Anti-Trust Laws: Are They Necessary? (University paper)
My aim in this paper is to investigate whether anti-trust legislation is necessary and whether abolishing it would be better for both consumers and producers. The backbone of anti-trust legislation lies in the fallacy of “market failure.” Proponents of anti-trust claim the free market isn’t capable of punishing firms that collude for their interests at the expense of the consumer. Such thinking is based on a flawed definition of monopoly. Without the understanding of the correct theory of monopoly as well as the relevant economic knowledge, anti-trust proponents are lost in the cause of promoting fairness but always fail to achieve it.
After explaining the correct theory of monopoly, I will also show that anti-trust legislation suffers from additional deficiencies. Those include its inability to deal with monopolies that the government creates itself or the fact that legislation is used as a protectionist tool by small firms against big ones. My conclusion is that it’s in the interest of everybody that these laws are abolished and the free market let to run its course. Ten to twelve pages don’t allow for a broad explanation of these issues so I will remain brief enough to provide clarity and concise enough to avoid superficiality.
Monopoly as Defined by Anti-Trust Proponents
There are several definitions of monopoly within the group of politicians and economists who favor anti-trust legislation. Some define monopoly as a title which should be attributed to a firm which has a certain “big” market share.<!–[if !supportFootnotes]–><!–[endif]–>
Others say that a firm has a monopoly status if it’s the only seller of a particular good, as reflected in the word itself which comes from Greek language (monos meaning ‘one’ and polein meaning ‘to sell’).<!–[if !supportFootnotes]–><!–[endif]–>
Often these two definitions are combined and the fulfillment of any of the criteria is sufficient to constitute a monopoly. Anti-trust proponents do recognize that governments have the ability to create monopolies, but they see this only as a secondary case to the previous, more important, causes.
In addition, there is also another theory, sometimes named the competition theory, which attempts to justify anti-trust laws on economic grounds of misallocation of resources. The theory links to the first definition of monopoly, a firm as a single seller of goods with relatively no substitutes for its products in the market. The theory then continues by suggesting that if such a “monopoly” firm reduces its output, which consequently leads to higher prices for its products, resources are misallocated and social welfare is reduced. The term “misallocation of resources” means scarce resource aren’t being put to the most urgent uses but are rather squandered in uneconomic lines. The theory suggests that this can occur in two forms. First, product prices of the “monopoly” firm exceed their marginal cost, which leaves these firms without any incentive to expand their production. Second, firms with “monopoly” status can afford to be less efficient with the usage of their own resources due to their competitive advantage. This increases costs, decreases production, and in the end again leads to the misallocation of resources.<!–[if !supportFootnotes]–><!–[endif]–>
Before beginning with the exposition of the correct theory of monopoly, it’s important to stage a critique against the views of monopoly as explained by the anti-trust supporters.
First, market share is an arbitrary indicator of the size of the firm. What constitutes a “big” firm? A firm with 50, 60 or 70 percent market share can only subjectively be considered big. No objective number whatsoever can be derived from the observation of a firm’s market share. As a result, no objective standard can be set to determine the “right” size that the firm should have in the market. Such a thing can only be determined by consumers and their choices.<!–[if !supportFootnotes]–><!–[endif]–> In addition, the definition of the market size itself is entirely arbitrary because such are the methods that bureaucrats have instituted in measuring it.
Second, the idea that a monopolist is a firm that is the only seller of a good is simply vacuous. Goods and services are not homogenous; they all differ from each other in one way or another. Even the same products must have some differences that were imposed during the production process. This leads us to reductio ad absurdum, because it implies that all firms, providers of heterogeneous goods and services, are monopolists!<!–[if !supportFootnotes]–><!–[endif]–> Such a condition cannot, therefore, serve as legitimate criteria for monopoly.
From this we can also extend the critique to the idea of “monopoly price.” Such a thing as “monopoly price” is impossible to come to because one needs a “competitive price” as a reference for comparison.<!–[if !supportFootnotes]–><!–[endif]–> How can anti-trust supporters come to “competitive price” if they are looking for it in a market situation which they characterize as monopolistic?
