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    Antitrust Policy: The Case for Repeal
    Antitrust Policy: The Case for Repeal
    Antitrust Policy: The Case for Repeal
    Ebook147 pages2 hours

    Antitrust Policy: The Case for Repeal

    By D.T. Armentano

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    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 They violate both economic efficiency and individual liberty, and they should be repealed.

    LanguageEnglish
    PublisherCato Institute
    Release dateMay 1, 1986
    ISBN9781935308584
    Antitrust Policy: The Case for Repeal
    Author

    D.T. Armentano

    Dominick T. Armentano is an adjunct scholar at the Cato Institute and professor of economics emeritus at the University of Hartford.

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      Antitrust Policy - D.T. Armentano

      Preface

      Although it is difficult to summarize more than a century of antitrust enforcement in one observation, it is undeniably true that the antitrust laws have often been employed against business organizations that have expanded output and lowered prices. That is most obvious in private antitrust cases (95 percent of all antitrust litigation), but it is also evident in the classic government cases as well. Since antitrust regulation (at least the Sherman Act) was allegedly designed to prohibit business activity harmful to consumers' interests, much of antitrust policy as practiced appears misguided and can be termed a paradox.¹

      The alleged paradox can be explained in several ways. One approach is to challenge the public interest origins of antitrust policy.² If the laws were originally meant to protect less efficient business organizations from competition rather than to promote the interests of consumers, then there is no paradox. From that perspective, antitrust regulation is just another historical example of protectionist rent-seeking legislation, the overall effect of which is to lessen economic efficiency.³

      It has also been argued that there has traditionally existed serious theoretical confusion over the meaning of competition. That confusion may have misled the courts and the administrators of antitrust law.⁴ For example, when a firm lowers its price, is that competition or an attempt to monopolize? When a firm gains market share, is that evidence of efficiency or a threat to competition? When business mergers are restricted by law, is competition enhanced or restrained? When a firm engages in expensive research and innovation that competitors cannot easily duplicate, is that monopolization? Faulty theorizing on those issues could explain a policy attack on economic efficiency in the name of preserving competition.

      Misdirected Theory

      The theoretical foundations of antitrust policy developed generally from neoclassical microeconomics and were refined by scholars specializing in industrial organization. Industrial organization (IO) theory remains deeply rooted in the neoclassical models of pure competition and pure monopoly. IO economists in the 1940s and 1950s focused on those industries that lay between pure competition and absolute monopoly, and their efforts represented an attempt to understand the relationships among market structure, economic behavior, and economic performance.

      Early IO economists generally accepted a deterministic relationship between market structure and economic performance. If markets were competitively structured (small firms, homogenous products, and ease of entry), then the market process led automatically to an allocation of resources whereby price, marginal cost, and minimum average cost were all equal. Alternatively, high market concentration, collusion among firms, economies of scale, or product differentiation could create barriers to entry and market power that would misallocate economic resources. Early empirical data on market concentration and profitability appeared to support the general IO hypothesis that competitively structured markets performed better than concentrated markets.

      It was a short step from microeconomic theory, regression analysis, and some engineering studies on optimum plant size to recommendations concerning appropriate public policy. If poor market structure led to economic inefficiency, then government antitrust regulation might correct such market failures. For example, antitrust regulation could reduce or restrain industrial concentration (anti-merger policy), prohibit horizontal price and output agreements (anti-collusion rules), and discourage other agreements within and among firms (prohibitions against tying agreements and resale price maintenance) that might restrain trade and competition. Barriers to entry that seemed to shelter so-called dominant firms (product differentiation, for example) could be attacked under the antitrust laws to make the marketplace more efficient.

