Automaker Antitrust Investigation Wrong Way to Fight Cartels

The Justice Department is launching an antitrust investigation against Ford, Honda, VW, and BMW, alleging that the automakers colluded on a deal with the state of California to follow its stricter fuel economy and emission standards, rather than looser federal standards. My colleague Marlo Lewis has argued that automakers are obliged by statute to follow the federal standards, not the state standards. He also correctly argues that cartels can only be propped up with government support. A few more words about cartels are in order.

For the sake of argument, let’s assume that Ford, Honda, VW, and BMW, have, in fact formed a cartel. By themselves, they do not have the power to sustain it. A federal antitrust case against the carmakers aims at the wrong target. The proper solution is to rein in California’s government, which should not have cartel-making power in the first place.

Cartels need government support because they contain the seeds of their own destruction. Cartels raise prices by restricting supply—when something becomes scarcer its price goes up. That extra profit margin gives each cartel member an incentive to cheat by increasing supply on the sly. The more they do this, the more they undercut the high cartel price. In other words, self-interested companies acting selfishly naturally undo their own cartels.

Of course, this illustration only holds if the cartel’s participants control the entire market, or close to it. This is not the case with Ford, Honda, VW, BMW, and California. The two biggest automakers, GM and Toyota, are not part of the agreement. Neither is Mercedes-Benz. They can choose to differentiate their cars’ fuel economies from what the cartel members have agreed to. If consumers prefer these cars over the cartel members’ cars, then the cartel is lost, even with government support from California.

For these two reasons, the antitrust investigation against automakers should be dropped. And as Marlo also points out, the same arguments that apply to reining in California’s cartel-making powers at the state level also apply to federal CAFE standards. For more on why cartels are unsustainable without government’s help, see Wayne Crews’s and my recent paper, and other resources at antitrust.cei.org.