Who's Getting Busted... Trust Or Customers?

Who's Getting Busted... Trust Or Customers?

December 31, 1998

[P]erhaps the most effective pro-consumer program would be to consider federal enforcement of the antitrust laws to be a per se restraint of trade.

—Thomas W. Hazlett

Antitrust is a form of economic regulation. And like all economic regulation, it transfers wealth, typically in response to special interest urging. Recognition of such insults led to deregulation of various sectors like transportation, telecommunications and now electricity. But antitrust regulation has been given a pass.

It shouldn’t. In every antitrust case, the targeted company’s rivals have a direct financial, as opposed to spiritual, interest in the case’s outcome. Appeals to the public interest don’t change the fact that private motives of rivals deeply infect every case. Even "disinterested" trustbusters themselves have career aspirations: landing the big fish guarantees a lucrative career in the antitrust shop of a top law firm.

Antitrust is hardly the consumer-friendly policy it is made out to be. The doctrine that antitrust helps consumers, or even that its primary motive is to help consumers, deserves re-examination.

Make no mistake, the goal of businessmen is to make money: most aren’t necessarily in the game because they want to help their fellow man. But business transactions are fundamentally voluntary, non-coercive dealings – unlike government force, which jealous rivals rely upon. From this fresh perspective, one finds that even the most despised business behaviors – even collusion and mega-mergers – can be pro-competitive and pro-consumer, deserving of hugs and kisses, not venom and rebuke.

Big Mergers: When firms merge, the number of competitors in their field decline, but this doesn’t mean that prices will increase. Cost efficiencies often drive mergers, as appears to be the case in the Exxon/Mobil union. As the late economist Murray Rothbard argued, competition is a process, not a quantity. Competition has little to do with the number of competitors and industry concentration ratios that so bewitch government economists.

Mergers feature a built-in efficiency gauge. Competitor opposition to a merger occurs when rivals expect prices to fall. If a merger will raise prices, competitors will not object: they can sell more at their existing lower prices (or even raise prices). Falling prices do hurt competitors, but they help consumers.

Collusion/Price - Fixing:  It's been said that cooperation by people one doesn't like is a conspiracy: otherwise, it's just a plan.  Price-fixing is seen as a conspiracy against consumers.

But is it, really? In the same way that coordination between individuals confers benefits (marriages, tandem canoes, orchestras), so can "cartels" between firms in the same line of business. "Collusion" differs little from forming a partnership, entering a contract, or creating a larger corporation. Coordination allows firms to cope with uncertainties, to share research and development, and so on, rendering "collusion" not merely efficient, but essential in a global, high-technology economy that creates and commands vast resources. Business is merely voluntary trade: all "collusion" can ever do is achieve certain predetermined business ends.

Like mergers, collusive or price-fixing arrangements have a built-in efficiency check: the fundamental instability of cartels. Parties can "cheat" on price agreements by competing on quality or service. Price isn’t the only variable. Entry by rivals not part of the original agreement also disciplines "colluders."

Predatory Pricing:  Predatory pricing means pricing below cost with intent to monopolize.  Firms supposedly employ it to drive out rivals, snatch their customer, and amass an increasingly larger market share.   Then the predator happily begins charging monopoly prices.

Predation hurts the predator more than rivals because the predator must expand output and bear losses in order to capture the rivals’ market. Meanwhile, the rival can merely cut back sales. Even if the predator drove out rivals, monopoly pricing attracts new entrants, forcing a new round of losses.

But this is ridiculous. Customers can quickly tire of a company whose product underwent absurd price swings. Moreover, no predator could escape the wrath of its suppliers and business customers – those who stand to lose from the predator’s monopolization. These groups have adequate incentive to police and forbid any predatory efforts.

Typing or Bundling:  Tie-in sales are those in which customers purchasing "monopoly" product A are required to purchase product B.   Trustbusters claim this extends a monopoly into a new realm that would otherwise have been competitive.  Microsoft's bundling of the Explorer wev browser with the Windows operating system is the latest example.

The error in the tie-in logic is that the monopoly profit, assuming it exists, can be collected only once. If Microsoft or some other firm exploits all of its monopoly power from its primary, "monopolized" product, customers pay only that much and no more. There is nothing extra available to extract for product B.

Bundling arrangements actually perform important economic functions. They spread selling and administrative expenses across more than one product: drills come with bits; cars come with engines; televisions come with remote controls; cable television packages come with channels no one wants. Bundling also reduces the costs of monitoring customer satisfaction with related products, helping to ensure the primary product’s longevity and perceived quality. That can help a seller avoid warranty expenses.

But preserving the myth of harmful tie-ins will keep trustbusters employed, despite bundling’s utter necessity.

Exclusive Dealing:  Exclusive dealing limits a business partner's ability to work with one's rivals.  But to work, the retailer must be made better off - low wholesale prices, or placement on a computer desktop - in return for special effort on behalf of a product.  Additionally, exclusive arrangements assure the retailer that he, and customers, will have an unbroken supply of inventory for the duration of the contract.  Low prices and assured supply benefit consumers.

Since others are free to compete to secure their own exclusive dealerships with the retailer by offering a better deal, exclusive dealing does not harm competition. It is a form of it.

The list of vilified business practices is long, but needn’t be. A list of vilified trustbuster practices would be more advantageous to consumers.

This article and examples are adapted from the forthcoming CEI publication, Antitrust Terrible Ten: How the Most "Reviled" Business Practices Can Benefit Consumers, by Clyde Wayne Crews. To obtain a copy when available, send email to info@cei.org, or contact us at the address on page two.