Category Archives: Antitrust

Automaker Antitrust Investigation Is Wrong Way to Fight Cartels

The Justice Department is launching an antitrust investigation against Ford, Honda, VW, and BMW,  alleging that the automakers colluded on a deal with the State of California to follow its stricter fuel economy and emission standards, rather than looser federal standards. My colleague Marlo Lewis has argued that automakers are obliged by statute to follow the federal standards, not the state standards. He also correctly argues that cartels can only be propped up with government support. A few more words about cartels are in order.

For the sake of argument, let’s assume that Ford, Honda, VW, and BMW, have, in fact formed a cartel. By themselves, they do not have the power to sustain it. A federal antitrust case against the carmakers aims at the wrong target. The proper solution is to rein in California’s government, which should not have cartel-making power in the first place.

Cartels need government support because they contain the seeds of their own destruction. Cartels raise prices by restricting supply—when something becomes scarcer its price goes up. That extra profit margin gives each cartel member an incentive to cheat by increasing supply on the sly. The more they do this, the more they undercut the high cartel price. In other words, self-interested companies acting selfishly naturally undo their own cartels.

Of course, this illustration only holds if the cartel’s participants control the entire market, or close to it. This is not the case with Ford, Honda, VW, BMW, and California. The two biggest automakers, GM and Toyota, are not part of the agreement. Neither is Mercedes-Benz. They can choose to differentiate their cars’ fuel economies from what the cartel members have agreed to. If consumers prefer these cars over the cartel members’ cars, then the cartel is lost, even with government support from California.

For these two reasons, the antitrust investigation against automakers should be dropped. And as Marlo also points out, the same arguments that apply to reining in California’s cartel-making powers at the state level also apply to federal CAFE standards. For more on why cartels are unsustainable without government’s help, see Wayne Crews’ and my recent paper, and other resources at antitrust.cei.org.

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State Attorneys General Launch Antitrust Investigations, Forget ‘Relevant Market’ Fallacy

Facebook and Google are facing separate antitrust investigations from publicity-seeking state attorneys general from both parties. New York’s Democratic attorney general is heading a joint investigation into Facebook for its “dominance in the industry and the potential anticompetitive conduct stemming from that dominance.” Texas’ Republican attorney general is heading another joint investigation into Google, for what The Wall Street Journal describes as “potential harms to consumers from their information and ad choices being concentrated in one company,” as well as potential anti-conservative bias.

Both investigations have fallen for the relevant market fallacy. In short, a company’s relevant market is usually larger and more competitive than antitrust regulators allege.

For example, as a method of communication, Facebook competes with text messages, video calls, phone calls, and emails, as well as in-person interaction. Social networking is one part of this larger relevant market.

As a way to spend leisure time, Facebook’s relevant market is larger than social networking. It also includes movies, sports, books, music, restaurants, and more. Again, Facebook does not have a monopoly. It can even serve as a complementary good, giving its competitors an unintentional boost. It is common for fans to follow and comment live in chat groups during a sports game or new episode of a television show. Not only that, but this is also often done using Facebook’s competitor Twitter—hence the term “live-tweeting.”

As a media aggregator, Facebook’s users each have more power over sharing what content to share or click on than does Facebook itself. It also competes with Twitter, Google, and thousands of other sites, from major news organizations such as The New York Times and The Wall Street Journal, to news aggregators such as the RealClear family of sites, to smaller outlets covering special interest topics such as local news, pop culture, or niche hobbies.

Nor does Facebook have a monopoly on photo sharing. It shares this market with Google Photo, Shutterfly, and more private sharing options such as Dropbox and other cloud storage services, and even simple email attachments.

Google’s relevant market is larger than a traditional search engine page. Every Uber ride involves an Internet search to pair riders and drivers. These searches do not use a Google algorithm, and would not work if their customers’ information was “being concentrated in one company.” Netflix, Hulu, and Spotify searches do not use Google. Nor do dating sites, which compete with each other based on proprietary search algorithms, as do many other popular search-based Internet services.

The relevant market fallacy also applies to allegations of anti-conservative bias against Google. If Google acquires even the reputation of serving unreliable search results, consumers can turn to competing options by simply typing a web address into their browser. And the relevant competitive market, as noted above, is not limited to search engines. News aggregators, consumer review sites, and other relevant content sites are legion, and easy to find, even for relatively uninformed users.

