Many people are worried about increasing levels of economic concentration in United States industries. As a result, they call for expanding the interventionist reach of antitrust law. That would mean encouraging the Justice Department to reject more mergers and bring suits against more companies alleged to have monopoly power.
One difficulty with this approach is that it is difficult to determine whether a company possesses monopoly power, let alone figure out whether a merger will result in more monopoly power rather than invigorate competition. Moreover, attacks on monopoly discourage businesses from trying to obtain monopolies, an effort that itself brings innovation and benefits for consumers.
Three policies would decrease concentration far better than expanding antitrust law: making our trade freer, cutting back on regulation, and getting out of the way of efficient capital markets. Together, these policies would make the monopolization provisions in antitrust law much less needed.
Free Trade: The most powerful competition against domestic firms with market power can come from abroad.
It is not surprising that Left-liberals are calling for more government power to regulate and break up information technology companies, particularly when, like Franklin Foer, they worked in industries disrupted by those companies. But it is disheartening to find that the some on the Right are joining the interventionist chorus. To be sure, Silicon Valley leans left on everything but government regulation. It is not clear that this exception is just hypocrisy driven by self-interest or reflects the general political truth that people tend to be most conservative on matters on which they are most knowledgeable. But the Right should be grateful that Silicon Valley, unlike Hollywood and the mainstream media, is an ally on one issue.
Arguments that antitrust rules should be changed to apply to dominant tech firms and not just firms engaged in “monopolization”—the term actually used in the Sherman Act—would both weaken our economy and, even worse, allow government to harass firms based on a vague and manipulable standard. Even beyond the statutory language, there are very good reasons that the law requires the government, before it can apply sanctions, to show both that a firm exercises monopoly power and engages in exclusionary conduct unjustified by a substantial business practice.
First, the desire for a monopoly is not itself a bad thing.
The course of antitrust law in American history has proved a barometer of good governance. In the New Deal, the Roosevelt administration lurched from one policy to another, united only by the injury they did to the economy. Sometimes that administration broke up companies simply on account of size and at other times permitted actual collusion by competitors on prices. In the Warren Court era, both the Department of Justice and the Court itself prevented mergers, even though they were economically beneficial. In Brown Shoe, the nadir of all antitrust law, Chief Justice Earl Warren invalidated a merger between two relatively small shoe companies in an extremely competitive market because he concluded that it might become part of a merger trend and because it would make the companies more efficient at selling shoes!
In contrast, since the Chicago School revolution in antitrust was empowered by the Reagan administration and sustained by its successors, antitrust law has become quite sensible. It has intervened only when needed to protect the welfare of consumers, preventing collusion or mergers that would likely keep prices higher than in a free market. The consumer welfare standard of modern antitrust has also offered relatively clear rules of conduct derived from microeconomics, thus protecting the rule of law and curbing government discretion over business.
But ideas percolating on the left threaten this sound consensus and an oped in the New York Times yesterday exemplifies the danger. Lina Khan, who was the policy director for Zephyr Teachout, the radical Democratic candidate for New York Governor in 2014, complained about Amazon’s recent purchase of Whole Foods.
Over at our sister site, the Library of Economics and Liberty, David Henderson has a post taking some issue with my view that the Obama administration’s antitrust division should not have agreed to the US Airways/American Airlines merger. He argues that the better course is not to block the merger and instead to permit the building of more airport landing slots and allow foreign airlines to fly between U.S. cities.
I agree entirely with these deregulatory measures. Indeed in prior posts, I have called for some of them. But the soundness of such policy proposals does not advance the case for this merger. The Justice Department has no power to deregulate airport construction; such zoning is controlled by state and local authorities. Even foreign airline entry is controlled by another agency: the Department of Transportation. By law and competition theory, the Department should take the world as it finds it.
As a matter of law, the antitrust merger guidelines tell competition regulators to consider ease of entry as part of assessing whether an industry is too concentrated to permit a given merger. And these guidelines make sense. If entry is easy, concentration of incumbents becomes less relevant, because they remain price takers, deterred by fear of new competitors from raising prices above competitive levels. But when entry is difficult, that crucial discipline is absent.
