Redistributive policies (e.g., granting of subsidies) of our representative democracy have contributed to political tribalism. For its part, social media has been a factor adding fuel to a volatile situation, e.g., Twitter or Facebook being used for propaganda purposes. Blame for and reactions to these growing divisions and distance among citizens can be seen in demands for the reining in of tech companies being heard in most corners of the political spectrum.
While the primary focus of various petitioners has been on social media companies, there seems to be a general discomfort with the market power of other global tech giants (e.g., FAAMG: Facebook, Apple, Amazon, Microsoft, Google + Twitter & Netflix). As calls for antitrust actions have become commonplace, there is some urgency in investigating the efficacy of antitrust interventions to remedy what is said to be instances of excess economic power.
One aspect of the antitrust argument is that all monopoly prices and market dominance by one or a few economic actors are harmful. But this betrays an ignorance of the basic economic logic of entrepreneurial capitalism whereby the quest for high profits that generates “creative destruction” leads to the dynamism that brings new jobs and goods to markets.
Not only is it an open question as to whether antitrust interventions can eliminate or reduce economic power, more importantly, should such interventions be applied at all?
To investigate these questions, one might begin with the fact that antitrust lawyers in the Department of Justice will likely interpret the hue and cry against large corporations as an opportunity to expand their power and the budgetary resources granted to them. Once at the top of the heap of government officialdom, antitrust lawyers have become a shadow of their former selves, so to speak.
When I was a student, antitrust bureaucrats kept children up late with horror stories about the evil specter of monopoly, e.g., in GM’s growing market share. Or they might regale kids with heroic tales of having slain dragons like AT&T.
But then antitrust lawyers were sidelined by tort lawyers that stole headlines and racked up heavy fees. In 2001, antitrust lawyers employed by the federal government restored their glory days with a preemptive strike against Microsoft’s browser (i.e., Explorer), putting them again on front pages. Massive amounts of midnight oil must have been burned as denizens of the Justice Department reviewed the Sherman Antitrust Act and supportive legislation.
Now it seems their time in the sun has come again as the vocal demands of politicians, disaffected citizens and members of the mainstream media rise above the din of the news cycle and call to dismantle the behemoths of global capitalism. These are tantalizing prospects for antitrust regulators.
But a cautionary tale lies therein. While competition is to be preferred over a true monopoly, the arguments in favor of antitrust actions are rather weak. It is also the case that grandstanding by public officials can lead to disastrous results. Concerning the latter, consider that the catastrophic and deadly raid on the Branch Davidians in Waco (1993) was driven in part by an attempt by the ATF to restore its glory from its role in helping bring down Al Capone.
Those too young to remember having lost sleep over GM’s market position might remember how Nokia once dominated the cell phone market or when Netscape or MySpace were dominant players. Then as now, new technology and changing preferences of consumers proved to be more important in improving service and lowering prices than busting up companies that dominated a particular market or activity.
One should not assume that federal legal bureaucrats are less inclined to look after their own self-interest than lesser mortals. Anyone believing that civil servants or politicians act outside of their own self-interest is living in another universe. Or perhaps they never met a Chicago alderman.
With such large targets on the radar screen of federal officials in search of malefactors, they will no doubt take delight in scaring the bejeezus out of the richest and most successful US corporations. But it is unlikely to end well for the common man since the biggest winners are likely to be private-sector lawyers made rich by defending deep-pocketed corporate clients and officials of the antitrust division being able to justify bigger budgets and higher pay.
In all events, it turns out that the likelihood of market dominance surviving without antitrust legislation is much less likely than assertions to the contrary. Whatever the legal or personal logic behind regulatory assaults, there is little support either from economic theory or historical evidence.
Before considering the implied dangers of market power, it must be remembered that monopolies are literally the sole seller in a given market. But such circumstances are quite rare and most have short lives, unless government intervention restricts the entry of competitors.
Indeed, most economists understand that true monopolies exist and survive as the result of government interventions in the first place. As such, the term “monopoly power” should be reserved only for those instances where the firms have been granted protections for their market position. (A better depiction of corporate activity is to describe it with relation to market dominance, itself neither a crime nor a threat, per se, to consumers.)
Whatever “economic power” they might have was awarded to them by those possessing political power. Inasmuch as economic power without the support of political power will be contested and transient, the correct solution is to curb the exercise and expansion of political power rather than intervening in market transactions.
In this framing State actions are the basis and the means for sustained monopoly power, by imposing restraints on competition (e.g., professional licensing) or legislation to grant privileges or subsidies. Without such interventions, monopolies eventually become what Ludwig von Mises referred to as a “trivial” problem because self-adjusting market mechanisms will tend to reduce or eliminate them in the long run.
A bet I offered students for 30 years might provide insight into the pitfalls of antitrust legislation. So certain am I that market forces will eliminate monopoly power, I offered them an “A” grade, without further participation in my classes, if they present a counterexample to the following.
I asked them to identify a monopoly producer whose actions injure the community by overpricing or underproducing and survive without government restrictions on competitors’ entry. I have never had to deliver on the bet.
