Is antitrust enforcement good per se, no matter what its effect on consumers? Reading an August 26 New York Times editorial, one could easily conclude that the Times editors think so. Indeed, the content of the editorial is in tension with the editorial’s title. The title is “Americans Pay a Price for Corporate Consolidation.” You might think on that basis that the editors would point out how consolidation of corporations would create market power, causing consumers to pay higher prices. But you would be wrong. The editors explicitly reject the idea of judging mergers by their effects on consumers. There are powerful forces arrayed on their side, specifically the head of the Federal Trade Commission, Lina Kahn, and the head of the Department of Justice’s Antitrust Division, Jonathan Kanter. If Kahn, Kanter, and the Times editors get their way on enforcement of current law, the odds are high that we consumers will be worse off.
The Debate of the 1960s and 1970s
The Times editors seem to be aware that they are entering a debate conducted fiercely among economists during the late 1960s and early 1970s, and they even seem aware about which side won. Until the late 1960s, the dominant view in the area of economics known as “industrial organization” was that when concentration in an industry increased, firms in that industry would gain market power and would use this power to charge higher prices to buyers. For that reason, economists who held that view often argued for preventing mergers of firms in the same industry and even occasionally argued for breaking up large firms in concentrated industries. Some economists in this school of thought, for example, favored the Hart bill, a bill proposed in 1973 by Philip Hart, a US senator from Michigan, that would have broken up large firms when industry concentration exceeded a particular level.
But in the late 1960s, economic thinking began to change. Economists at the University of Chicago and at the University of California, Los Angeles, where I earned my PhD, argued that the positive correlation between industry concentration and profitability was not due to market power but, rather, due to superior performance of the largest firms in the industry. One of the key economists who made that case was the late Harold Demsetz, who bounced back and forth between the University of Chicago and UCLA. (Disclosure: Demsetz was the person who persuaded me, when I was nineteen, to get a PhD in economics, was my mentor at UCLA, and supervised my PhD dissertation.)
What first led Demsetz in this direction was his observation of the auto industry in the 1960s. Why, he wondered, was General Motors, the largest firm in the industry at the time, the only one making high profits? Could it be that those high profits resulted from a combination of better management and economies of scale? If so, then reducing the concentration of the industry by breaking up GM would well raise costs and raise prices. Concentration would be lower, but car buyers would be worse off. His subsequent empirical work reinforced this belief.
In my and Steven Globerman’s 2021 book, The Essential UCLA School of Economics, we summarized Demsetz’s insight and his empirical finding in a 1973 article in the Journal of Law and Economics titled “Industry Structure, Market Rivalry, and Public Policy.” We wrote:
Under competitive market conditions, he [Demsetz] argues, specific firms might develop differential advantages due to innovations that either lower their costs or give their products advantages over other products. Lower costs will lead directly to higher profits for those innovating firms. Superior products would allow innovating firms to charge higher prices than their competitors, which, in turn, would increase the former’s profits given that average costs do not increase commensurately. At the same time, the competitive advantages of innovative firms will contribute to increased market concentration as those firms take away market share from their less efficient competitors. In his research paper, Demsetz provided empirical evidence that higher price-cost margins reflect superior efficiency which, in turn, is linked to resulting increased market concentration.
One of the participants in the debate was the late Yale Brozen, an economist at the University of Chicago. In his 1982 book, Concentration, Mergers, and Public Policy, Brozen extensively surveyed the evidence on concentration up to that point. His bottom line was like Demsetz’s. In the introduction, Brozen wrote:
Readers of the concentration literature should be astounded that the correlations of concentration and profitability were taken as proof of inferior performance [which Brozen explained in the previous paragraph meant higher prices]. If a firm continually innovates and improves efficiency faster than its competitors, offering attractive products at competitive prices, would it not be expected that it would attract a large share of the customers in its markets and be more profitable?
I said above that the Chicago School and UCLA School essentially won the debate. That’s an easy claim to make if you consult only one side. But at the end of this book, Brozen gave chapter and verse about the participants on the other side who retracted their original view. Among these were Donald F. Turner and Carl Kaysen, who were giants in the literature of the 1950s and 1960s, David Schwartzman of the New School for Social Research, Leonard Weiss of the University of Wisconsin, and Paul MacAvoy of MIT. While these names might not ring a bell with modern readers, be assured that their articles critical of concentration were on many syllabi in graduate courses in industrial organization in the 1960s.
