Nobody Knows The Cost Of Antitrust Regulation, And That’s Bad
Antitrust regulation is hardly insignificant, and its costs need to be recognized in today’s world. We’ve seen interference into ATT‘s attempted merger with T-Mobile, delays of the Comcast-NBC Universal, a SiriusXM merger with concessions imposed and so on and on.
And antitrust is global; in addition to a string of European Commission interventions over the years, Gemany has just set out upon Facebook’s market power.
Large companies may enjoy market power for a period of time (firms have life cycles like industries and products), but they possess nothing that matches the near-absolute power antitrust authorities exert over the entire economy as a whole. Antitrust intervention is capable of changing entire industry structures, and in the process it reorients economic trajectories and generates outcomes that do not resemble what market competition would have delivered.
Interestingly, we know next to nothing about such costs. The White House Office of Management and Budget’s (OMB) cost estimates for federal regulation do not include assessment of antitrust regulation’s economic costs.
Even back around the turn of the century when it bothered to address aggregate costs of regulation, the OMB left antitrust out of the roughly $398 billion in aggregate non-trade economic costs it once compiled (see “A Baseline for Aggregate Annual Economic Regulation Costs” here).
As OMB stated back in its 2000 Report to Congress on the Benefits and Costs of Federal Regulation, “our definition of economic regulation does not include antitrust activities such as preventing the formation of monopolies through mergers or anticompetitive behavior.”
Yet OMB itself in certain instances has shared the view that antitrust regulation may not be entirely beneficial. As noted on p. 18 in the 2000 Report:
"Economic regulation may produce net social benefits when natural monopolies are regulated to simulate competition. Although … the dollar amounts of such efficiency benefits are small and short lasting in a dynamic and technologically vibrant economy, this is a judgment that is not the result of an empirical study. It is, however, based on the increasingly accepted view that the U.S. economy is becoming more competitive over time, with fewer long-lasting natural monopolies, and on evidence that much economic regulation seeks primarily to enhance one group at the expense of another."
The U.S. Department of Justice collected $1 billion in payments related to criminal antitrust investigations in FY2011. Apart from such assessments, costs of antitrust regulation (not including the government’s on-budget enforcement costs) are hard to find, but have been estimated at $1.9 billion annually for 2003, as seen in this chart, “Costs of U.S. Antitrust Regulation.” Benefits are said by practitioners to “almost surely” outweigh costs, while I would differ. In any event, assuming no added costs and putting this estimate in 2010 dollars, we have indirect antitrust costs of around $2.34 billion annually. Shockingly, that’s about it.
These costs include responding to government investigations; costs of private litigation; and indirect costs such as opportunity costs of management time spent on compliance and litigation, and distraction and deterrence of beneficial firm activities.
This is woefully low figure, insufficient for capturing antitrust’s enormous impacts on the economy. While not disputing claims that benefits of enforcement outweigh costs, Robert W. Crandall and Clifford Winston provide some context for the billions involved annually:
"Total resources consumed by antitrust enforcement, however, amount to much more than government antitrust agency expenditures….Firms involved in antitrust cases must pay for legal advice, particularly in obtaining approvals for mergers and acquisitions. Fisher and Lande (1983) estimate that a merger case cost a ﬁrm as much as $1.5 million during the 1980s. Firms that face a lawsuit must pay for their defense, which could involve a lengthy trial and subsequent appeals. Antitrust cases also require the time and resources of management and critical staff to address issues of ﬁrm conduct, to provide ﬁnancial information and so on. We are not aware of estimates of the costs to ﬁrms caused by antitrust investigations and court proceedings, but they undoubtedly run into the billions of dollars per year. Finally, the largest cost of antitrust enforcement may be that ﬁrms are discouraged from pursuing potentially efﬁcient mergers, taking competitive pricing actions, developing new products or making new investments for fear of being embroiled in an antitrust action, especially if competitors use the antitrust authorities to block one another."
Another survey notes, regarding “cost of a failed merger attempt” alone, that:
"The failure of a merger attempt can entail significant direct and indirect costs to the acquirer, target, or both firms. From the time of a merger announcement to the time when it is completed or canceled, the acquiring firm discloses information that it would not otherwise disclose, incurs substantial legal expenses, and faces production activity disruptions as well as management distraction. If the deal falls through, then competitors are in a better position to use such information to their advantage. Ekbo and Wier (1985) find evidence that rival firms benefit from the news of a merger proposal and that a delay in completion of the deal gives rival firms additional time to exploit the news. Bates and Lemmon (2003) find that the inclusion of target termination fees is more frequent in merger deals where the potential for information expropriation by third parties is significant. The target, on the other hand, has to seek other means of restructuring, including being taken over by a different firm, which may not be possible within a short period of time."
Antitrust activism results in second-order and indirect regulatory effects not reflected anywhere in governmental regulatory estimates. And even direct effects get too little attention; for example AT&T’s abandoned merger with T-Mobile entailed a breakup fee of $4 billion. This cost was caused entirely by government’s interference with one free market transaction, a derailment from which rivals benefit and avoid the need to respond competitively. This cost and others like it are not compiled for antitrust activism generally.
Also not included are lost synergies and inefficiencies created by “conditions” forced upon transactions, such as the spinoffs of business elements that frequently occur with respect to mergers. Such meddling is standard now, even with respect to something as mundane as e-cigarettes. It happened before with “intense mints.”
We don’t know the cost of antitrust regulation, and that’s bad. As policymakers address economic sluggishness, the cost of regulation deserves much more attention, rather than the free pass that intervention gets today.
Originally posted at Forbes.