The Failure of Antitrust Policy; D.T. Armentano

THEFREEMAN IDEASON LIBERTY THE FAILURE OF ANTITRUST POLICY by D. T. Armentano T he 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 pro tect consumers, have been used historically to harass efficient corporations that have increased market output and lowered mar ket price. How could a public policy allegedly de signed to help consumers have come to hurt them instead? One explanation is that anti trust regulation was never intended to pro tect consumers. It was intended to shield some firms from the efficiency of other firms and, like tariffs, was fundamentally protec tionist. 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 spe cial-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 conDr. Armentano is Professor ofEconomics at the University of Hartford and the author of Anti trust and Monopoly, Second Edition (New York, Holmes & Meier, 1990). cepts such as "competition" and "monop oly 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 com petition, or is it a "barrier to entry" that restricts competition and harms consumers ? Clearly, theoretical ambiguities could con tribute to a massively misdirected antitrust enforcement effort. Again, the antitrust par adox 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 microeconomic 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 per formance were often used to rationalize antitrust intervention. Generations of stu dents who studied antitrust economics (or "industrial organization" as the subject came to be called) were told that "compet itively" structured markets tended inevita294 THE FAILURE OF ANTITRUST POLICY 295 bly 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 collu sion) resulted in some "control" over mar ket price. Firms with "monopoly" power "misallocated resources" (relative to per fect competition) and became legitimate candidates for antitrust prosecution.

The theoretical predictions of antitrust economics were accompanied by empirical research and by statistical (mostly regres sion) analysis. Early industrial organization economists were enthusiastic supporters of antitrust regulation because they believed that there were strong statistical correla tions 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 microeconomic 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 para digm developed in the 1970s and they help explain a modest change in antitrust en forcement in the 1980s. First, "new learn ing" critics (mostly Chicago-school econo mists) 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 correla tions between market concentration and profit disappeared. Second, revisionist case analysis demonstrated that antitrust regula tion was often employed against firms that had increased their outputs and lowered their prices. Third, the basic theoretical paradigm itself-the static equilibrium mod els 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 Theory Austrian economists generally held that real-world departures from perfect compe tition 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 dis covery process and were not resource mis allocating. That they were inconsistent with the perfectly competitive equilibrium con dition was irrelevant since that condition itself was entirely irrelevant for policy pur poses.

Further, Austrian economists held that the empirical studies that attempt to mea sure monopoly power or social welfare loss were fundamentally misleading. The diver gence of price from some measure of ac counting cost was a disequilibrium condi tion and represented nothing sinister. Indeed, such divergencies were necessary in order to provide information and incen tives to entrepreneurs to move resources to their highest valued use. Business organi zations 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 domi nant firm with the textbook monopoly. Yet the textbook monopolist misallocated re sources by definition, that is, because of strict equilibriumassumptions that ruled out the entry of other suppliers. In the absence of equilibrium assumptions-or legal barri ers to entry-it was not even possible to 296 THE FREEMAN • JUNE 1994 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 mar ket share by lowering prices and increasing outputs, precisely the opposite conduct and performance predicted by conventional mo nopoly theory.

Finally, costs and benefits for Austrian economists were always personal and sub jective; they simply did not lend themselves to interpersonal aggregation or compari son. This basic Austrian insight obliterated all rule of reason and welfare analysis in antitrust regulation. For example, the con ventional rule of reason approach assumes that regulators can promote the public wel fare 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 utili tarian 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 theo retical 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 busi ness 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 barri ers and so-called restrictive agreements (such as resale price maintenance) simply don't have this effect on private plan coor dination. Since antitrust regulations unam biguously lower the efficiency of the market process, and since they additionally restrict individual liberty and property rights, there's little reason to support the continu ation of such regulation. In the name of efficiency and liberty, all antitrust law should be repealed. D A Lesson from the Past: The Silver Panic of 1893 by Lawrence W. Reed L ast year marked the 100th anniversary of the beginning of the second greatest cyclical depression in American history. Businesses collapsed, banks closed, unemployment soared.

Previous interpretations and analyses of the silver controversy and its tragic aftermath have been incomplete. In A Lessonfrom the Past,Lawrence Reed weaves sound economics and history into a fascinating,instructive narrative as he details the inevitable consequences of intervention in the free market by government monetary authority. The Silver Panic, says the author, "has left many lessons for those who will listen. For the believer in the free economy, these lessons add up to a compelling indictment of government's alleged ability to 'manage' a nation's economy." 96 pages, indexed, $9.95 Please add $3.00 shipping and handling. Send your order, with accompanying check or money order to FEE, 30 South Broadway, Irvington-on-Hudson, New York 10533. Visa and MasterCard phone and fax orders are welcome: (800) 452-3518;fax (914) 591-8910.