Antitrust Policy

The Case for Repeal

D.T. Armentano

• Publisher: Cato Institute
• Year: 1986
• ISBN:
  9781935308584
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

D.T. Armentano has long been one of the foremost critics of antitrust, and in this new book he states his challenge squarely: there is no respectable economic theory or empirical evidence to justify antitrust. Antitrust laws have been employed repeatedly to restrict the competitive market process and to protect the existing industrial structure. They violate both economic efficiency and individual liberty, and they should be repealed.

I. A New Direction in Antitrust Policy

Introduction

Antitrust policy has changed markedly over the last 10 years. Much of traditional antitrust enforcement has been curtailed, and a new direction in antitrust policy has emerged. In the 1980s the longstanding antitrust paranoia over the internal growth of large corporations has declined sharply. Internal business growth that tends to expand market output is now generally excluded from antitrust scrutiny. Conglomerate and vertical integration mergers— which rarely harbor any direct threat to restrict market output or reduce consumer welfare—are now of only limited concern to the antitrust authorities. Many joint-venture arrangements are permitted with little controversy, as are horizontal mergers that fall within the revised merger guidelines issued by the Department of Justice and the Federal Trade Commission in 1982. A substantial amount of price discrimination and many vertical nonprice restrictions are being perceived as part of an efficient market process, not as elements of monopoly power bent on injuring consumers. Finally, and this is important, some public and private antitrust enforcement efforts have been initiated against certain local and municipal government regulations, such as cable-television franchising and taxicab licensing, that legally restrict entry and restrain competition.

The collapse of much of the intellectual support for traditional antitrust enforcement can be traced to a number of specific developments. The most important theoretical development has probably been the increasing professional disenchantment with the so-called barriers-to-entry doctrine.¹ This doctrine held that certain economic obstacles prevented smaller companies from competing with leading firms, enhanced the market power of these leading companies, and served to harm consumer welfare. Most of these alleged barriers have proven to be economies and effidendes that leading firms have earned in the marketplace. Effidency and successful product differentiation certainly can limit rivalry with firms unable to match or surpass such innovation; superior economic performance can make it difficult for new firms to enter markets or for old firms to expand their market shares. But none of this is unfair or unfortunate from any consumer perspective, and none of it can rationalize an antitrust attack on the firms with the superior performance.

A reexamination of the antitrust case evidence has also tended to support recent administrative reforms in antitrust policy. By the mid-1970s it was becoming dear that much of the antitrust case history did not confirm the resource misallocations suggested by orthodox monopoly theory. Indeed, economic analysis of the leading antitrust cases tended to demonstrate that the indicted corporations had increased their outputs and lowered their prices and had behaved generally as competitive firms would be expected to behave in open markets facing direct or potential rivalry.² The thrust of antitrust policy in these cases was, if anything, to restrain the competitive performance of the leading firm and thus to protect the existing market structure of generally smaller, less effident business organizations.

These findings are perhaps best exemplified in U.S. v. IBM,³ the disastrous government antitrust case against the International Business Machines Corporation that contributed significantly to the movement away from traditional antitrust policy. IBM was indicted by the Department of Justice in 1969 and charged with illegal monopolization of the general-purpose digital-computer-systems market. The suit held that IBM had systematically engaged in certain exclusionary business practices that tended to restrain trade and create a monopoly in violation of the Sherman Antitrust Act (1890). The case finally went to trial in 1975. After more than six years in court and a trial transcript of more than 104,000 pages, the case was abandoned by the government in 1982.

It was clear from the start that this government antitrust case and the many private antitrust cases against IBM⁴ were all fundamentally misguided. They were, in brief, an attack on entrepreneurial success and efficiency. Clearly, IBM had not restricted production to raise prices and profits; nor had it repressed invention and innovation. On the contrary, IBM had achieved its considerable success and market share by taking unprecedented research-and-development risks, innovating superior products, and developing an unsurpassed, long-term corporate commitment to customer-support services.⁵ Most of the alleged unfair practices, such as educational discounts and bundled hardware and software, were only "exclusionary" of less efficient sellers—some larger than IBM, some smaller—that could not match IBM's overall market performance.