It can be seen that most movers or new businesses might initially earn monopoly profits, but competitive conditions without government interference to protect them ensure they cannot earn them for long. Instead of being a danger to society, monopoly profits are an important feature of market dynamism that incite innovation and competition; at the very least, they attract entry into the market barring government interference. In all events, monopoly profits that emerge for successful new products tend to be undercut if the product or service can be copied by competitors.
There are a few extreme cases, as when cartels form to fix prices, that antitrust interventions may be necessary in that cartels are already illegal. In any case, they tend to be unstable such that they seldom survive for long periods, unless supported and protected by legislation or State dictate as in the case of OPEC. While cartel participants face strong incentives to cheat by offering lower prices or ignoring quantity limitation, the costs of policing the behavior of other members will rise with larger numbers of participants, thereby undermining the survival of the agreements.
And so it is that “successful” antitrust actions tend to weaken incentives to innovate or compete. On the one hand, weak competitors might encourage antitrust actions against dominant players instead of addressing their own failings by improving their own products or cutting costs. On the other hand, established firms might find that curbs on behavior will raise the costs of start-ups, giving them protections against new entrants.
Monopolists’ positions are undone by the dynamics of time that allow for consumers and other producers to react to the higher prices and profits arising from restrictions on output. Eventually, everything changes in dynamic markets to undermine market dominance and erode profits.
For example, changing relative prices induce consumers to seek substitutes or for producers to produce them. It is also the case that changing tastes and preferences result from new information about other goods.
Changing technology reduces the value and community impact of a monopoly as in the case of most “monopolies” during the 19th century. There is considerable historical evidence and theoretical support to show technological innovation as a market-based curb on market dominance if free and open trade is allowed to generate competition.
As it is, industries most exposed to rapid technological changes will tend to dispose of dominant inert players with the greatest alacrity. Firms must be reengineered to avoid being rendered ineffective as a nonviable competitor.
So, if true monopolies are so rare, it might seem strange that there are so many valiant defenders of public interest that support antitrust actions with such self-righteous conviction. As suggested, a partial answer resides in political impulses relating to lobbying or the incentives of government bureaucracies to act to further their interests rather than responding to economic exigencies.
On the one hand, it appears that attacks on deep-pocketed corporations play well on Main Street. There is some indication that citizens might fear or imagine abuse of private corporations more than they fear the abuse of political power exercised by public-sector officials or politicians. And they do so despite the fact that there are more mechanisms to punish private sector actors than officials in government.
On the other hand, weak competitors and perhaps small or medium-sized firms might be delighted by legal bureaucrats hobbling and humbling dominant market players. In the former case, there is no better way for a weak competitor to gain market share than government-imposed restraints on or punishments against more innovative rivals.
But it might also be a tendency to interpret antitrust action as if motivated by good intentions. Never mind the results.
As it is, there can be a wide gulf between intentions of public officials and the outcome of public policy. Yet, ill-timed or ill-conceived policy actions have been the source of every significant economic downturn or price level upsurge in history.
Justifying antitrust actions on the grounds that citizens need protection from corporations wielding too much economic power has a stifling effect on competition, and worse, merging corporate power with State power. Big data gathered by the former can be made available and (mis)used by the latter. (See China’s “social credit” system wherein data from tech companies is used to “nudge” their citizens toward “good” behavior.) In the end, these latter outcomes constitute a much greater threat and lead to a more lethal outcome than market dominance that is almost certain to be temporary.
One inappropriate and indeed impossible task is for antitrust regulators to decide on the optimum size of firms or the number of competitors in a given market. In the case of deciding whether a dominant player has excessive market power, it is necessary to make a (subjective) interpretation of the extent of the market.
Defining the market widely might indicate that no firm has market power, but a narrow definition might indicate that every firm has market power. For their part, antitrust authorities face incentives to defend their actions and maintain their budgets by insisting on a narrower rather than broader definition of the extent of a market.
Other problems also arise from the threat of antitrust enforcement. First, it introduces uncertainty for firms considering merit-worthy mergers and acquisitions so that firms must try to predict the reactions of antitrust authorities.
For their part, many mergers can lead to gains in economic efficiency by allowing economies of scale to emerge. And then there is the case that takeover threats can provide an inducement for current managers to improve to evade takeover.
It turns out that the globalized economy, in requiring transnational firms to be nimble to respond rapidly, has a strong regulating effect without the need for State intervention. In some cases, being large may be its own punishment. If a corporation is “too large” and cannot readily respond to competitive pressures, the market will inflict far greater punishment than any bureaucrat might wish.
Conversely, if large size is an advantage in the global setting, e.g., due to economies of scale reducing costs, it would be imprudent to “downsize” the industrial or tech giants. While corporate logic behind “downsizing” has led to a fair number of mistakes in the private sector, incentives and logic of government regulation are likely to be even more misguided, leading to more widespread distortions.
And so it is that antitrust enforcement against mergers or guessing the optimum size of a market or the appropriate number of competitors might do greater harm than the intended good. If antitrust legislation and interventions involve unnecessary interference with corporate growth or mergers, there will be lower quality products, fewer choices, less R&D and higher prices.
Given that antitrust actions have undesirable side effects, they should be avoided rather than encouraged. In passing judgment on the antitrust legislation that bears his name, Senator John Sherman might have done to American businesses and consumers what his elder brother General William T. Sherman did for the immediate well-being of Atlanta.
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