      That structure-conduct-performance perspective became the primary intellectual justification for traditional antitrust policy in the 1950s and 1960s.⁵ Within that framework, several classic antitrust cases were brought to end price discrimination,⁶ tying agreements,⁷ increasing industrial concentration,⁸ and the high market share of United Shoe Machinery⁹ and International Business Machines.¹⁰

      Criticism of the structure-conduct-performance framework and of traditional antitrust regulation began in the 1970s. The new learning challenged some of the theoretical assumptions of the older IO paradigm (economic uncertainty generally replaced perfect information in the newer economic analyses, for example) and questioned many of its important empirical predictions.¹¹ New learning theorists such as Harold Demsetz and Yale Brozen argued that increasing market concentration was not necessarily associated with inefficiency or monopoly profits and that increased concentration could lead to an increase in market efficiency that benefited consumers.¹² In addition, careful reexaminations of earlier antitrust cases demonstrated that much of the historical enforcement effort had been entirely misplaced. By the mid-1980s, each part of the traditional justification for vigorous antitrust enforcement had come under severe criticism by economists and law professors. That intellectual criticism helped pave the way for some modest changes in antitrust enforcement.

      The 1980s Revolution

      When Antitrust Policy first appeared in 1986, we were in the midst of what some observers called an antitrust revolution. That revolution was evidenced by several important factors. First, there was a decided shift in the mix of antitrust cases initiated by the Department of Justice and the Federal Trade Commission. Second, there was a modest decline in both public and private antitrust activity. Finally, the Supreme Court was becoming increasingly skeptical of traditional antitrust theories of monopoly power.

      The last factor was probably the most significant. In decisions such as those in Sylvania,¹³ Brunswick,¹⁴ Illinois Brick,¹⁵ Broadcast Music,¹⁶ Monsanto,¹⁷ and Zenith Radio¹⁸ the Supreme Court broadened the rule-of-reason perspective in antitrust law. Those decisions were based primarily on orthodox microeconomic analysis, and they were by no means entirely consistent or complete.¹⁹ But the trend in court decisions during the 1980s definitely represented a change from decisions and analyses in the 1960s and early 1970s. Recent antitrust decisions confirm that that judicial trend has continued.²⁰

      Unfortunately, antitrust policy appears to have returned from near death and threatens to be a major regulatory force in the 1990s. Both James Rill and Janet Steiger, the Bush administration's antitrust regulators at the Department of Justice and the Federal Trade Commission, respectively, have made it reasonably clear that they favor a far wider and more vigorous enforcement effort than did their Reagan administration predecessors. Antitrust investigative efforts are now ongoing in many areas, and a spate of new cases may be just over the horizon. In addition, there has been a resurgence of state antitrust enforcement that shows little sign of abating. In short, renewed enthusiasm for antitrust regulation appears to be building.

      The return of more activist antitrust regulation after a brief hiatus is not entirely unexpected. In 19861 warned that the Reagan-sponsored changes in enforcement, the so-called antitrust revolution, could prove temporary and that the theoretical and empirical case against antitrust was strong enough to justify its complete repeal. Part of what I wrote in the original preface to this book seems worth repeating now:

      Much is risked in a call for total repeal. Any call for repeal is likely to galvanize those interests committed to a return to the old-style, traditional enforcement policies; after all, faith in old-style antitrust enforcement has not been destroyed but simply subdued. In addition, the call for repeal would likely rekindle active opposition to the new direction in current antitrust policy. The antitrust establishment—attorneys, consultants, antitrust agency bureaucrats—would probably step up its attack on those who intend, from its perspective, to further weaken antitrust regulation. Critics and abolitionists would again be portrayed as pro-business and anti-consumer, devoid of concern for efficiency or fairness. The most serious danger is that a rekindled opposition could delay new and important antitrust reforms or even reverse some of the substantial administrative reforms already achieved. Why rock the boat, one might argue, when it already moves steadily in the direction of less antitrust?

      Similarly, any call for repeal runs the risk of alienating the support of those critics of traditional antitrust policy most responsible for the antitrust reforms that have been achieved to this point. The majority of the important antitrust critics do not support the repeal of the antitrust laws; in their view, there is an appropriate role for antitrust policy in a free-market economy, although one that is much reduced in scope from the traditional understanding of it. Antitrust regulation, they might argue, is still important for combatting cartels and other restrictive horizontal business agreements, for example.

      I disagree. There certainly are risks in working for repeal, but there are greater risks, in my

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