Why We Don't Need Antitrust Regulation
by
Charles W. Baird
Most economists who understand the competitive market process argue that at best antitrust regulation is irrelevant, and at worst it is insidiously destructive. So long as combinations in restraint of trade (cartels) are not supported by government, they are unlikely ever to be successfully launched, and when some are launched they very quickly collapse as individual members of the combination resort to various types of competitive activities. Competition is not a tender plant that can be easily killed. It is more like a weed. No matter how hard people try to kill it, it always comes back.
Briefly, there are at least four reasons why combinations in restraint of trade that are not supported by government will self-destruct.
A. The Problem of Initial Agreement
Sellers who compete with each other are not carbon copies of each other. They may all agree that it would be nice to join together and, in solidarity, act as a monopolist would act, but then they have to agree on the details. Which prices should the cartel try to impose? A price that is optimal for a particular cartel member may be undesirable to other members. How should the cartel divide up the market? Since the sellers are likely be of unequal size, equal shares will not seem fair except to the very small members. Who should get bigger shares, and who should be content with small shares? Even if an economist could calculate the optimal shares for all members, they would be optimal from the point of view of the whole, not from the point of view of individual members. In short, most cartels that are proposed never get launched because the parties cannot agree on the rules. And if they are launched, the rules are always a subject of disagreement among members. Of course, if government imposes the rules there is no initial agreement problem.
B. The Free-Rider Problem
If a cartel is successfully launched, its members will be expected not to cheat on the rules. No member should cut price, exceed his production quota, or encroach on another's territory. All should refrain from competitive acts. If everyone sticks to the rules, the cartel as a whole will maximize its profit, and each member will receive the share of those profits that is specified for it in the cartel agreement. Suppose, however, that one member decides to cheat on the rules while all the others adhere to them. The cheater will end up with more profits than he would if he didn't cheat. This is because since all other members stick to the rules, they will not undertake ordinary competitive acts to defend themselves against the cheater. The cheater gets a free ride at the expense of all the other members. First one member cheats, then another does, and more and more do until the whole cartel collapses. Put another way, every member of a cartel is subject to a temptation and a fear. The temptation is to try to be a successful free rider; the fear is that someone else will try to free ride at his expense. Of course, if government forces all members to obey the rules there is no free-rider problem.
C. The Interloper Problem
If the members of a cartel are well known to each other and they trust each other it may be possible to overcome the free-rider problem, for a while. With everyone sticking to the rules, the cartel will be maximizing profit, and that profit will be above competitive rates of return. Above average rates of return attract interlopers like flowers attract bees. In an open market all that is necessary for an entrepreneur to enter the market as a rival seller is to assemble the necessary resources through hiring contracts with resource owners. No permission from any authority must be obtained. The cartel cannot keep out the interlopers so what is it to do? It could bring them into the cartel, but as the size of the cartel grows the costs of policing the cartel agreement rapidly increase and each member's share of monopoly profits is diluted The interlopers will be strangers who do not enjoy the trust of the original members. This increases the probability that the free-rider problem will emerge with all its usual consequences. Of course, if government closes the market - i.e., keeps the interlopers out - there is no interloper problem.
D. Creative Competition
Competition is not a tender plant. When one form of competition is cut off, other forms will emerge. For example, from 1938-1978 the federal government supported a cartel of interstate airline companies. It prohibited all price competition, it assigned routes that the carriers could fly, and it kept out interlopers. Nevertheless, by the mid 1970s the carriers were having difficulty making any profits. The reason was that since ordinary modes of competition were prohibited, the carriers began to compete on the basis of frequency of flight. Those who were permitted to fly, say, between San Francisco and Atlanta, scheduled several flights a day for the convenience of travelers. If one missed the 12 o'clock flight, not to worry, there would be another flight at 1:30. This meant that many airplanes were flying with many empty seats. This increased the carriers' cost per passenger-mile and consumed profits. Interestingly, when the carriers tried to get the government to extend its regulations to frequency of flight, the politicians balked and totally deregulated the airlines. Since then there are many more carriers flying most routes, and airline fares have fallen by over one-third. Of course, if government stamps out new forms of competition as soon as they are noticed, a cartel doesn't have to worry about creative competition.
The reasons why many economists think antitrust laws have been insidiously destructive of the competitive market process and entrepreneurial discovery are thoroughly discussed by Dominick Armentano in his Antitrust and Monopoly: Anatomy of a Policy Failure (1982). It turns out that many antitrust prosecutions have been initiated not at the behest of harmed consumers but at the behest of established firms that wanted to quash interlopers and their ideas for new ways to compete. For example, small grocers fought supermarkets and department stores fought warehouse discounters. Other antitrust prosecutions were initiated because particular firms were so good at satisfying customers that their smaller rivals had a hard time surviving. The Alcoa, IBM, and, more recently, Microsoft cases are examples. Antitrust laws are represented as necessary for the protection of consumers. In fact, they are used to restrict competition and benefit firms that are poor or lazy competitors at the expense of consumers.
Free-market monopolies, ones not supported by government, are always fleeting. When an entrepreneur creates a new product, a variation of an established product, a new production technique, a new marketing strategy, a new financial instrument, a new organizational architecture, or a new mode of labor representation, he will be a monopolist. The first to do something is always the only one to do it at the moment of innovation. If an innovation is successful it will soon be imitated, and the innovator's monopoly will gradually erode. If it unsuccessful it will not be imitated, and it will collapse. If antitrust regulation is used to quash free-market monopolies at the behest of established enterprises and unions that are threatened by the innovations, the rate of innovation and the gradual improvements in standards of living that come from those innovations will be substantially reduced.
In sum, antitrust laws are dangerous. They can be, and often are, abused. Since consumers don't need them for protection against combinations in restraint of trade, they ought to be abolished. What consumers need is for government to get out of the business of supporting all such combinations - including labor unions.