New at Reason

June 21, 2007

Steve Chapman explains why hearing about mergers makes regulators' knees knock together.

Comments

|6.21.07 @ 7:10AM|#

As with most regulation (especially consumer safety and discrimination), this fits the following pattern:

1: Egregious abuses are committed
2: Laws are passed to eliminate the egregious abuses
3: The agencies/people enforcing those laws develop political power and interests
4: Regulatory creep leads to the law being applied to cases that are less and less egregious

|6.21.07 @ 8:23AM|#

The point is not that corporations will never try to suppress competition.. The point is that they will usually fail, because of the many choices available to the buying public-and that on the rare occasions when they succeed, the success is invariably fleeting.

Sounds like an empirical claim. How can we test it?

|6.21.07 @ 8:56AM|#

Lest we not forget, ONLY the government can create/enforce a monopoly, which they do repeatedly by using threat of force against the competition. You know, for our own good.

Companies can form natural monopolies in which they beat other competitors so badly that no one else is around to play, but once profits rise some new guy will come in and compete.

thoreau|6.21.07 @ 9:05AM|#

A lot of the stuff in that column strikes me as the more naive sort of economic predictions that I wish libertarians wouldn't make. You can't easily predict what will happen in a market, which was Hayek's point. For us to pretend that we know what will happen is just as mistaken as when a liberal claims to know (and then proceeds to regulate in accordance with those predictions).

Still, this was spot-on:

The key government error is defining the market as a narrow sector isolated from other sectors that provide reasonable substitutes.

Dave W.|6.21.07 @ 9:19AM|#

Mr. Chapman breezily tells me that I can just order my foods online, or else tool on out to the Farmer's Market if I don't like the big chains idea or selection of "organic." Then he gnashes his teeth because some large companies may be denied the convenience of doing business as even larger companies. Do I even need to tell you the size of the violin I am playing for Mr. Chapman's clients here?

|6.21.07 @ 9:27AM|#

People a million times smarter than I am have explained the flaws in the economic justifications for antitrust law (Richard Posner and David Friedman come to mind). In addition, the statutory mandate is so rubbery that antitrust "law" is the opposite of the rule of law -- the crime is almost whatever the enforcer decides it is.

|6.21.07 @ 9:31AM|#

To ensure that free markets operate for the benefit of all, we are told, the government has to strictly police mergers to keep any company from gaining an unfair advantage.

I used to buy that BS. Then I did some research. The only real monopolies that survive any significant length of time are created by, drumroll please, THE GOVERNMENT. Remember A&P was once the unstoppable monopolistic juggernaut. Seen one lately?

steveintheknow|6.21.07 @ 9:36AM|#

Because only two satellite broadcast licenses were issued it makes me go hmmm….., and I will always go hmmmm… However it is impossible to say exactly what a larger/unlimited amount would have produced. My prediction: satellite radio goes bust anyway. The real competition will probably be the ipod or the cell phone. Although one can only say retrospectively, which is why I find the antitrust cases I hear about very dubious at best.

The funny thing about Microsoft is that information technology monopolies could easily be solved with patent reform. No I can't give details, I don't know or care that much.

As far as the Whole Foods/Wild Oats merger, well that's just a joke.

Dave W.|6.21.07 @ 9:39AM|#

JsubD, you may want to use a different example in the future:

"Over the years, the federal government repeatedly hauled the A&P into court for abusing its market power. The government first began to scrutinize the firm in 1915, when Cream of Wheat refused to sell to the A&P because of its pricing policy. Then in 1936 came the Robinson-Patman law, which was popularly known as the "Anti-A&P Act." A year later, the Federal Trade Commission filed suit against the A&P, charging that the company had forced a Maryland vegetable packer to grant it a special 4 percent discount. In November 1942, the Antitrust Division filed a Sherman Act case against the retailer, one section of which detailed how the A&P had used "several turns of the screw" to coerce Ralston Purina into granting it a discount three and a half times what the cereal packer offered any other firm. Three years after winning that case, the Justice Department was back in court in September 1949 with another Sherman Act suit, this time asking for the dismemberment of the A&P. Filed at a time when the grocer was already clearly in decline-not least because of antitrust enforcement-the 1949 case was dropped five years later. But this was only after the A&P admitted guilt, agreed to dissolve an internal company that traded in agricultural products, and signed an outright prohibition against "dictating systematically" to suppliers. The final antitrust case against the A&P was not resolved until February 1979, a month after a West German grocery mogul bought control over the remnants of the once-huge firm.

