Alberto Mingardi  

Do we need more antitrust?

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Do we need more antitrust enforcement? The Economist presents a number of interesting research papers. Among the most striking insights, the authors find that income inequality is "explained by a growing dispersion in average wages paid by firms," as opposed to increasing inequality within businesses ("where managers are well paid, so are janitors"). This, it would appear, is mainly due to the lack of competition among corporations, which would necessitate an aggressive bout of trust-busting.

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For The Economist, this divergence between private business profits could be explained by some companies acquiring more "market power" than others. Other explanations (including growth of red tape negatively affecting a big chunk of the private sector and creating innumerable opportunities for rent-seeking and gaming the system) are airily dismissed.

The British newspaper presents an elegant story, which is by and large shared by self-anointed "elites" all over the world. Yes, "the dismantling of barriers to the free flow of commerce, such as state monopolies, trade unions and restrictive practices" have "produced some clear successes". But now deregulation is under political attack and thus action is needed to secure support for "liberal" policies. Here antitrust comes in handy.

Market power is supposed to be policed by competition agencies, but they have lost some of their vim, particularly in America, where competition cases are fought out in the courts. A landmark Supreme Court judgment in 2004 said monopoly profits were the just reward for innovation. That has made it harder for trustbusters to root out rent-seeking or block mergers. Most big firms got where they are by being good at what they do, not because of coddling by regulators. But if firms can hold onto their market share for years, they create distortions in the rest of the economy. Incumbent firms are powerful lobbyists.

These are very different arguments. On the one hand, The Economist insinuates that competition agencies are less willing to challenge big firms - particularly in high tech sector. On the other hand, The Economist points out that incumbent firms tend to be better lobbyists.

There are plenty of reasons to believe the second argument is closer to the truth. First of all, for newcomers to argue their case as lobbyist is naturally more difficult: they are "new", they can't claim in the face of legislators they need to protect "jobs", or shareholders. At most, they can claim protection for their right to innovate, which typically comes with no constituency attached. Second, older companies tend to become entrenched in the system - when the system allows this to happen. Companies engage in lobbying vis-à-vis other activities either because they sense government action can be threatening for them, or because they sense government action can give them special privileges. We are back to the original argument: "liberalising" policies, that go in the direction of decreasing government powers, are in a sense the best competition policy. The less the government can give away, the least a private business could ask from it.

But when it comes to the first argument, we may have some doubt. Antitrust has traditionally been very eager to tinker with high tech sectors: think of Microsoft's browser wars. These interventions haven't been particularly successful, not least because these are "new" business sectors, in which entrepreneurial creativity is working at full speed and forecasting future market scenarios is very difficult indeed. Antitrust should care about "consumer welfare", and it would be difficult to argue that the rise of Internet giants such as Google or Amazon has gone against consumer welfare so far: and The Economist doesn't either.

My impression is that The Economist is using an old argument in favour of stronger antitrust. We need stronger antitrust to spread the idea that we care about the market economy being "fair", and bigness just doesn't look very "fair" at all. But do regulators, or The Economist for that matter, have a right to impose their vision of "fairness" on market participants?


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CATEGORIES: Competition




COMMENTS (5 to date)
Pithlord writes:

You use a lot of the argumentum ad scare quotum, with a little bit of straw man thrown in.

The far-left Economist provides empirical evidence that there are monopoly rents going to firms. You don't dispute this at all.

You claim that "elites" are behind this massive worldwide tendency to stronger antitrust enforcement. Of course, anyone making any policy argument at all can be characterized as an "elite", but you certainly don't present any evidence that opposition to corporate concentration is negatively correlated with income or any other proxy for elitehood.

Then comes the straw man. The issue is not whether the rise of Internet giants has been good for consumers over all. The issue is whether network externalities give incumbents a power that they can use in a way that reduces consumer welfare relative to some remedy that the antitrust system might impose. That is actually a complicated issue, and you don't address it at all.

Then you ask whether regulators have a right to impose its idea of fairness on market participants? Well, obviously any system of law imposes its view of fairness on those who disagree. This includes a common law system of property and freedom of contract. Do libertarians have the right to impose their idea of "fairness" or "liberty" on others? No, but they do have the right to make policy arguments and these should actually be addressed, rather than lazily dismissed.

CMOT writes:

"Antitrust has traditionally been very eager to tinker with high tech sectors: think of Microsoft's browser wars. These interventions haven't been particularly successful ..."

Au contraire! Before the anti-trust imbroglio, Microsoft had no dedicated political lobbyists or budget for campaign contributions, although it donated to industry groups that did lobby.

Afterwards Microsoft was spending lots of cash on political insiders, and not just as lobbying or campaign contributions. Dollars sloshed into the political/media class via Slate.com, various fellowships, Gates Foundation honorarias, etc.

Antitrust was very successful for the political class indeed!

And any new shakedown, I mean anti-trust effort, will be even more lucrative, uhm, er ... justice restorative.

MikeP writes:
Most big firms got where they are by being good at what they do, not because of coddling by regulators.

Coddling of big firms is not the most important impact of regulation. In fact, no intent by anyone is required for big firms to have significant advantages due to regulation that hinder competition from smaller firms.

In an age when new technologies, institutions, and forms of organization are making it more and more possible for firms to focus more and more strongly on their comparative advantages, there is one dominant factor that still induces economies of scale, since it is in no firm's comparative advantage.

Regulation.

Every hour consumed, every dollar spent, every person hired to deal with regulation is an hour, dollar, or person that is not contributing to the comparative advantage of the firm.

This is basic economics: if you are doing anything but that which you have a comparative advantage in, you are simply producing less wealth than you otherwise would.

And the way that regulations work, there are quantum jumps in hours, dollars, and people to deal with regulations that constrain firms to smaller sizes than they otherwise could be without those burdens. Firms inefficiently size themselves in order to deal with regulatory burdens.

On the other side, very large firms find the costs of regulations so high that they do try to gain comparative advantage in complying with them. And they eventually develop lobbying efforts to try to bend the regulations to their advantage. Note that they don't necessarily care if new regulations burden them: their metric of success is whether new regulations burden them less than they burden their competitors.

Again, none of this requires intent, corruption, or coddling. It is simple economics. It is surprising that The Economist fails to recognize it.

Roger McKinney writes:

Pithlord:

The issue is whether network externalities give incumbents a power

Network externalities are grossly overrated, as are all externatities and market "failures."

CMOT:

Antitrust was very successful for the political class indeed!

Exactly! Anti-trust has never been anything more than legal extortion!

MikeP:

none of this requires intent, corruption, or coddling.

But it does. Most new regs come from large corps which they design to reduce competition and create oligopolies. The oligopolies allow them to charge more and pay their people more as well as paying their politicians more. As Buchanan's public choice school shows that politicians exist only to sell their services to the highest bidder. Large corps buy them and then staff the regulatory agencies with their people who then generate massive new regs to kill competition.

RL Styne writes:

Methinks Pithlord needs to read a lot more Demsetz and Coase. Network externalities aren't a major issue if there is competition for the field. We've seen many examples of this in the tech sector (Uber, Lyft, browser wars, etc). Contestability can be choked off with regulation, but that's about it.

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