Category Archives: Economics

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.

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.”