The New Trustbusters

What's behind the resurgence of antitrust activism--and why it's bad news for consumers.

James V. DeLong from the March 1999 issue

(Page 2 of 4)

Antitrust practice came to mean filing the notification forms the government requires before a corporate merger can be consummated and negotiating the terms on which the government would approve. This often meant selling off a division or two in the name of preserving "competition" in some minor market or product line, but the issues were usually marginal, rarely involving fundamental questions of antitrust purpose and policy. Antitrust became a particularly boring kind of regulatory law, consisting mostly of copying thousands of pages of documents to ship over to the DOJ and the FTC for pre-merger review.

Now, after almost two decades of marginal relevance, the thrill of activism is back. Corporate officers and Wall Street arbs once again furrow their brows when they speak of "The Division" or "The Commission." The telephone rings. Hours are billed. People who say "let's do lunch" actually follow up. Headhunters pass out business cards. Members of the opposite sex no longer flee when you say, "I do antitrust."

It is important to avoid what the English writer C.P. Snow called "the cynicism of the unworldly." One should not underestimate the impact of sincere belief on the actions of government officials. The Antitrust Division, the FTC, and the private bar are full of honest lawyers who would be outraged at the suggestion that they are acting for personal or class interest, or that they are stretching the law in the interests of ideology. But it is also important to recognize that self-interest is the aphrodisiac of belief and that adopting the theories underlying the new activism is much to the benefit of the antitrust professionals on both sides. To those with a bent for public choice explanations, the enforcers, flogged on by the politicians and the competitors, have seized upon the computer, the information revolution, and the Internet as excuses to reverse the cautious "first, do no harm" antitrust policy of the past 20 years and restore the promiscuous activism that characterized the 1960s.

The question, of course, is whether these dour apostles of the public choice view are right. Answering that question requires a return to the basics. The antitrust laws stem from our collective fear of monopoly, a bred-in-the-bone knowledge that a supplier of a good or service who lacks competitors will jack up the price, cut the quality, become arrogant and unresponsive, and in general behave obnoxiously. Economists can give you good explanations for this, complete with charts and graphs of supply and demand curves made out of solid and dotted lines and annotated with lots of alphas and deltas. They can explain with precision why raising the price increases the monopolist's revenue even if it cuts sales, and they can tell you the size of the price hike that will maximize the loot.

The noneconomists among us fear monopolies even without the charts and graphs, based on common sense. After all, raising the price is logical; it is what we would do if we had a monopoly of our own. We also look to our experience. Think of the U.S. Postal Service, cable television companies, state liquor stores, or the local public school. Monopolies all, and legendary for unresponsiveness, ineptitude, and overcharging. But these things are mostly peripheral to our lives, or there are safety valves in the form of substitute goods or direct action, so the lack of competition is an annoyance rather than a disaster. Imagine the impact of a complete monopoly in a truly essential product, such as automobiles or groceries.

The fear of monopoly that triggered the first of the big antitrust statutes--the Sherman Act of 1890, which outlawed combinations in restraint of trade and attempts to monopolize--was far from unfounded. Alfred D. Chandler Jr., the eminent business historian, documented the situation in the late 19th century in his classic book The Visible Hand. The rise of mass production, combined with the railroad, the steamship, the telegraph, and the telephone, created the possibility of nationwide marketing and management. As output exploded, prices dropped precipitously. Many industries responded by attempting to put together cartels intended to reduce output and stabilize prices. The means varied--contracts, holding companies, corporate voting trusts, mergers--but the goal, as explicitly stated by the participants, was to attain the joys of monopoly power over a market.

Considering these expressed intentions, public fear was rational, but history has shown that it was largely unnecessary. It turned out that amalgamation is not alchemy, and the trusts could not achieve their goal of excluding competitors and sustaining prices at monopoly levels. The experience of the National Cordage Association, recounted in Chandler's book, illustrates the vulnerability of monopoly schemes. The NCA could not achieve economies of scale in operation or management. Nonetheless, it was forced to pay premium prices to lure competing companies into selling out, which stuck it with huge capital costs. The bought-out competitors then used their money to start new cordage companies that were more efficient than the NCA, so they could undercut its prices. The association went bankrupt in 1893.

Even mighty Standard Oil, the great bête noire for trustbusters of the late 19th and early 20th centuries, was a symbol more than a true villain. By 1911, when the Standard "monopoly" was broken up by the Supreme Court, eight other large integrated oil companies were competing with it. Before that, Standard never tried to sustain prices at high levels. The history of oil during the late 19th century was one of huge expansion in markets and facilities and steadily falling prices.

Many of the complaints about Standard came from medium-sized refiners that lost cozy local monopolies to Standard's rationalizing and price cutting. The same pattern has been repeated many times. As changes in communications and transportation create possibilities for new forms of business organization that might make things cheaper and better for consumers, firms that are doing well under the old forms fight back. This was true in the late 19th century, and it remains true today.

Often, the beneficiaries of the status quo cry "Monopoly!" Almost always, they are wrong. If you look back at the examples of monopolies given a few paragraphs ago, you will notice that all are public institutions or publicly regulated businesses. It is impossible to find examples of truly private monopolies, except on a minor scale. In areas where the natural technical and economic structure of an industry would tend toward monopoly, such as utilities or railroads, public regulation was imposed early (with dubious results--but that is a different tale). In other sectors, monopolies are rarely developed and never sustained.

Some thinkers, such as Dominick T. Armentano, a professor emeritus of economics at the University of Hartford and a scholar of antitrust history, have responded to this experience by advocating the elimination of the antitrust laws. They argue that the benefits from the few instances in which these laws might do good are outweighed by the harm caused by their inevitable misapplication at the behest of the political system.

Others are less willing to scrap the antitrust laws. They note that it's always possible that the members of an industry might succeed in getting together and setting a monopoly price. Perhaps in 1911 Standard and the other eight big oil companies could have set up regular meetings and fixed prices or merged into one company. Over the long term, such a monopoly would not last, any more than OPEC lasted. As the price remained high, new entrants would want to get a cut and would have to be brought into the cartel. Eventually, shares would get so diluted that some members would find it worthwhile to break off and cut the price, thereby ruining the system.

But a cartel can cause pain while it lasts, as did OPEC, and the wait for its inherent contradictions to assert themselves can seem awfully long for us short-lived humans. So most people who study the problem, whatever their general political orientation, agree that a core of antitrust enforcement is important. In particular, they agree that price fixing among competitors should be outlawed, and so should merger to monopoly and agreements to divide markets and set up a series of monopolies in different sectors of the economy. This was the basic antitrust policy of the Reagan years.

As the abolitionists love to point out, though, when you take this first step you step on an intellectual banana peel that sends you skidding down a slippery slope. The fundamental problem is that the meaning of "monopoly" is amorphous, and the ambiguity leaves unclear exactly what the law is trying to prevent, encouraging ad hoc approaches and governmental mischief.

A true, clear monopoly would be something for which there are no substitutes. If you are drowning in the middle of a lake, and someone in a boat comes along and asks if you want to buy a life jacket, he can fairly be said to have a monopoly. Short of a situation like that, there are only varying degrees of power to charge a premium price. A beef company's power is limited by the availability of chicken and fish, and a local grocery store's power is limited by your ability to shop in a neighboring town. In each case, the power is real but limited. So at what point does this power justify government action? There is no clear answer, and no satisfactory theoretical basis for developing one.