In the end, we must deal with the competition theory with regard to the misallocation of resources. The competition theory seems quite reasonable on first sight, but it contains deep problems. The main problem is that it’s not based on real life but rather on a theoretical situation where information is perfect and consumer tastes don’t change. Such a static world would even challenge the entire notion of efficiency, because with perfect information and a constant consumer taste, economic efficiency would be a needless task. This is not the case in the real world, however, where divergence and change are integral parts of the dynamic market system. “To assume away divergent expectations and change, therefore, is to assume away all the real problems associated with competition and the resource-allocation process.” <!–[if !supportFootnotes]–><!–[endif]–>
The Correct Theory of Monopoly
So what is then, the correct theory of monopoly? According to Murray Rothbard and Dominick T. Armentano, as well as the Austrian school of economic thought, a monopoly can only exist if any of these two conditions are fulfilled.<!–[if !supportFootnotes]–><!–[endif]–>
<!–[if !supportLists]–>a)government grants the firm a special a privilege <!–[endif]–>
<!–[if !supportLists]–>b)entry to the market in which a particular firm operates is hampered. <!–[endif]–>
Both notions are pretty straightforward, but let’s briefly take each case separately. First, if a firm is given subsidies or is exempt from any particular regulative or tax obligations, that firm constitutes a monopoly. Any form of government help towards a particular firm will make it a monopoly because it will give it a competitive edge against other firms which the government doesn’t help.
Second, if the entry to the market in which a firm competes is hampered, the firms that are currently in the market are monopolistic. Barriers to entry are therefore crucial in distinguishing between competitive and monopolistic markets. Only government inference with regulations or licenses can create these barriers. In turn, this interference makes it very hard or even impossible for new firms to enter market and challenge the prices that “in-market” firms impose.
From this we deduce that monopolies are a cause of government interference with the free market. This not to say, however, that firms can’t achieve relatively great market shares in a totally free market and therefore become “monopolistic.” But for such a thing to exist, firms would need superhuman abilities in anticipating consumer demand and be able to provide great quality products, low prices and pioneering differentiation. But even if such a firm miraculously developed, there wouldn’t be anything harmful about it simply because it would be a creation of the consumers. As soon as that firm engaged in practices that weren’t in line with the desires of the consumer, the dynamic market process would shift profits to other firms that corresponded better with consumer demand.
After having defined the correct theory of monopoly, we can now continue by listing the deficiencies of anti-trust laws and the subsequent arguments based on them.
Government is a Monopoly Itself
According not only to the correct theory of monopoly but also to its very own anti-trust laws, the government should start taking action by abolishing itself. It constitutes a monopoly because it’s the only agency that uses coercion to enforce its decisions and thus is a classic example of “predatory” competitiveness. If U.S. government wants to uphold the Sherman Act with consistency, it should start by dealing with itself first.
The government also creates other monopolies. Think about the healthcare systems in Europe, the public transportation systems or the nationalization of electric energy in Southeastern Europe. All these national corporations have monopoly advantage over private suppliers. First, they are subject to less regulation and more subsidies, which add to their incompetence and in turn punish private firms which have to contribute through taxes. Second, the barriers of entry to markets such as healthcare, public transportation or electric energy are very tough. Dozens of regulations stipulate conditions that have to be fulfilled by private companies in order to make it to the market, which is then turned against them.
Why don’t anti-trust laws account for this? Sure, one may argue that instead the government should leave these services to the provision of the market, but where does this leave anti-trust? Only in the same conclusion; repeal government control over the dynamic competitive process that the free market provides.
A “Heads I Win, Tail You Lose” Story
It’s not surprising that when long, entangled legislation is established, its subjects have a hard time abiding it. Such is the case with anti-trust laws that practically amount to hypocrisy.
When a producer tries to serve consumers in the best way by aggressively lowering the price of his goods and services below the free market equilibrium, anti-trust laws call it “predatory pricing” and prohibit it.
When a producer doesn’t distinguish from other producers and keeps relatively the same price, he is blamed for “collusion” and punished.
When a producer increases the price, he is blamed for “price gouging.” It just seems that whatever producers do, regardless whether it is good for consumers, they are chased down by anti-trust laws and punished.<!–[if !supportFootnotes]–><!–[endif]–> Such hypocritical action directly points to the inconsistency of anti-trust and its fallacious economical foundation.
Anti-Trust as a Protectionist Tool
It’s an interesting fact that since the creation of anti-trust legislation in the United States (Sherman Act, 1890) and at least up to 1999, more than 90% of all cases were not brought by the government but by private firms against each other.<!–[if !supportFootnotes]–><!–[endif]–> This should make us leery and recoil back in surprise. Why do firms use so much a law that was created to restrain them from their voluntary business activities? The very fact that many businesspeople support anti-trust legislation raises suspicion as to whether the effects of it are what its legislators had in mind upon its creation. I’m sure that using anti-trust as a form of protectionism to get ahead in competition is not what they envisaged.