Conservatives eager to combat perceived bias should also heed the conservative icon Barry Goldwater’s advice that a government big enough to give you everything you want is a government big enough to take away everything that you have. It is easy to imagine the government power conservatives seek today being used against them tomorrow. The relevant news cycle is much longer than the most recent negative headline about President Trump.

Additionally, eight states, including Texas, have already previously investigated Google for antitrust violations, in conjunction with the Federal Trade Commission. They dropped their investigation in 2013 after finding no violations, despite 18 months of searching.

Market conditions change rapidly, but the weakness of a potential antitrust case has not. As recently as this July, Iowa’s attorney general told Bloomberg News in a revealing moment of honesty, “We are struggling with the law and the theory” in developing antitrust cases against big tech companies. There is a reason for that—one of them being the relevant market fallacy. These antitrust investigations serve the interest of attorneys general’s political ambitions, not consumers.

For more reasons to drop the investigations, see Wayne Crews’ and my recent paper, “The Case against Antitrust Law.”

Tyler Cowen – Big Business: A Love Letter to an American Anti-Hero

Tyler Cowen – Big Business: A Love Letter to an American Anti-Hero

Big businesses are not perfect, and Cowen gives several examples. This is not a hagiography. Instead, Cowen argues that most people underestimate the amount of good that big businesses do. They make possible affordable communications, books, culture and art (and the supplies needed to make them), transportation that expands employment options for workers, safe and diverse food supplies, architecture, and more. As with many of Cowen’s books, it reads quickly and easily, almost a little too much so. When he offers the occasional insight, take a minute longer than he does to ponder it. This has been received as the prolific Cowen’s best book in some time, and I agree with the sentiment.

On the Radio: Antitrust

On Sunday morning from 8-9 AM PT, I’ll be on the Bob Zadek Show talking antitrust regulation. He has a promo article with a link to listen live here. See also Wayne Crews’ and my antitrust paper.

Antitrust Basics: Think Long Term, Not Just Short Term

This is the seventh entry in the “Antitrust Basics” series. See below for previous posts.

Moore’s Law states that computing power doubles every year and a half or so. An antitrust case against IBM, by contrast, lasted for 13 years, never reached a decision, and was eventually dropped because the original issue had long become obsolete. Markets are ongoing-long-term processes but antitrust cases are often short-term reactions to temporary situations—even if they sometimes last so long as to outlive the problem they seek to address.

Today’s Neo-Brandeisians and right-wing populists calling for an antitrust revival are not the only analysts prone to short-termism. Robert Bork, famous for his antitrust skepticism, writes on p. 311 of his 1978 book “The Antitrust Paradox”:

Antitrust is valuable because in some cases it can achieve results more rapidly than can market forces. We need not suffer losses while waiting for the market to erode cartels and monopolistic mergers.

Bork’s statement focuses on short-term results while ignoring long-term underlying processes, and has several other problems besides. How do regulators and judges know which cases are causing consumer harm and which are not? How do they ensure cases are chosen on the merits and not for politically-motivated reasons?

Cases also often take years to resolve. Assuming regulators do identify a valid case, how would they, and the judges who hear the case, know if market activity could address the problem by the time the case is decided? Do the benefits of regulatory action exceed the court and enforcement costs? Are the affected companies in a position to capture the regulators?

More to the point, does the short-term benefit come at a greater long-term cost? An enforcement action now could have an unforeseen deterrent effect on future mergers, contracts, and innovations, including in unrelated industries. The consumer harm from these could well exceed the short-term benefits of a short-term improvement on market outcomes—assuming that regulators are consistently capable of such a feat.

In the 1969-1982 IBM case, regulators eventually gave up, however belatedly. But this is not guaranteed to happen in every case. And who knows what consumer-benefiting innovations IBM could have developed with the time and resources it ended up devoting to defending itself in this case?

As the Justice Department and Federal Trade Commission conduct their investigations into Facebook, Google, Amazon, and Apple, they should keep their limited abilities to answer such questions in mind—as well as their bosses’ short-term focus, which rarely extends beyond the next election cycle.

For more, see Wayne Crews’ and my paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous blog posts in the Antitrust Basics series:

Antitrust Basics: Corruption and Rent-Seeking

This is the sixth entry in the “Antitrust Basics” series. See below for previous posts.

