|Montreal, December 21, 2002 / No 116||
by Edward W.Younkins
Antitrust laws purport to prevent monopolies and encourage competition. These laws allow the federal government to regulate and restrict business activities, including pricing, production, product lines, and mergers. However, since their advent in 1890, history has shown that they do not prevent monopoly, but, in fact, foster it by limiting competition. Government has been the source of monopoly through its grants of legal privilege to special interests in the economy. The social cure for such “coercive” monopoly is deregulation and repeal of the antitrust laws.
The purported goal of antitrust laws is to protect competition based on the idea that a free unregulated market will inevitably lead to the establishment of coercive monopolies. However, a coercive monopoly cannot be established in a free economy – the necessary precondition of a coercive monopoly is closed entry that can only be achieved by an act of government intervention in the form of special regulations, subsidies, or franchises. There is no invulnerable monopoly unless it is protected by the state.
As long as the possibility of substitution exists, there should be no fear of coercion by monopolists. Rival firms can develop substitutes for the monopolized good or service. In the absence of force, others are free to enter the field and offer similar goods or services. As long as others are free to enter any business of their choice, no firm can get away with whatever it wants to do without facing the prospect of a would-be competitor entering the market. Industrial concentration is most often caused by superior efficiency on the part of one or a few firms in a given industry. It follows that a reduction in the number of competitors does not necessarily result in restraint of trade unless it was accomplished through force or fraud.
The term "shared monopoly" connotes a conspiracy among firms to monopolize a market. What it actually refers to is a few firms who conduct a large portion of the business in some product or service line. These firms are not monopolists – they are in fact competing with one another. The concept of “shared monopoly” is therefore logically deficient. In addition, there is nothing wrong with output restriction. Owners of property have the moral right to use and allocate their resources in what they perceive is the most efficient and profitable manner over time in accordance with existing and expected future market scarcities.
Pricing has been a particularly popular area for antitrust action. If a company charges a price higher than its competition and it continues to attract customers, it is deemed to have a monopoly per se (e.g., drug companies). If a firm charges a lower price then it is attempting to monopolize (e.g., Wal-Mart). And if several firms charge the same or similar prices they are guilty of price-fixing (e.g., airlines). In the first case, if the prices are set high, then new competitors could be expected to enter the market. In the second case, the firm is likely to simply be competing, although it is often charged with “predatory pricing” – pricing products below costs temporarily in order to drive competition out of the market and then raising the price in a market devoid of competition. In the long run however, predatory pricing cannot work because firms cannot suffer losses for long periods of time. And the fact is that if the prices are subsequently raised then the prospect of profits will attract new entrants, including beaten companies that could reopen. In regard to the third case, there is nothing sinister about price coordination, or other forms of collusion for that matter. Companies cooperating to increase their profits are no different from any joint venture, partnership, or joint stock company. In addition, it is well known that cartels are inherently unstable because of the tendency for members to cheat. Then there is the possibility that price coordination may actually improve the efficiency of the market because the reduction of price variability could reduce search costs on the part of the consumers.
Antitrust restrictions on mergers and acquisitions have had the effect of protecting incumbent managers and corporate assets from the prospect of efficient reorganization. There is nothing wrong with buying out competitors because no coercion is involved. Vertical mergers are often disallowed on the grounds that purchasing a raw materials supplier forecloses rivals of the manufacturer with respect to the raw materials. In addition, it is often alleged that it is wrong for a supplier to merge with a retailer because this supposedly cuts off competition of the supplier regarding channels of distribution. The assumption that increased purchases of a raw material by one firm means that there will be less for others is illogical. As long as there is a demand for a raw material someone will step up to supply it. With respect to suppliers supposedly cut off from channels of distribution, nothing is stopping them from integrating or from finding other retailers to deal with.
Prevention of exclusive distribution agreements not only impede the development of the most efficient arrangements for distributing goods and services, an individual’s right to voluntarily negotiate the most profitable contracts would also be denied. Exclusive deals are perfectly acceptable – there may be some other firms that would then create competing products. Also attacked are tying contracts – agreements between buyer and seller that bind the buyer to purchase one or more products in addition to the product in which he is mainly interested. Forbidding the legitimate marketing strategy of offering the entire package or none of it denies the owner of a product to offer it for sale in the form that he desires.
Clearly, the very practices most threatened by antitrust laws are the core elements of the competitive process. The effect of antitrust restrictions is to protect inefficient competitors and harm consumers.
An unrealistic economic model
Antitrust regulation is based on an unrealistic economic model that compares the structure of existing markets with an arbitrary abstract ideal of pure and perfect competition that can never be attained in the real world. This model, which is used as a benchmark to judge monopoly and for resource misallocation analysis, includes the following conditions: 1) homogenous and unchanging products offered by all the sellers in the same industry; 2) numerous sellers who individually have insignificant impacts on prices; 3) the possession by all market participants of perfect knowledge with respect to all relevant information; 4) no barriers to entry or departure to and from the market (i.e., ease of investment and disinvestment through equal and costless entry and departure); 5) firms do not cooperate (i.e., collude); 6) no fear of retaliation by competitors in response to a firm’s actions; 7) no need for advertising; and 8) economic profits tend toward zero.