Antitrust enforcement against the A&P and other big firms like Sears prevented any twentieth-century American retailer from ever growing nearly as powerful as Wal-Mart is today."

Full scoop:
http://www.harpers.org/archive/2006/07/0081115

|6.21.07 @ 9:39AM|#

Query: Why didn't Jonathan Rauch's immigration article get a H&R post?

Dave W.|6.21.07 @ 9:40AM|#

The funny thing about Microsoft is that information technology monopolies could easily be solved with patent reform. No I can't give details, I don't know or care that much.

Has Microsoft ever enforced a patent in court?

Some people will believe any convenient thing.

steveintheknow|6.21.07 @ 9:54AM|#

Has Microsoft ever enforced a patent in court?

Some people will believe any convenient thing.

I was refering to IT in general, but if you want to read a little something on MS go here . If you want more on the general point look up the Teachnology Liberation Front blog.

Dave W.|6.21.07 @ 10:00AM|#

Has Microsoft ever enforced a patent in court?

(I honestly don't know the answer.)

|6.21.07 @ 10:04AM|#

JsubD, you may want to use a different example in the future:

No, maybe I wasn't clear enough. All of the government scrutiny or persecution had little to do with A&Ps eroding market position. Do you claim, does anybody other than the FTC clain that the Great Atlantic and Pacific Tea Company was in a monopolistic position from 1915 to 1979? The A&P case was probably good job security for lawyers and government bureaucrats, but nobody else benefitted. Surely you don't suggest that people had no other chooices than A&P (or Wal=Mart today)?

If A&P was so dominant for 64 years in the U.S. grocery business, what the hell did the do with all that money? They should own Brazil. Or something like that. I don't shop at Wal-Mart, lots of people do. You can buy disposable diapers and lawn mowers at lots of places.

steveintheknow|6.21.07 @ 10:06AM|#

Dave

Yeah, I really don't know either. Considering as many as they have I would put alot of money on it.

|6.21.07 @ 10:13AM|#

"Left to its own devices, many critics of capitalism believe, the market would allow voracious corporations to collude, joining forces to hold consumers upside down and shake the nickels out of their pockets."

Many supporters of capitalism believe this as well.

|6.21.07 @ 10:16AM|#

Please forgive the typos.

thoreau|6.21.07 @ 10:16AM|#

The only thing I learned about the Sherman Act in Econ 101 was that one of the first targets was a labor union. This fact was presented to suggest that it wasn't really about protecting the little guy from big companies.

I don't know if that fact really gets us very far in examining antitrust law, but it may serve as an interesting window into what econ professors think. Or not.

steveintheknow|6.21.07 @ 10:34AM|#

I don't know if that fact really gets us very far in examining antitrust law, but it may serve as an interesting window into what econ professors think. Or not.

Well, upon consulting the proper authority (wikipedia!) it looks like it was used against unions as well as companies, until 1914 anyway. The language used to describe the intention of the Act is "restraint of trade" not "anti-trust" which was a later interpretation/application.

But as far as bias in the old Econ 101 goes, I wouldn't doubt it. Not that I would disagree, but it seems like it would be a hard thing to prove. An argument to be made at a cocktail party, preaching to the choir, or something.

|6.21.07 @ 10:38AM|#

Antitrust law is the last refuge of failed market participants. If you can't beat 'em, sue 'em.

It is completely arbitrary how the government chooses to define a market. You can buy organic at Krogers.

Dave W.|6.21.07 @ 11:01AM|#

All of the government scrutiny or persecution had little to do with A&Ps eroding market position.

Let's be clear about my position here:

1. On another recent thread at HnR, I have admitted that the scrutiny of Whole Foods and Wild Oats merger is probably indicative of bigger companies using antitrust law to reduce, rather than enhance, competition in an oligarchic market. IIRC, I also pointed out that this was exactly the kind of thing that made Uncle Miltie flip flop on antitrust law at the mid-point of his long career.

