D. T. Armentano

Professor of Economics, University of Hartford

Both the normative and economic case for free markets and against any antitrust law is impressive. Since the law inevitably interferes with both rivalry and cooperation, it must tend to make the economy less efficient. And since the law inevitably interferes with individual rights and with peaceful exchange, it must tend to make the social system less fair and just. In short, the law appears to have lost any claim to legitimacy.

https://imprimis.hillsdale.edu/antitrust-policy-in-a-free-society

The primary concern of political economy is the appropriate role of government in social affairs. The debate, in brief, is whether the economy should be left free to establish a “spontaneous order,” or whether government regulation is necessary to maintain efficiency and economic welfare. Some liberals, most conservatives, and all libertarians would argue that government regulation of industry generally tends to reduce efficiency and economic growth and should be avoided. Since the late 1950s, and at an accelerated pace since the 1970s, free market economists and others have repeatedly argued that many governmental policies are unworkable, and that these policies often tend to achieve results that are the opposite of those intended. Indeed, theoretical and empirical criticisms of government regulation in industries such as transportation, telecommunications, and banking have been the primary rationale to deregulate these markets, and to allow free competition to determine the allocation of scarce resources.

Antitrust Deregulation

Antitrust policy has now joined the growing list of government “regulations” subject to theoretical and empirical revisionism. It wasn’t always so. Indeed, for most of the 20th century, antitrust policy was relatively immune from serious criticism. Its intentions and (apparent) results enjoyed wide academic and political support. It was generally assumed that the antitrust laws were based on solid theoretical foundations, and that vigorous enforcement was necessary to preserve business competition. What muted criticism there was of antitrust policy concerned the blatantly anti-consumer Robinson-Patman Act (1936). But aside from Robinson-Patman, the rest of the antitrust laws were seen by most as necessary to “preserve competition.”

The antitrust world has changed rather dramatically over the last 10 years. The enforcement of traditional antitrust policy has generally been curtailed sharply, and a “new direction” in antitrust enforcement has clearly emerged.

We might take a moment to contrast traditional enforcement policies with the current practices of the Federal Trade Commission and the Department of Justice. Traditional antitrust concern over the growth of “big” companies has been sharply reduced. Business arrangements whose sole probable effect is to expand market output and reduce market price can safely be excluded from antitrust prohibition. Conglomerate and vertical mergers (rarely a threat to any restriction of market output), and even many horizontal mergers (within certain reworked merger guidelines) can be permitted. Price discrimination and many vertical business agreements are now generally seen as part of the competitive market process and not as elements of monopoly power. Finally, and most importantly, antitrust enforcement efforts have been initiated recently against certain state and local regulations and ordinances that legally restrict entry and competition.

Why has antitrust policy changed? Is the new direction correct? Do we still require antitrust prohibition of certain “horizontal” agreements? Are antitrust supervision of trade association activity and rate bureaus necessary? Is there a rationale for any antitrust policy in a free society?

Monopoly Theory and Antitrust Policy

The most important reason for the collapse of traditional antitrust policy is the absence of any intelligent theory that would explain how private monopoly power could exist and be harmful to consumer welfare. Assume, for instance, that we have some industrial market with no legal barriers to entry. Business organizations will enter that market and prosper if they can allocate resources in generally efficient ways to consumers. The firms that grow and accumulate market share will have earned their market positions through exceptional performance, and holding or advancing their position will depend upon a continuously exceptional performance.

On the other hand, firms that misallocate resources (from a consumer perspective) would likely lose market position relative to more efficient business organizations. Organizations, for example, with relatively higher costs, restricted outputs, higher prices, poor quality products, repressed innovation and generally restrictive practices would likely lose profit and market share to rivals.

What useful role could antitrust policy play in this open market process? To employ antitrust against the successful firms would be anti-consumer and destructive to industrial efficiency. Yet to employ antitrust against firms that perform poorly would be unnecessary since strong economic incentives exist for such firms to change their behavior or, given failure, for the market process to reallocate resources away from such organizations. Any government action would be either premature or redundant. Thus in the absence of any intelligent theory of how resources could continue to be misallocated in open markets, the theoretical justification for traditional anti-monopoly enforcement tends to evaporate.

In a last-ditch effort to save traditional enforcement, it was argued that certain non-legal “barriers to entry” protected large firms from competition. On analysis, however, the “barriers to entry” doctrine self-destructed. Most of the so-called “barriers” turned out to be economies and efficiencies that leading business organizations had earned in the marketplace. For example, certain large firms enjoyed economies of scale that often permitted low-cost production and sale. Certain firms enjoyed an excellent reputation for high quality products and service. Certain firms successfully differentiated their product, successfully advertised their product, and successfully engaged in uncertain research and development to keep a flow of products available to accommodate the everchanging tastes of consumers.

From a competitor’s perspective, all of these achievements represented economic “barriers” that served to “limit” competition. It should be obvious, however, that from the relevant consumer perspective, these so-called barriers represented economic values that consumers willingly supported and sustained. Attack these values with antitrust policy and you attack the very economic virtues that the competitive process serves to discover and perpetuate. The non-legal barriers-to-entry discussion represented the final bankruptcy of conventional anti-monopoly theory.

Antitrust History and Policy

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