Food Fight

Thomas J. DiLorenzo (“Turning Back the Clock,” Nov.) called the Bush administration’s antitrust policy a retreat from the economic common sense championed by the Reagan administration. Mr. DiLorenzo uses as his sole support the Federal Trade Commission’s action challenging Red Food Stores’ acquisition of the Chattanooga Kroger supermarkets.

President Reagan appointed all of the commissioners who voted to challenge the acquisition. Later, Bush appointees approved a settlement of the complaint that the Reagan-appointed commission had issued.

Additional inaccuracies and half-truths fill the article. For example, the FTC never alleged that competition and low prices kept new supermarkets from entering the Chattanooga market. The FTC challenged the acquisition because it unduly increased concentration in the Chattanooga market and made entry difficult. Indeed, Red Food Stores’ internal documents showed that it made the acquisition to preempt entry and expansion by its competitors. Red Food did not have any efficiency reasons for buying additional stores.

In addition, the commission did not overlook past entry by “grocery giants” A&P, Wint-Dixie, and Giant Foods into Chattanooga. These and other chains were not successful, suggesting that entry into the market was not easy.

Finally, Mr. DiLorenzo refers to a Chamber of Commerce survey for one quarter in 1988 showing low grocery prices in Chattanooga. Yet before that quarter, surveys usually showed that Chattanooga’s grocery prices were higher than its general cost of living index. In fact, in 1987, Chattanooga’s grocery prices were higher than the nation’s average.

The FTC is committed to enforcing the antitrust laws in ways that make economic sense and benefit consumers. The commission places great weight on the 1982 Department of Justice Merger Guidelines when deciding whether to challenge an acquisition. As the guidelines note-and our actions support- concentration figures alone do not make a merger anticompetitive. The commission made the right decision to challenge the acquisition and to accept a settlement that will increase competition in the Chattanooga market.

Kevin J. Arquit Director Bureau of Competition Federal Trade Commission Washington, DC

Mr. DiLorenzo replies: Rather than defending the Bush appointees to the FTC, Mr. Arquit has damned them with his faint praise of their actions in the Red Food case. He boasts that the only action taken by the Bush appointees “was to approve a settlement of the complaint.” But the “settlement” was apparently forced on Red Food after a district court judge had thrown the case out, arguing that “the FTC has not shown a likelihood that Red Food, if it acquires the Kroger stores, will be able to exercise market power.” The judge also noted that the merger would save 400 jobs.

Former FTC chairman and Reagan appointee Daniel Oliver strongly objected to bringing the case in 1989 on the basis that it “was not supported by commission precedent, applicable case law, economic theory or the realities of the Chattanooga market .... It’s a throwback to an earlier era when the commission was more concerned with abstract measures of concentration than with competitive realities and consumer welfare.”

Bush antitrust appointees have reverted back to the “bad old days” when market concentration was used (and abused) as a measuring rod of competition. Mr. Arquit’s reference to “unduly increased concentration” implies that he possesses special knowledge of the “correct” amount of market concentration. The idea that any individual can possess such knowledge is an example of Hayek’s “fatal conceit,” which pervades antitrust thinking, especially among lawyers.

Mr. Arquit’s condemnation of Red Food on the grounds that its “documents showed that it made the acquisition to preempt entry” suggests he believes that a company can be found guilty of violating the antitrust laws merely by having the “wrong” intentions, as defined by government overseers, regardless of the effects of its actions. It is ominous that antitrust regulators like Arquit believe in prosecuting businesses based on presumptions about the businesses intentions rather than their actual behavior.

Mr. Arquit displays a misunderstanding of basic economic principles when he says that Red Food “did not have any efficiency reasons for buying additional stores.” Voluntary trade is efficient whenever both traders are better off-otherwise they wouldn’t trade-and no one is worse off. The Red Food merger was certainly efficient in this sense.

The grocery business also has significant economies of scale. Red Food uses a low profit margin/high volume pricing strategy; the merger would have increased its volume, making it easier to pursue this low-price strategy, all to the benefit of consumers.

Because several large food chains have left Chattanooga, argues Mr. Arquit, “entry into the market was not easy.” But the exit of those firms is evidence of what a low-price competitor Red Food was. It was in fact widely reported in the local media that the FTC accused Red Food of charging excessively low prices. Consumers benefited because “entry was not easy,” for low prices made (and still make) entry difficult. If Red Food charged monopolistic prices, as Mr. Arquit suggests, entry would be very easy indeed.

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