2. However, I don't think this type of problem means that we have to scrap antitrust law any more than I believe that Enron and Worldcom meant that we should scrap the stock market of the government-created corporate form.

3. I would like to see a political push for better, more policy-driven enforcement of antitrust law as it is written. It would help if the rabble came round when a bad merger was being scrutinized, instead of only showing up on the rare occasions when a good one was. It would be nice to see Reson hire some journalists with better objectivity in this area. It would be nice if some HitnRunners recognized that antitrust is the perfect remedy for the MPAA and RIAA. And for Microsoft (here's a hint: stripping them of all their patents wouldn't do a darn thing).

4. I am open to other remedies against consolidation to displace current antitrust law. My favorite would be to tax businesses and to make the tax rate proportional to the degree of consolidation. This directly incentivizes the government to go after players whose consolidation has lead to above-free-market profit margins. Because that is where the money will always be, and because money is what the politicians always, ultimately want. Also, adjustments to marginal tax rates is a much more precise tool, than the all or nothing remedies typical of current antitrust law.

5. JsubD: If you are going to use A&P a an example of a would-be oligopolist/oligopsosist that was prevented by something other than antitrust law, then you deserve to give a sophisticated audience some better explanations than that.

6: joe: Nice one. You really know how a crazee man thinks!

|6.21.07 @ 11:09AM|#

"The language used to describe the intention of the Act is "restraint of trade" not "anti-trust" which was a later interpretation/application."


Good point, steveintheknow. The law doesn't say "you can't have a monopoly." It says "monopolies can't use their market power to behave in a predatory manner."

wsdave|6.21.07 @ 11:10AM|#

Since we've established (sort of) in another thread that there is no free will, can't we just scan everyone at birth for monopolistic tendencies and stop them from running businesses?

wsdave|6.21.07 @ 11:13AM|#

joe,
"Good point, steveintheknow. The law doesn't say "you can't have a monopoly." It says "monopolies can't use their market power to behave in a predatory manner."

Which says something about Wal-Mart: They may shake out your nickels, but they leave you your dollars.

Dave W.|6.21.07 @ 11:18AM|#

can't we just scan everyone at birth for monopolistic tendencies and stop them from running businesses

I think the law makes a mistake in introducing an intent element into antitrust law. However, I do think it is possible to figure out what firms have pricing power, or other forms of market power, and go after that, regardless of intent.

It is an accident of history that the Sherman Act leans so heavily on the word "monopoly," and that word should not figure so heavily into modern discussions. Sort of like how the concept of "well regulated militias" has changed over time. Sometimes in order to most sincerely uphold a law, you need to make allowance for the way word usage has changed over time, and not use these shifts to score cheap political points.

Dave W.|6.21.07 @ 11:24AM|#

Which says something about Wal-Mart: They may shake out your nickels, but they leave you your dollars.

Compared to what: the competition they have now or the competition they would have in a truly competitive market?

I think it is possible that good would be a lot cheaper still if the Chinese imports revolution happened in the context of a competitive retail market. I think America sold its mfgr and retailing sectors to Wal*Mart for a pittance as far as the manner in which benefit of Chinese indentured servitude is distributed through the US population. It may be tough for me to prove that, but it is equally tough to prove I am wrong.

|6.21.07 @ 11:29AM|#

"I think the law makes a mistake in introducing an intent element into antitrust law."

I agree - this isn't an issue of evildewers doing evil, any more than a lion killing guy is evil. It's the nature of corporations to use whatever is available to strengthen their position. Sometimes, the actions they take have beneficial effects, such as their efforts to out-compete their opponents with better products and lower prices improving our material quality of life. Sometimes, not so much, such as when Coke and Pepsi threaten to cut off a supermarket if it dares to provide Polar with too much shelf space.

Dave W.|6.21.07 @ 11:32AM|#

dares to provide Polar with too much shelf space.

or, better yet, Boylan's Cane Cola!!!

|6.21.07 @ 11:34AM|#

JsubD: If you are going to use A&P a an example of a would-be oligopolist/oligopsosist that was prevented by something other than antitrust law, then you deserve to give a sophisticated audience some better explanations than that. JsubD: If you are going to use A&P a an example of a would-be oligopolist/oligopsosist that was prevented by something other than antitrust law, then you deserve to give a sophisticated audience some better explanations than that.

http://www.altfeldinc.com/pdfs/BASICECONOMICS.pdf

Mr Sowell is a fairly well respected economist.

|6.21.07 @ 11:35AM|#

See, that's why I just do quote marks.