Rent-seeking is economics jargon for chasing after unfair special favors from government. Businesses and individuals have a large menu of rent-seeking options to choose from, and antitrust regulations are one of the items. Licensing regulations and other restrictions can make it harder for startups to enter a market, favoring incumbent businesses. Bailouts, such as General Motors and several large financial firms have received in recent years, are another form of rent-seeking. Cash subsidies, such as many green energy producers receive, are rent-seeking examples. Special financing, as through agencies like the Export-Import Bank or the Overseas Private Investment Bank, enable rent-seeking by Boeing and many farm and construction equipment manufacturers such as John Deere and General Electric.

All told, it is a minor miracle that corporate welfare is only about a $100 billion problem. Standard economic theory predicts that it should be much larger. Competitive Enterprise Institute founder Fred Smith and I wrote a paper arguing that virtue is an important limiting factor, though incomplete. Antitrust regulation provides another temptation to seek unfair rents, and would not improve the business world’s moral climate.

Neo-Brandeisians and other progressives rightfully oppose rent-seeking, but err when they propose increased antitrust policies as a solution.Tim Wu, a prominent neo-Brandeisian analyst, correctly points out how numerous companies game government policies to reduce competition, but then goes on to advocate for more government power as the solution. Even now, in a relatively restrained antitrust environment, roughly 95 percent of antitrust lawsuits are brought privately by competitors, not by the Justice Department or Federal Trade Commission. Repealing antitrust regulation would not eliminate rent-seeking—there are many other avenues rent-seekers can take—but it would reduce it.

Neo-Brandeisians advocating antitrust regulation as a way to promote virtue have a common misunderstanding of how governments work in practice. Government employees do not operate with only the public interest in mind. They are human beings, with the same incentives, flaws, and self-interested tendencies as other human beings.

Agency employees want to increase their budgets and power, and often enjoy the publicity that accompanies big cases. Regulators are also vulnerable to what is known as a Baptist-and-bootlegger dynamic. In Clemson University economist Bruce Yandle’s classic example, a moralizing Baptist and a profit-seeking bootlegger will both favor a law requiring liquor stores to close on Sundays, though for different reasons. A morally-motivated Baptist does not want people drinking on Sundays and a bootlegger would gain a lucrative monopoly every Sunday. They may find themselves strange bedfellows, and bootleggers may even hide themselves in Baptist clothing.

Applying this dynamic to antitrust regulation, a true-believing “Baptist” in Congress or at the Justice Department or the FTC would be inclined to listen seriously to the entreaties of corporate “bootleggers” who can come up with virtuous-sounding reasons for why regulators should give their businesses special favorable treatment.

Oracle, one of Microsoft’s rivals, ran its own independent Microsoft investigation during that company’s antitrust case, for what it alleged were Baptist-style reasons. “All we did is try to take information that was hidden and bring it to light,” said Oracle CEO Larry Ellison. “I don’t think that was arrogance. I think it was a public service.” Former Sen. Orrin Hatch (R-UT), who counted Oracle among his constituents, was one of the loudest anti-Microsoft voices in Congress. Around that time, he also received $17,500 donations from executives at Netscape, AOL, and Sun Microsystems.

Perhaps heeding Hatch’s admonition that, “If you want to get involved in business, you should get involved in politics,” Microsoft expanded its presence in Washington from a small outpost at a Bethesda, Maryland, sales office to a large downtown Washington office with a full-time staff, plus multiple outside lobbyists. Microsoft quickly went from a virtual non-entity in Washington to the 10th largest corporate soft money campaign donor by the 1997-1998 election cycle. Sen. Hatch’s campaign was among the beneficiaries.

The lines between Baptist and bootlegger can be blurry, and some actors play both parts. But such ethical dynamics are an integral part of antitrust regulation in practice.

The best way to reduce rent-seeking and regulatory capture is to have a system of government with few rents that can be sought, and fewer regulations that can be captured. Neo-Brandeisians, just like the rest of us, have to deal with the government we have, rather than an idealized abstraction. A more aggressive antitrust policy would increase rent-seeking, and should not be put forward as a solution to the problem.

For more, see Wayne Crews’ and my paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous blog posts in the Antitrust Basics series:

Ron Chernow – The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

Ron Chernow – The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

More of a corporate history than a history of the Morgan family. But this 1990 book, Chernow’s first, also chronicles the evolution of banking and finance from the Industrial Revolution up to about the 1980s. I picked this up due to an interest in antitrust law, competition, and the rise of big business. While this book is ultimately more useful for financial regulation scholars, I still found it useful. And though its characters are not as compelling as Chernow’s Rockellers in Titan, it is an enjoyable read.