Clueless On Competition

Wednesday, July 21, 2021
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President Biden has issued a bold executive order “on promoting competition in the American economy.” His opening salvo leaves little to the imagination:

A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.

Note the tension between the two halves of this sentence. The praise of competition makes good sense. But his condemnation of “excessive market concentration” is far more ambiguous. Optimistically, that phrase could be read as an endorsement of the traditional antitrust measure of economic concentration, the Herfindahl-Hirschman index, which assesses the increase in market power in a given market caused by the reduction in the number of firms—typically by merger or acquisition. But Biden’s broadside condemnation makes it all too clear that he has taken a leaf out of the playbook of one of his new economic advisors, Tim Wu, author of The Curse of Bigness. To Wu, the size of major firms, and not their market share, is the (mistaken) guiding antitrust principle.  That approach leads to stronger calls to stop mergers, mandate practice restraints, impose heavy fines, and even bring more criminal prosecutions.

Biden’s order also seeks to unleash the power of the new chair of the Federal Trade Commission, Lina Khan, whose aggressive antitrust enforcement attitudes are well established. Thus, the most telling remark in Biden’s executive order press conference was his gratuitous denunciation of “the misguided philosophy of people like Robert Bork,” whose consumer-welfare standard rid antitrust law of many of the strongly anticompetitive decisions of the 1960s, such as United States v. Von’s Grocery (1966). His standard also led to the rejection of predatory pricing cases (Matsushita v. Zenith Radio Corp., 1986).

Biden ignores these signal achievements because he clearly understands very little about antitrust. The president is certainly on firm ground in attacking barriers to entry that keep new firms from challenging incumbents by offering a mix of lower prices and superior goods—a position that, ironically, is consistent with Bork’s consumer welfare standard.  However, more vigorous enforcement of antitrust laws is not necessarily conducive to consumer welfare—targeting the wrong firms and business practices could, to the detriment of consumers, lead to a reduction in the competition that Bork favored in his landmark book The Antitrust Paradox (1978). 

Therefore, to figure out what is new and dangerous in the Biden formulation, it is necessary to look closely at the cases in which his policies deviate from Bork’s. The key to that enterprise lies in understanding Biden’s freewheeling and ambiguous use of the word “unfair.” The correct definition of “unfair competition” refers to improper tactics whereby firms hope to gain a more dominant position in the marketplace by engaging in deliberate misrepresentations to palm off their shoddy goods as though they were made by a reputable source, or by falsely disparaging the products of their competitors. That misinformation distorts consumers’ choices and reduces social welfare.

Yet Biden does not so restrict the term, and often brands as “unfair” various practices that actually help competition. Indeed, he often takes inconsistent positions in the same sentence.

For example, he writes: “While many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers’ ability to find jobs and to move between states.” The first half of the sentence is an unacknowledged tribute to monopoly power, by encouraging wage increases not through higher productivity but through the exclusion of new competitors. Higher wages gained by collusion are no better, from an antitrust perspective, than higher prices set by a cartel or monopoly. Biden’s mistake is made still worse because he gratuitously introduces a racial dimension into an area that has, to date, been mercifully free of these distractions. There is, quite simply, no reason to permit black or Hispanic workers to earn greater benefits than white or Asian workers by the imposition of barriers to entry—or to suffer greater harms. A colorblind principle is imperative.

Biden is surely correct that these licensing requirements can restrict movement across state lines at enormous costs to consumers. The harder question is whether any licensing requirement, whether of hair braiders or doctors, promotes efficiency by stopping fraud, as opposed to simply restricting the market—which is exactly the way Bork framed his pro-competitive positions.

These interstate prohibitions can harm consumers and stifle innovation. Telemedicine is perhaps the most powerful way to bring superior health care services to individuals in isolated or marginalized communities. But even if the provider is fully licensed in one state, he cannot provide his services to a patient who is physically located in another. As the tragic tale of Maki Inada reveals, some patients diagnosed with serious ailments, like cancer, must drive hours to cross state lines to receive care via telemedicine in order to comply with state restrictions. Congress would do well to remove all these senseless barriers to entry. 

But that same strong conclusion does not hold for the much more complex issue of whether, as Biden puts the question, the government should “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Covenants not to compete have been generated by firms that operate in competitive markets as long ago as Mitchel v. Reynolds (1711). It is critical to understand the relative tradeoffs between the efficiency and restrictive effects of any contractual practice. Typically, these covenants prevent an employee who is leaving the firm from taking advantage of firm secrets and practices acquired in the course of employment. Any employee may well have access to customer lists, marketing strategies, and trade secrets from which the firm derives a competitive advantage. It would be intolerable to allow that employee to gain access to proprietary information that he could then use instantly—and for free—to outcompete his former employer after he leaves the firm. Nondisclosure agreements sometimes work, but they are less reliable than noncompete clauses.

On the other hand, it is risky to let employers impose blanket prohibitions for long time horizons because former employees could become legitimate competitors with their former bosses. Hence, rough rules have helped reach the right efficiency/restriction tradeoffs: restrictions last only for about a year, cover only the same geographical market, and extend only to existing product lines. It would be unwise to strike down these restrictions as unfair, especially when applied to workers who possess valuable firm-specific trade secrets. Employers may also use self-help to protect trade secrets, say by limiting their internal distributions to a need-to-know basis. But the existence of one safeguard should not lead antitrust authorities to remove the other well-established legal backstops. 

Elsewhere, unfortunately, Biden underestimates the systematic risk of monopolies in labor markets. He gets off on the wrong foot by insisting that monopoly employers “in company towns across Appalachia” and elsewhere bid down wages by up to 17 percent. Labor markets today remain far more competitive than product markets, the latter being the general purview of traditional antitrust merger guidelines. Indeed, the only real danger of a monopoly in labor markets is the one Biden is peculiarly blind to: union power. The explicit statutory monopoly of unions is more powerful than that of any other business, because no company has the power to force potential customers or employees to do business with it. Sadly, Biden thinks that higher wages are always better, without asking, as he does of businesses, whether they stem from market excellence or monopoly power. 

Unions need to maintain a united front, which prevents any worker from cutting his or her own deal with an employer. At the same time, unions impose senseless work rules to keep all union members happy notwithstanding the loss of productive efficiency. And unions always harm consumers by imposing higher prices, especially when they retain control of not only a single firm but an entire industry. Indeed, unions in service industries can impose huge immediate losses by using strikes to shut down school buses and emergency rooms. Regretfully, Biden is mum on these losses.

One of the most welcome developments in recent years has been the decline of unions in private markets to little over 6 percent––even workers know that union membership carries with it real economic risk. Unfortunately, Biden’s strong support for the Protecting the Right to Organize Act is an outright sop to union power that is wholly inconsistent with his strong plea for competitive markets. 

And so we see Biden at both his best and his worst. His instinct for competition will occasionally work to open markets to innovation and competition. But all too often his quest for higher wages will distort labor markets. The great tragedy here is that Biden does not seem to understand the principles of competition that his executive order purports to champion.