Wikipedia|6.21.07 @ 11:42AM|#

Mr Sowell is a fairly well respected economist.

Funding

The Hoover Institution receives much of its funding from private charitable foundations, including many attached to large corporations. A partial list of its recent donors includes:

* Archer Daniels Midland Foundation
* ARCO Foundation
* Boeing-McDonnell Foundation
* Chrysler Corporation Fund
* Dean Witter Foundation
* Exxon Educational Foundation
* Ford Motor Company Fund
* General Motors Foundation
* J.P. Morgan Charitable Trust
* Merrill Lynch & Company Foundation
* Procter & Gamble Fund
* Rockwell International Corporation Trust
* Transamerica Foundation

|6.21.07 @ 11:49AM|#

The Hoover Institution receives much of its funding from private charitable foundations, including many attached to large corporations.
So this makes the argument invalid? Hmmm.

Convinced|6.21.07 @ 11:57AM|#

Wow. That's a long list of companies who've shown no sign that they support Sowell's economic opinions, and rather a lot that they don't. He's a shitty shill.

Everyone\'s Fave Blow Up Doll|6.21.07 @ 12:06PM|#

Wow. That's a long list of companies who've shown no sign that they support Sowell's economic opinions, and rather a lot that they don't. He's a shitty shill.

The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum - even encourage the more critical and dissident views. That gives people the sense that there's free thinking going on, while all the time the presuppositions of the system are being reinforced by the limits put on the range of the debate.

|6.21.07 @ 12:56PM|#

As far as the Whole Foods/Wild Oats merger, well that's just a joke.

You know I felt that way too at first. Then I saw some more info:

The chief executive of Whole Foods Market told his board of directors the $565 million acquisition of rival Wild Oats Markets would avoid "nasty price wars" in several markets, according to a federal court filing unsealed Tuesday.
...
The FTC's court filing quoted parts of an e-mail that John Mackey, chief executive of Whole Foods, sent his board of directors. "By buying [Wild Oats] we will ... avoid nasty price wars in Portland [both Oregon and Maine], Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability."
...
Mackey also said in the memo that acquiring the company's chief competitor would prevent other retailers from scooping up Wild Oats to get into the profitable organic food business, according to the court filing.

"Eliminating them means eliminating this threat forever, or almost forever," his memo said.

Mackey also touted the Whole Foods brand, saying it has "a customer loyalty that will not be stolen away by conventional markets who sell the same products."

"Whole Foods isn't primarily about organic foods. It never has been. Organic food is only one part of its highly successful business model," Mackey said in the memo.


Originally I thought the government was crazy when they took the position that conventional grocery stores aren't really competitors with Whole foods etc, -- but if the head of whole foods doesn't think they are competition either, how can we blame the government.

Furthermore, it seems this merger is basically being done to try and kill competition and avoid lower profit margins that would result by competitive pricing. The plan is to buy them and close them to prevent someone else from buying them and possibly competing with Whole Foods.

Based on Mackey's own comments I believe a good hard look at this merger should be taken.

I dunno if I think it should be stopped, but it's not as clear cut as I thought it should be.

Dave W.|6.21.07 @ 1:12PM|#

Furthermore, it seems this merger is basically being done to try and kill competition

Two things:

1. If this merger would prevent Wild Oats from merging with an even larger chain, then it is a merger that enhances competition. If Kroeger, for instance, buys Wild Oats, in the next of couple years on the pretext that they are in different markets (so no antitrust scrutiny), I will be heartily dismayed with what the regulators are doing now.

2. Even if this particular block of merger reflects sorry priorities on the part of the regulators, we have probably enetered an era of such high consolidation that it is always good to block a merger, regardless.

|6.21.07 @ 1:24PM|#

Furthermore, it seems this merger is basically being done to try and kill competition

One thing:

1. Shopping at Whole Foods and Wild Oats is a luxury. Please oh please do not have the government moderating competition among luxuries.