One of the striking things about the Times editorial is that the editors admit that the more stringent enforcement of antitrust will not help consumers. For example, the editors discuss the DOJ’s and the FTC’s proposed tighter rules for allowing mergers. They start by suggesting that the tighter rules will increase competition, which “keeps pressure on prices.” But then in discussing the looser restrictions that came about early in the Reagan administration and under subsequent administrations, they write:
It wasn’t enough to show a merger would reduce competition; the government generally sought to block deals only when it could show a merger would result in higher prices for consumers or that it would clearly cause some other quantifiable harm—a standard that was rarely met.
Did you catch that? The standard was rarely met. In other words, when companies proposed mergers and the federal government’s antitrust enforcers approved, those measures were not expected to hurt consumers. So much for the Times’s argument, then, that tighter rules on mergers will “keep pressure on prices.” That line makes sense only if the pressure is upward, that is, to keep prices high.
The Times editors also made a major misstatement about current antitrust law, confusing what it is with what they would like it to be. They wrote:
Antitrust authorities have failed in their responsibility to the American people by assigning to themselves the burden of trying to figure out which mergers may be harmful, rather than taking seriously their marching orders from Congress to prevent concentration.
Congress has given no such “marching orders.” The oldest of the antitrust laws, the Sherman Act of 1890, doesn’t even address concentration. It’s all about “restraint of trade.” Restraint of trade means producing less, which results in higher prices. The empirical question is whether increases in concentration result in restraint of trade and, thus, higher prices. But as the Times editors already conceded, that standard was “rarely met.”
What about the Robinson-Patman Act of 1936? Wasn’t that act “marching orders from Congress to prevent concentration”? Actually, no. It was about price discrimination. The closest you can come to finding orders from Congress to prevent concentration is Section 7 of the 1914 Clayton Act. But that section gives the feds the power to prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” So even there the test is not concentration, but whether the merger reduces competition or tends to create a monopoly.
In short, concentration per se is not illegal.
The Economic Consensus on Mergers
One thing that has been heartening has been the fact that economists who are not generally thought of as classical liberal, libertarian, or conservative have been critical of the Department of Justice’s proposed tighter rules on mergers. Take Carl Shapiro, who is an economics professor at the University of California, Berkeley, and who was deputy assistant attorney general in the Department of Justice’s Antitrust Division during the first Obama presidential term. Last month, he wrote an extensive article that is quite critical of the rules. He recently wrote:
Critically, the draft says nothing to indicate that [the Department of Justice and the Federal Trade Commission] will evaluate mergers based on whether they are likely to harm customers due to enhanced market power. Unless revised, protecting consumers will no longer be the Biden administration’s stated goal of merger enforcement. That would represent a fundamental and reckless change from forty years of merger guidelines spanning many administrations. In my view, that change is neither wise nor necessitated by the Biden administration’s desire to strengthen merger enforcement.
Similarly, Lawrence Summers recently weighed in on the debate, stating, “These guidelines—by moving away from an emphasis on lower prices for consumers to broader abstractions—are a substantial risk.”
To Get More Competition, Allow It
The Times points out that we are now left with “four major airlines, three major cellphone companies, and two dominant makers of coffins.” Of the three industries mentioned, the one I know best is airlines. The Times points out that US airfares are significantly higher than European fares. There’s a reason for that, a reason that immediately suggests a solution. The reason is that the EU allows many more airlines. Cut-rate Ryanair, for example, based in Ireland, flies between London and Sofia, Bulgaria, and charges a fare under $100. The US government should follow suit: allow foreign airlines to compete on domestic routes. If the federal government did so, we could conceivably have six or seven major airlines competing on heavily traveled routes such as San Francisco to New York or Los Angeles to Chicago.
Moreover, although I don’t know much about the coffin industry and hope not to for at least another twenty years, state governments in the past have helped cement the dominant position of the leading coffin producers. Indeed, one of the many victories of the pro-market public interest law firm called the Institute for Justice was in getting rid of the restrictions that prevented a bunch of monks in Louisiana from selling lower-priced coffins. Are the Times editors even aware of that victory for competition?
If governments refrain from enforcing monopolies and refrain from preventing new competition, monopolies tend to be short-lived. The prospect of monopoly profits attracts new and often innovative competitors the way honey attracts ants. Unless you value antitrust enforcement independent of its effects and, indeed, independent of what the law actually says, you should be very skeptical of the path that the Times, Lina Kahn, and Jonathan Kanter want to lead us down.