Antitrust Regulation; D. T. Armentano

THEFREEMAN IDEASON LIBERTY ANTITRUST REGULATION: BACK TO THE PAST by D. T. Armentano T here 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 ex emption 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. Tradi tional antitrust enforcement (1945-1980) had been based on the theory that firms in concentrated markets could restrict compe tition, raise prices, and misallocate eco nomic resources. This position was discred ited when antitrust critics (such as Robert Bork) argued that market share and concen tration were related to economic efficiency and not "monopoly power. " Other scholars D. T. Armentano is professor ofeconomics at the University of Hartford and author of Antitrust Policy: The Case for Repeal (Cato Institute, 1991).

argued that the antitrust laws themselves had been employed (by private and public plaintiffs) to protect less efficient competi tors and not the competitive process. This argument and case analysis, together with some key administrative appointments, paved the way for modest changes in anti trust enforcement in the 1980's. 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 sufficientreason to abandon the 1980'santitrust mini-revolution?Hardly. The congressional and Bush Administration antitrust initiatives are misguided attacks on the competitive processin the name of protecting it. And special interests-who would directly benefit by regulatory protec tionism or increased litigation-are again spearheading the drive for a more "vigor ous" enforcement of antitrust law.

Any rational antitrust policy depends upon resolving the ambiguity over the mean ing of "competition." Some free-market 16 economists hold that competition is an un fettered market process of discovery and adjustment under conditions of uncertainty that involves both business rivalry and co operation. The more traditional academic position, however, is that competition exists only if firms have relatively small market shares, entry is "easy," firms do not coop erate (collude), 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 "com petitive" firm behavior. The traditional competitive model is irrel evant in a dynamic business world with imperfect information. Antitrust attempts to micro-manage market structure or firm be havior to comply with that model's arbitrary assumptions would be destructive of effi ciency and competition. Especially perni cious would be attempts to interfere with inter-firm cooperative arrangements-which trustbusters routinely mislabel as "collu sive." Contrariwise, business cooperation is essential in achieving the economic effi ciencies that will keep firms competitive in tomorrow's international marketplace.

BusinessCooperation,Efficiency, and the CompetitiveProcess The new antitrust initiatives continue to misconstrue the relationship between busi ness cooperation, efficiency, and the com petitive 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 wrongheaded 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 sim17 ilar patterns of cooperation in the U.S., the antitrust regulators appear anxious to threaten efficient foreign suppliers with lit igation.

The current attempt to repeal the insur ance industry's antitrust exemption is a similarly misconceived attack on coopera tion. Critics of the industry's performance have argued that the exemption allows col lusive 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 cred ibility. 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 reorganiza tion 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 sys tem (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. Sev eral 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 pub lic. Any antitrust divestiture of the CRS would create strong disincentives for future technological investment; it would also pro vide 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 tech nology or by expropriating the benefits of risky entrepreneurship. The Justice Department has also initiated an investigation of the pricing process em18 . THE FREEMAN • JANUARY 1993 ployed by the air carriers. Changes in fares are announced through an electronic clear inghouse (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 appar ently concerned that this system of pricing encourages subtle "price signaling" which may well be a form of price collusion pro hibited by law.

Is this pricing process anti-competitive? Yes, if the relevant benchmark is the tradi tional 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 informa tion 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. D Ten Thousand Commandments T he breakup of the leading integrated companies and the divorce, divestiture, or dissolution of the biggest producers and distrib utors, whether integrated or not, is a luxury the country cannot afford. Its "great concentrations of economic power" in American industry are more essential to the nation's defense than its great concentrations of administrative power in Washington. The new interpretations of the antitrust laws endanger the political structure of the country. They disintegrate the law, making it a respecter of persons, which tends to be no law at all. They upset the balance of power between Congress and the courts, by judicial legislation, which is a usurpation of Congress' role. Whatever "power" they take away from business organizations will not revert to the people but is automatically being appropriated by government agencies.

-Harold Fleming IDEAS ON LIBERTY THEFREEMAN IDEASON LIBERTY ARE THERE Too MANY LAWYERS? by Joseph S. Fulda and Patrick J. Vincent I•t might appear that the question "Are there too many lawyers?" reeks of the discontent with the market that still prevails among the elites who support the discred ited models of the managed economy. In deed, given world events, no one should have to answer questions such as "Are there too many shoemakers?" It is simply up to consumers willing to pay certain amounts for shoes, accessories, and repair-the de mand schedule-and up to wouldbe shoe makers willing to offer their services at certain wage rates-the supply sched ule-to jointly determine the number of shoemakers. Closer analysis, however, as well as some startling data suggest that lawyers providing legal services to plaintiffs are in a class of their own. Yes, there is a market for legal services and, yes, a free-market society does have a place for actions at law. Not withstanding this, however, legal services are fundamentally different from other ser vices, simply because lawyers must use the law-the State-to give plaintiffs the prop erty of defendants. Today's plaintiffs' bar is expert at using the law to attain wealth by what Albert Jay Nock called "the political means" rather than "the economic means"