Dave W.|6.21.07 @ 1:40PM|#

Not having anti-freeze in your toothpaste and poison in your catfood is a luxury now?

|6.21.07 @ 1:53PM|#

Not having anti-freeze in your toothpaste and poison in your catfood is a luxury now?

There is pretty much no intrusion into the competitive marketplace that the government can make that wouldn't be excusable under such an argument.

we have probably enetered an era of such high consolidation that it is always good to block a merger, regardless.

Oh, forgive me. You've already gone there...

|6.21.07 @ 2:27PM|#

A sidebar on Homo Economicus...
http://www.sciam.com/article.cfm?chanID=sa006&colID=13&articleID=27333871-E7F2-99DF-3A66FD19F6C2AF91

Homo economicus is extinct, felled by the new sciences of behavioral economics and neuroeconomics, which have demonstrated that we are remarkably irrational creatures.

Dave W.|6.21.07 @ 2:34PM|#

There is pretty much no intrusion into the competitive marketplace that the government can make that wouldn't be excusable under such an argument.

I am not suggesting that the government make intrusions into competitive marketplaces. A competitive marketplace has a multitude of suppliers for each kind of good, each supplier's good equally accessible to the consumer, no supplier having any idea about the other suppliers' prices/policies.

But we are not discussing competitive marketplaces on this thread. We are discussing actual marketplaces. Which is what forms the grounds for government "intrusion."

Can the government do a perfect job creating the types of free market Adam Smith envisioned? No.

Can they do a better job of this task than what happens over the long run absent government "intrusion"? Yes.

|6.21.07 @ 2:35PM|#

Side bar on choice/branding that mentions Sowell...

http://www.sciam.com/article.cfm?articleID=5B90A7E1-E7F2-99DF-3083871CC967A052&chanID=sa006&colID=13

|6.21.07 @ 3:01PM|#

Homo economicus is extinct, felled by the new sciences of behavioral economics and neuroeconomics, which have demonstrated that we are remarkably irrational creatures.

From your cited article...

If you are like most people (myself included), you would sell your Google stock and hang on to your Ford stock in hopes of recovering your losses. This would be the wrong strategy.

Uh, I would sell my Ford stock for the tax reasons. If I had no gains to offset, I might sell them both to zero my tax bill.

Why would you sell shares in a company whose stock is on the rise, and hang on to shares in a company whose stock is on the decline?

The price of the Google stock and the price of the Ford stock already include the market understanding of the potential of one to rise and one to fall. Absent tax reasons, they are dollar for dollar identical stocks to sell.

Why should I listen to this guy?

Oh, right. He offers evidence that humans aren't always rational about risk-reward decisions. Well, duh. That in no way makes homo economicus extinct. Only at the extreme edges is economic theory even concerned with whether individuals acting in their perceived self interest actually act in their perfectly rational self interest.

Ryan|6.21.07 @ 3:24PM|#

All this:

"The FTC's court filing quoted parts of an e-mail that John Mackey, chief executive of Whole Foods, sent his board of directors. 'By buying [Wild Oats] we will ... avoid nasty price wars ... which will harm [Whole Foods'] gross margins and profitability.'"

makes me want to do is short Whole Foods stock, if that is the whole of the CEO's thinking. Reads just like the turning point from creative, agile upstart to staid, lumbering dinosaur. Go ahead, 'lock-in' your profit margin. See how long that lasts.

Ryan|6.21.07 @ 3:26PM|#

Hint: not as long as the gvmt lawsuit against the new 'monopoly'.

|6.21.07 @ 4:28PM|#

MikeP

"Why should I listen to this guy?"

Only because he has added a small piece to the empirical picture...Homo economicus is probably more accurately described as having evolved rather than having gone extinct.

Just ,imo, an interesting article posted for consumption. Take if for what it is worth.

|6.21.07 @ 4:56PM|#

Neu Mejican,

Fair enough.