Almost all of the numerous court cases against Microsoft or IBM were lawsuits filed by smaller companies that failed to win the support of consumers through better and cheaper products. Even though Microsoft was never a monopoly,<!–[if !supportFootnotes]–><!–[endif]–> courts often ruled against it and in favor of companies which knew better how to take advantage of anti-trust.
The standard textbook will tell you that anti-trust originated from the idea of “public interest.” However, by taking a closer look we see that anti-trust unfortunately serves as a tool of protectionism through which economic efficiency is lessened.<!–[if !supportFootnotes]–><!–[endif]–>
The answer to anti-trust and other governmental interventions in the market is all the inefficiency and unfairness that they have produced. In order to build a business environment where economic growth is desired, one must always hold freedom at the core of equation. Only the free, unrestrained transactions between individuals can produce positive outcomes. In a free market, firms are big only because they produced goods and services at prices which consumers bought at mass. Nothing else could have made these firms big. The scenario where firms grow at the expense of others is one which government takes from Paul to give to John, a scenario of corporatism where government expropriates tax-payers for the benefit of big corporations. That scenario, however, is fully absent in a society of freedom, private property and self-responsibility.
It must be also noted that people don’t have positive rights, that is, rights on the service of others. If I open a new firm, I don’t have the right to earn profits, only the possibility of doing so. Having such a right implies that consumers are obligated to patronize my services and buy my products. The same should be told to “small” firms that complain about the “burden” that other relatively bigger firms are imposing on them. If a small shop can’t compete with Wal-Mart that’s because Wal-Mart is doing something better than they are. If this superiority in providing a service leads to the bankruptcy of the small firm, it should not worry us for the small firm doesn’t have the positive right to make profits. If such a right was legitimate, anybody offering any service can complain that they are being destroyed by the “big one” and ask to be given remedies at the expense of others.
In order for fairness and economic growth to happen, we must allow individuals to interact freely in person or in group. We must understand that growth only comes from offering services and products which somebody finds useful and buys. In this sense, we must not curse mass producers but rather cherish them for the ability to satisfy the masses. Anything that damages the consumers can’t constitute a good law. And because these very consumers are exactly the producers who must engage in economic activity to create that which we will later consume, their damage is also damage to the very means of producing the necessary goods and services that maintain our standard of living.
<!–[if !supportFootnotes]–><!–[endif]–> Binger, B & Hoffman, E. Microeconomics with Calculus, 2nd ed. p 391, Addison-Wesley, 1998.
<!–[if !supportFootnotes]–><!–[endif]–> The standard theoretical analysis of competition, monopoly, and resource misallocation can be found in any microeconomics text, such as William F. Shughart II, The Organization of Industry, 2nd ed., 1997
<!–[if !supportFootnotes]–><!–[endif]–> Mises, L. Human Action(Scholar’s Edition), p. 361-362, 1998
<!–[if !supportFootnotes]–><!–[endif]–> Rothbard, M. Man, Economy and State (Study Edition). p. 122, 2004
<!–[if !supportFootnotes]–><!–[endif]–> Armentano, D. Anti-Trust: The Case for Repeal, 2nd ed. p. 33-34, 1999
<!–[if !supportFootnotes]–><!–[endif]–> Rothbard, M. Man, Economy and State (Study Edition). p. 122, 2004
<!–[if !supportFootnotes]–><!–[endif]–> A YouTube video where Ron Paul discusses anti-trust and monopoly, July 13th 1983, http://www.youtube.com/watch?v=8C4gRRk2i-M&feature=PlayList&p=B132AD363D81C227&playnext_from=PL&playnext=1&index=18
<!–[if !supportFootnotes]–><!–[endif]–> Armentano, D. Anti-Trust: The Case for Repeal, 2nd ed. p. 18, 1999
<!–[if !supportFootnotes]–><!–[endif]–> Anderson, W. & Block, W. & DiLorenzo, T. & Mercer, I. & Snyman, L. & Westley, C. “The Microsoft Corporation in Collision with Antitrust Law,” Vol. 26, Nr. 1, 2001
<!–[if !supportFootnotes]–><!–[endif]–> Bruce L. Benson, M.L. Greenhut, and Randall G. Holcombe,
“Interest Groups and the Antitrust Paradox,” Cato Journal 6 (Winter 1987): 801–18; and William Baumol and Janusz Ordover, “Use of Antitrust to Subvert Competition,”
Journal of Law and Economics 28 (May 1985): 247–65.