More generally, antitrust regulators cannot assume a world that does not exist, because that premise makes the perfect the enemy of the good.
Last week American Airlines took two extraordinary actions that confirm that the airline industry has become an entrenched oligopoly. First, American Airlines began a bizarre new advertising campaign. Its message: be a good flyer by showing consideration to your seatmates and maintain equanimity in the air. This advertisement makes little sense in a competitive industry. It does not tout low prices or any distinctive amenities of American that might help it gain market share. An industry that implicitly coordinates on price and amenities, however, might benefit from the such an advertisement, if it got more people to fly generally.
Second, American Airlines gave a $13 million severance payment to its President even though he was joining a rival, United Airlines. And the severance was not a matter of legal obligation but at its discretion. It is wholly against usual business practices to give gifts to a high level executive who goes to work for a rival. The more frequent reaction is to sue the official for endangering trade secrets. But again this course of action makes sense if American, United and other airlines are engaging in the implicit coordination made possible by oligopoly. The President of American would then still working for a common cause. Why not maintain goodwill in those circumstances?
In his column "Robber Baron Recessions" Paul Krugman argued this Monday that American companies have been investing less because of greater market concentration in their industries. Exhibit A for Krugman is Verizon: he contends that it has not sufficiently invested in Fios, a fiber optic system that would accelerate internet speeds. He thus wants more government intervention to police monopoly power and decrease economic concentration. Both Krugman’s claim and his remedy are dubious. Let’s begin with alternate explanations for low corporate investment. The most obvious is government regulation. The Obama administration has been one of the most aggressive regulators in history.…
One of the Carter administration’s great achievements was deregulation, and in no sector was the success greater than in the airlines industry. The result was more competition and lower fares that democratized travel. It is a troubling sign of America’s lurch from liberty and free markets that Democratic legislators are trying to re-regulate the airlines and that the Obama administration is dampening competition.
The most egregious offender is Chuck Schumer, the incoming Democratic leader of the Senate (he will be majority leader if the prediction markets are right). He wants to regulate the width and leg room of airline seats. This is hardly a safety issue: the FAA has not expressed concern, and airline travel has never been safer with no fatalities on domestic commercial passenger flights last year.
Airlines already offer more room in first class and economy-plus for additional money. Are consumers not capable of choosing how much leg room they want to pay for? What other decisions does Schumer want to make for us?
Many on Left want to politicize American law and they are emboldened by the vacancy on the Supreme Court to achieve their long sought goal. But don’t take my word for it. Zephyr Teachout, a professor of law at Fordham, ex-candidate for the governorship of New York and current candidate for Congress, laments the current state of antitrust law: “If you can depoliticize antitrust law, you can depoliticize anything.”
The quote comes at the end of a long article in the New York Times in which many commentators complain about Supreme Court decisions friendly to business. The evidence that the Roberts Court has been the best court for business in decades comes from a study by Lee Epstein, Bill Landes, and Richard Posner. This study has been ably critiqued by Jonathan Adler, who notes, among other things, that the study leaves out regulatory decisions quite unfriendly to business.
But my observation here is that neither the authors of the study nor the commentators in the Times article try to show that that the decisions in favor of business were legally incorrect.
In two recent posts, I have suggested that the Fourteenth Amendment of the Constitution does protect economic liberty against the states but in a modest way. Legislation, like a state granted monopoly, that merely protects one group of people over another is illegal. But states are free to pass inefficient legislation that trenches on liberty so long as it has a bona fide police power rationale, like health and safety. The Fourteenth Amendment does not enact cost-benefit analysis.
Thus, the direct results for economic liberty of hewing to a more originalist understanding of the Fourteenth Amendment will be modest, because much legislation is inefficient, but not simply protectionist. But there are other means of achieving the goals sought by a more stringent judicial review of economic legislation, most importantly more vigorous use of the federal antitrust law and the establishment of state and local agencies that impose cost-benefit analysis on regulations.
In North Carolina State Board of Dental Examiners v. FTC, The Supreme Court recently made clear that agencies that are composed of a majority of industry representatives are subject to antitrust scrutiny, unless they are “actively supervised by the state.”