I'm mostly annoyed by Scientific American's further departure from science towards the implicit goodness of rule by scientists. If a columnist is going to say something as loaded and unqualified as, "Homo economicus is extinct," he should at least know something about economics.

|6.21.07 @ 5:22PM|#

I agree - this isn't an issue of evildewers doing evil, any more than a lion killing guy is evil. It's the nature of corporations to use whatever is available to strengthen their position. Sometimes, the actions they take have beneficial effects, such as their efforts to out-compete their opponents with better products and lower prices improving our material quality of life. Sometimes, not so much, such as when Coke and Pepsi threaten to cut off a supermarket if it dares to provide Polar with too much shelf space.

Is it wrong for a wife to demand fidelity of her husband? And if a similar agreement takes place between two companies, what is wrong with that--whose rights have they violated? Don't give me that sillyness about restricting the market: first of all, it's beverages; second of all, if it wasn't a popular product, then it wouldn't be carried; and third, if there are no legal barriers to entry then there is no way to avoid competition.

Here's an article on just how silly antitrust laws are:

And for those interested, here's a book that calls for total repeal of antitrust laws.

|6.21.07 @ 5:23PM|#

And for those interested, here's a book that calls for total repeal of antitrust laws.

Errr, link didn't work:

http://www.mises.org/books/antitrust.pdf

Gene Berkman|6.21.07 @ 6:03PM|#

A Whole Foods takeover of Wild Oats may limit competition temporarily, as would a Wild Oats bankruptcy.

The free market analysis says that is such a situation, new firms would arise, or existing firms would expand their business lines to provide competition in the long run.

There are two other factors that limit potential new competition. The role of the Federal Trade Commission in "protecting competition" might lead them to prevent some existing large firms from moving into natural foods retailing - that is how enigmatic the FTC concept of competition is.

At the same time, Community Redevelopment programs subsidize favored firms in real estate acquisition, and create an artificial shortage of available commercial real estate.

There is evidence that Whole Foods Market has taken advantage of Community Redevelopment programs in Austin, and presumably in other cities. And the shortage of available commercial real estate is another reason for Whole Foods to want to buy out a competiting company which has leases in many urban markets.

|6.21.07 @ 6:47PM|#

Dave W. says: "Compared to what: the competition (WalMart has) now or the competition they would have in a truly competitive market?"

The people running WalMart must be astonished daily to think that some people actually think that WalMart isn't subject to brutal, unrelenting competitive pressures -- the same WalMart that grew from a single little shoestring store into the behemoth it is now by going head to head against relentless competitors who are poised to take back market share at the slightest slipup. Seriously, which part of Sears / KMart / Target / Best Buys / Circuit City / Costco / Safeway / every other grocer and retailer on the planet don't you get?

|6.22.07 @ 1:02AM|#

People a million times smarter than I am have explained the flaws in the economic justifications for antitrust law

The economic justification is for the dumb masses. The truth is somewhere else.

Look at how big international corporations can get. They can get as big as a government. What does the government do when the corporation gets up one morning and says "I don't feel like following your laws anymore."?

Anti-trust laws are a club, for just in case.

|6.22.07 @ 1:51AM|#

Anti-trust laws are a club, for just in case.

Any company with that much power is probably paying the government to use the club on its behalf...

Dave W.|6.22.07 @ 10:01AM|#

Any company with that much power is probably paying the government to use the club on its behalf...

If company's that big really can run the government, then better to have them spend their political capital on antitrust enforcement than by having the government start a war, contract for an unneccessary expenditure, give a subsidy, give a special tax break, etc., etc.

As far as pernicious influence over government by big business, antitrust enforcement is about the least pernicious possibility, both because the targets can defend themselves somewhat (better than rank and file taxpayers anyway), and it is at least a transparent sort of help (rather than a pork provision deep in some spending bill). really, if the problem is that big business is buying government, then that is the problem that needs to be solved on its own terms, rather than blaming antitrust law.

|6.22.07 @ 10:55AM|#

Look at how big international corporations can get. They can get as big as a government. What does the government do when the corporation gets up one morning and says "I don't feel like following your laws anymore."?

Anti-trust laws are a club, for just in case.

The state doesn't need antitrust laws for that. It can just do what Mexico did back in the day -- "OK, Senor Capitalist, all your oil fields now belong to us."

Unless a corporation becomes a government -- thereby usurping the government's monopoly on force -- it can't ignore the law indefinitely. All it can do is get the government to change or selectively enforce the law in its favor.