In addition, and contrary to the assertions of the government and the private plaintiffs, IBM's considerable business success had not hurt the overall growth of non-IBM companies and the data-processing industry generally. IBM had grown rapidly, but the industry had grown far more rapidly; IBM's share of domestic electronic data processing revenues declined from 78 percent in 1952 to 33 percent in 1972, hardly persuasive evidence of any "monopolization."⁶ Assistant Attorney General William Baxter understood the true state of affairs when, in 1982, his office withdrew its absurd legal action, terming it "without merit."⁷

The collapse of the "concentration doctrine" also strongly influenced the new direction in antitrust policy.⁸ Early empirical work in industrial organization had appeared to discover a slight positive correlation between market concentration (the percentage of the market sales or assets "controlled" by a small group of firms, usually four) and the average profits earned by firms in such markets. Most of these studies assumed that the so-called barriers to entry mentioned above limited competition in the concentrated industries and allowed firms to earn monopoly profits.⁹

Later research argued, however, that the higher profits in the concentrated markets were more logically explained by the fact that the leading firms had lower costs and that these efficient firms had grown more quickly than the less efficient firms. In addition, over the long run, profit rates tended to decline in the high-concentration markets and to increase in the low-concentration markets, indicating that the competitive-market process of resource reallocation was alive and well. In short, evidence from the so-called new learning undercut much of the rationale for the traditional antitrust regulation of market concentration and high market share.¹⁰ A new direction in antitrust policy was inevitable.

Not all traditional antitrust policies have been abandoned, however. Antitrust in the 1980s is still, for example, very much concerned with price-fixing and market-division agreements between competitors (horizontal agreements), and neither the antitrust authorities nor the courts have relaxed their position that such arrangements are normally illegal per se. In addition, certain inter-firm cooperative joint ventures are still subject to regulation by the appropriate antitrust authorities. Resale price maintenance and so-called predatory practices remain illegal under the antitrust laws. The Department of Justice and the Federal Trade Commission still regulate horizontal mergers through revised merger guidelines issued in 1982. And although the merger attitudes and guidelines are somewhat more relaxed than they were in previous years, the antitrust authorities have intervened in certain steel, beer, and petroleum industry consolidations. In short, although the focus of antitrust enforcement in the 1980s has changed a little, the antitrust authorities still remain active in the areas of price fixing, merger, and restrictive practices, where it is still alleged that firms are able to harm social welfare.

The progress made in moving away from the irrationalities of traditional enforcement has, by some standards, been remarkable. Critics of traditional enforcement might be tempted to be content with these important administrative changes, or even more tempted to call for some additional marginal reform, such as the general adoption of a rule of reason with respect to certain restrictive practices, for example, tying agreements or resale price-maintenance contracts. It is argued below, however, that even additional reforms cannot be sufficient and that the case against antitrust regulation is strong enough to justify the complete repeal of all of the laws.

The Case for Repeal

The case for the repeal of the antitrust laws can be summarized as follows:

First, the laws misconstrue the fundamental nature of both competition and monopoly. Competition is an open market process of discovery and adjustment, under conditions of uncertainty, that can include inter-firm rivalry as well as inter-firm cooperation. Within this competitive process, a firm's market share is not its market "power," but a reflection of its overall efficiency. Monopoly power, on the other hand, is always associated with legal, third-party restraints on either business rivalry or cooperation, not with strictly free-market activity.

Second, the history of antitrust regulation reveals that the laws have often served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors. This protectionism is most obvious in private antitrust cases, in which one firm sues another, which constitute more than 90 percent of all antitrust litigation.

Third, some of the antitrust laws, such as section 2 of the Clayton Act (1914) and the Robinson-Patman Act (1936), explicitly intend to restrict price rivalry in the name of preserving competition. Government antitrust suits against firms that price discriminate almost always result in the defendant firm raising some of its prices to comply with the law.

Fourth, section 7 of the Clayton Act, which restricts mergers that may tend to lessen competition, is itself destructive of a competitive process. Restricting mergers and takeovers may inhibit the flow of productive assets into the hands of more efficient managers. The anti-competitive effect of section 7 is especially evident in vertical-integration antitrust cases and in cases in which poorly performing domestic firms may require merger or other forms of cooperation in order to compete more successfully with foreign firms. Even with relaxed attitudes toward mergers and revised merger guidelines, the Antitrust Division of the Justice Department has continued to hamper important business consolidations in the domestic steel and beer industries.

For instance, the proposed 1983 merger between the LTV Corporation and Republic Steel was at first strongly opposed by the Department of Justice as violating the department's 1982 merger guidelines.¹¹ A proposed consolidation between U.S. Steel and National Steel was abandoned for similar reasons. When intense criticism of the merger guidelines in steel developed, the guidelines were revised to re...

Table of contents

• Preface
• I. A New Direction in Antitrust Policy
• II. Competition and Monopoly: Theory and Evidence
• III. Barriers to Entry
• IV. Price Discrimination and Vertical Agreements
• V. Horizontal Agreements: Merger and Price Fixing
• VI. Liberty, Efficiency, and Antitrust Policy
• About the Author
• Cato Institute