The Trouble with Antitrust: Past, Present, Future

Antitrust issues are at the forefront of the proposed merger of T-Mobile US with Sprint, but also with concerns about the market power of firms such as Facebook and Google.

The point of antitrust legislation is consumer protection. So the empirical issue is whether antitrust action actually works, in practice. Do such actions (breakups, for example, as some suggest for Facebook and Google) protect consumers and provide benefits such as lower prices?

The answers might not always be clear. Firm actions are not always unambiguously pro-competitive or anti-competitive.

“When prices decline sufficiently so that no firm in an industry is earning economic profits and some firms exit, this outcome may reflect a highly competitive market,” note economists Robert Crandall and Clifford Winston of the Brookings Institution.

In other cases, a large competitor might be engaging in predatory pricing to drive out its rivals.

If one contestant adds lots of capacity, is that an example of an implied threat to cut prices drastically, or a way to add more competition?

“Almost any action by a firm short of outright price fixing can turn out to have pro-competitive or anti-competitive consequences,” the economists notes.

After studying the impact of antitrust actions, they say they can “find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anti-competitive behavior.”

So “authorities would be well advised to prosecute only the most egregious anticompetitive violations,” they note, as such actions are inconclusive. Looking at the big textbook examples of major antitrust action, they find

* the breakup of Standard Oil had little effect on either consumers or on profits
* The American Tobacco case did little to spur meaningful competition
* the decree did not reduce Alcoa’s dominance
* price of a movie ticket rose in the two decades following the Paramount decision and there was little market entry by new competitors
* After antitrust action, USM’s revenue gains were more than twice the sum of its four major competitors’ gains
* After the AT&T breakup, long distance prices did fall, but that is attributable to “equal access” rules, not the breakup
* Monopoly cases against Safeway and A&P had little impact on market structure
* The charge of American Airlines predatory pricing at hubs is inconclusive

One generic problem is that antitrust cases take so long to conclude that industry structures often already have changed by the time a decision is rendered. That was true in the Standard Oil, Alcoa, IBM and Microsoft cases, they say. In other cases, including American Tobacco, Paramount and United Shoe Machinery cases, negligible consumer price or industry structure changes happened.

Also, mergers may harm or benefit consumers. It depends. Mergers that enable firms to acquire market power may only raise consumer prices, while mergers that enable firms to realize operational and managerial efficiencies can reduce costs and thereby lower prices, the economists notes.

After reviewing about a hundred merger reviews and cases, the authors say “regulators are not sorting out good mergers from bad ones with much accuracy” and that “antitrust authorities overreach and attempt to block productive mergers.”

“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare,” they say.

“We have not found any evidence that antitrust enforcement has deterred firms from engaging in actions that would have seriously harmed consumers,” they add.

In the end, “any deterrent effect of the antitrust laws may be relatively small compared with the well demonstrated ability of competitive markets to deter anti-competitive monopolies, collusion and mergers,” they conclude.

The point is that antitrust actions often fail to achieve the objectives of greater competition and consumer price benefits.

“The apparent ineffectiveness of antitrust policy stems from several causes:
1) the excessive duration of monopolization cases, which portends that the particular issue being addressed will evolve into something different—often of less importance—by the time it is resolved;
2) the difficulties in formulating effective remedies for monopolization and effective consent decrees for proposed mergers;
3) the difficulties in sorting out which mergers or instances of potentially anticompetitive behavior threaten consumer welfare;
4) the substantial and growing challenges of formulating and implementing effective antitrust policies in a new economy characterized by dynamic competition, rapid technological change and important intellectual property (Carlton and Gertner, 2002);
5) political forces that influence which antitrust cases are initiated, settled or dropped (Weingast and Moran, 1983; Coate, Higgins and McChesney, 1995), including situations where firms try to exploit the antitrust process to gain a competitive advantage over their rivals (Baumol and Ordover, 1985);
6) the power of the market as an effective force for spurring competition and curbing anticompetitive abuses, which leaves antitrust policy with relatively little to do.”

There are some who say the emphasis on consumer welfare has to change. Bigness itself now seems to be the rationale for action. In what some claim is a return to earlier principles, the argument is that a focus on consumer welfare, especially prices now is inadequate.

Instead, antitrust should focus on potential harm to competitors, reduced innovation, jobs, reduced market entry, decreases in product quality, and privacy.

Since traditional antitrust has been relatively ineffective, one wonders how it might be any more effective when a number of harder-to-measure outcomes are substituted. We have done poorly enough when quantitative measures were used; we are likely to do far worse when qualitative measures are the substitute.