Antitrust Liberalization May Avert Need for Bailouts; Outdated Laws Deter Efficient Mergers
In early 2007, the economy was humming along and General Motors was considered to be in the process of a turnaround. To help stabilize itself, the company was considering buying its smaller, money-losing rival Chrysler.
But it faced a stumbling block in the form of antitrust law. According to analysts looking at a potential merger, the government would consider a combined GM and Chrysler too big and powerful with the ability to drive competition out of the market. The Wall Street Journal reported in March 2007 that such a merger “would probably face difficulty gaining approval from antitrust authorities because it would give the combined entity a highly concentrated position.”
Today, with GM on the brink of bankruptcy, such a claim seems especially laughable. But even way back in 2007 it was clear that the Big 3 had more than their share of competition from foreign automakers. An analyst for Bear Stearns & Co. (boy, a lot has happened since the beginning of 2008!) told Bloomberg that while “barriers to entry in passenger cars are relatively low,” the merger might hit the rocks because of the dominant position such a company would have in the “light truck” category that includes sport utility vehicles, minvans and pickups.
And even now, with both companies hitting the rocks, the merger may still face antitrust troubles because of a possible dominant position in the light truck market. A recent article in the Detroit News cited an antitrust attorney who said that a merger “would face a review of up to a year by either the Federal Trade Commission or the Justice Department”. The attorney, Ted Bolema who was formerly with the DOJ, told the newspaper: “The two companies would control about one-third of the light-vehicle market. That’s getting up there in market concentration.”
But lost in such an analysis would be that the market for light trucks itself has shrunk due to the spike in gas prices earlier this year and general economic woes. People are are choosing passenger instead of light trucks for a variety of reasons. Thus, defining light trucks as a separate “market” — instead of as part of the overall market for automobiles — gives a skewed look at market concentration.
Unfortunately, this is not the only instance where our antitrust laws are stuck in “Reverse” with antiquated and static definitions of markets. The Federal Trade Commission, for instance, is still fighting organic grocery chain Whole Foods Market Inc.’s acquisition of competitor Wild Oats based on the dubious claim that such a combination would dominate, in the words of an FTC official, the “premium natural and organic supermarkets” market.
Wait a minute, the what market?!! The parsing of the FTC’s words tells the story. Even though as known by people who love organic food (and by people, like the folks writing for this blog, who think the organic’s claims of superior quality is greatly inflated), every supermarket and its brother has been trying to cash in on the organic food craze, the FTC is trying to reverse the merger based on an extremely narrow definition of a market. The FTC analysis deliberately excludes the competition Whole Foods and Wild Oats face from grocery giants like Safeway and well as the retail behemoth Wal-Mart, limiting the market to stores that only sell organic and natural food.
But this market definition flies in the face of reality. Consumer surveys done by Whole Foods and others show that Whole Foods and Wild Oats and the conventional grocers are indeed competing for the same buyers of organic food. As an article in Smart Money noted last year, “Shares of both chains suffered badly last year as conventional grocers such as Safeway (SWY: 22.82, +0.01, +0.04%) and larger retailers like Wal-Mart Stores (WMT: 54.63, -0.16, -0.29%) boosted their organic offerings, pushing same-store sales down at the specialized purveyors of pesticide-free endives, hormone-free goat milk yogurt and fresh made whole wheat pasta.” And in a tough economy, there is probably even competition between organic and the lower-priced conventional food.
The sad thing for both taxpayers and consumers is that if GM and Chrysler had been allowed to merge in early 2007, they may have had the efficiencies and economies of scale needed to ride the current credit crunch out, even with the other management problems. Thus, they would not be begging for a bailout now.
Of course, there was no guarantee that a merger would have avoided the catastrophe they face now. And Whole Foods will still likely be healthy company even if the FTC succeeds in stopping the acquisition. But irrational regulations that stop efficient mergers may indeed mean the difference between survival and bankruptcy for many companies in a tough economy.
So liberalization of antitrust law away from outdated definitions of markets may be one of the best economic stimulus plans of them all. And the best part is that this change won’t cost taxpayers a dime.