The traditional antitrust model teaches that competitive markets tend toward equilibrium where price, marginal cost, and minimum average cost are all equal and where consumer welfare is maximized. According to this perspective, consumer welfare could not be maximized if companies advertised, products were differentiated, some firms could achieve economies of scale that are unobtainable by their competitors, or if collusion or high market share could lead to a degree of control over market prices.
The traditional antitrust model is irrelevant in a dynamic business world involving imperfect information. True competition is a process, not a structure, in which a profit-seeking company, operating with limited information, attempts to coordinate production and distribution with the desires of potential customers.
Real-world divergences from pure and perfect competition are not necessarily indicative of market failures. Companies should advertise and attempt to differentiate their products. Competition in a free market includes the process of observing and adjusting under conditions of uncertainty involving both cooperation and rivalry. An innovative firm’s lower costs should keep high-cost firms out of the market. When price exceeds cost, information and incentives are provided to entrepreneurs to invest resources in a particular line of business.
Antitrust regulation undermines the discovery process. Regulators, judges, politicians, and economists cannot know the most efficient organization of an industry, including the number of firms it should include, what prices they should charge, and what kinds of contractual agreements they should make with retailers, consumers, and each other. Such knowledge can only emerge through a trial and error discovery process in the marketplace. The essence of a free market is not pure and perfect competition but rather the freedom to compete.
According to Isabel Patterson in The God of the Machine:
Whereas the government argues that antitrust laws protect consumers, they actually serve as a smokescreen for an immoral method of attacking these firms which have found strategies for best satisfying consumers’ wants and needs. Therefore, it follows that antitrust laws are a bad shortcut that should be abolished in favor of market competition.
The essence of a free market
Antitrust proponents may be confusing the concepts of competition and monopoly power. When a firm advertises, is it competing or being anti-competitive? If a company innovates or spends money on research and development, is it competing or creating a “barrier to entry”? If a firm lowers its price, is it competing or trying to gain a monopoly? Competition, rightly understood, is a dynamic, rivalrous, process of discovery. It is not monopoly, but the prevention of competition that is to be feared – monopoly that results from superior performance should be welcomed. The idea of barriers to entry confuses coercive legal barriers with legitimately earned performance and cost advantages that are likely to benefit, rather than harm, customers. Competition simply refers to a situation where the basic rules of a free society are followed – freedom of contract, private property, etc. The essence of a free market is not pure and perfect competition but freedom of competition.
In essence, there are two types of monopoly – efficiency and coercive. An efficiency monopoly earns a high market share because it does good work. Such a monopoly has no legal power to force people to do business with it. On the other hand a coercive monopoly results from a state grant of exclusive privilege. The government may ban competition, grant privileges, immunities, or subsidies to one company, or impose costly requirements on others. What really bothers individuals about monopoly is not that one firm has economic dominance over a product or service, but that compulsion, force, or special privilege is used to prevent other firms from entering the market. There is no social harm in a monopoly if others have an equal right to enter the field of business. There is a large difference between monopoly in the sense of being the sole firm in a market, and in the exploitative sense of using state help or force to keep competitors out. The real robber barons are firms that look to privileges. Only a coercive monopoly hurts people because force, rather than ability, is used to keep others out of the market. The only way that a firm can gain a monopoly without having to fear the threat of competition is through the force of the government.
The essence of the monopoly problem is the existence of legal barriers to competition or rivalry. These keep the market from producing, disseminating, and utilizing the information that people need for planning and decision making. Legal restrictions cause monopoly power and prices. Repealing antitrust laws and ending government-sponsored monopoly will result in the monopoly problem being handled more efficiently through the market process.
It is interesting to note that real monopoly power has essentially been immune from antitrust regulation – government-created monopolies are not made the target of antitrust investigations. Cable TV and local telephone services are monopolies by law. Government licensing and tariff and quota protection restrict competition and produce monopoly profits for privileged private interests. Government-supported cartels (e.g., agriculture, oil production, transportation) result in long-run monopoly profits.
Antitrust law is a collection of vague, inconsistent, complex, and non-objective laws that can make virtually any business practice appear to be illegal. These laws are so vague that businessmen have no way of knowing until after the fact if a given action will be declared illegal. Often this system of “retroactive” law punishes a firm or individual for an action that was not legally defined as a crime at time of its commission. Vagueness is inherent in terms such as intent to monopolize and restraint of trade – there exists no exact definition for these and other such terms.
Antitrust laws are selectively applied. The antitrust bureaucracy chooses cases to prosecute based on their potential to further their own private interests and careers. Antitrust is used to transfer wealth from large unorganized groups of individuals to the narrow, organized interests of other groups of individuals. These antitrust benefits accruing to some (i.e., by limiting competition from their rivals) involve costs that are usually not apparent because they are spread over so many other firms and individuals.
Antitrust laws also involve large economic costs. Not only do these include the expenses involved in defending one’s firm in antitrust actions, but also in the innovations not undertaken, the competitive strategies not employed, and the mergers that are foregone due to the legal uncertainty associated with antitrust statutes and bureaucrats.
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