since the data could not be known to outside observers and could not be aggregated across different individuals or firms.
It is clear, then, that the Austrian theoretical perspective is extremely skeptical of traditional antitrust economics and of so-called “vigorous” antitrust enforcement. In the current case of the proposed mega-media mergers, they should be allowed to succeed or fail on their own merits. Public policy should be essentially neutral with respect to inter-firm business cooperation, mergers, and acquisitions.
The Essence of the “Monopoly Problem”
There is a “monopoly problem” in the U.S. economy but it is not to be found in purely private market activity such as business mergers. The essence of the monopoly problem is the existence of government legal impediments to rivalry or cooperation. Legal barriers to entry and prohibitions on inter-firm cooperation prevent the market from generating, disseminating, and using the information that the traders require for efficient plan coordination. Non-legal barriers and so-called restrictive agreements (such as resale price maintenance) simply don’t have this effect on private plan coordination. Since antitrust regulations unambiguously lower the efficiency of the market process, and since they additionally restrict individual liberty and property rights, there’s little reason to support the continuation of such regulation. In the name of efficiency and liberty, all antitrust law should be repealed.