FilippKozachuk

12November2014
EB102

Kozachuk1

AntitrustPolicyandEnforcementDoesNotEnhanceConsumerWelfare
Antitrustlawsarestatutesthatkeepanyonefirmorgroupoffirmsfromdominatinga
marketplacethroughmonopolypower.Supportersbelievethattheselawsarethefoundationof
freemarkets,andthatwithoutthehelpofgovernment,largeconglomeratesandcorporations
wouldmercilesslycrushtheirsmallercompetitionandegregiouslyraisepricesandprofitswhile
defraudingtheconsumer.ProponentsofantitrustpolicyoftenquoteAdamSmithfromThe
WealthofNations:Peopleofthesametradeseldommeettogetherbuttheconversationends
inaconspiracyagainstthepublicorinsomecontrivancetoraiseprices.Smith,thefatherof
Laissezfairecapitalismhashadhiswordsprooftextedovertheyearstojustifyalltypesof
interventionsandillinformedantitrustpolicy.Theseproponentsrarelymentiontherestof
Smithssentence:Itisimpossibleindeedtopreventsuchmeetings,byanylawwhicheither
couldbeexecuted,orwouldbeconsistentwithlibertyandjustice.Thispaperwillarguethat
antitrustincorrectlyassessthemarkets,andthusdoesnotenhanceconsumerwelfarethroughits
enforcement.Antitrustpolicyisverycomplexinitsassumptions,aswellasitsapplications,
thereforeitseffectivenesscannotbeseeninblackandwhite.However,byconsideringbothsides
inthedebate,thecostsclearlyexceedthebenefits.
Marketsareoftenreferredtoasfreemarkets,whichbydefinitionmeansthatpricesfor
goodsandservicesaresetfreelybyagreementbetweensellersandconsumers.Thelawsand
forcesofsupplyanddemandarefreefromanyinterventionbygovernment,pricesetting
monopoly,orotherexternalorinternalauthority.Inanattempttomakemarketsfairer,antitrust
presentsstricterpolicyandregulationtopreventdominantfirmsfromillegallyexploitingthe

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market.Oneoftheconcernsisusingmonopolytosetpredatoryprices.InthehistoricStandard
andOilCasein1911,neitherthetrialnortheSupremeCourteverpossessedempiricalevidence
thatStandardOilhadusedpredatorypracticestodestroytheirrivalsandraiseprices.In
actuality,StandardOilhadahighmarketsharethroughefficientoperationsandlowprices.In
1911,themarketwasverycompetitiveandtherewasnomonopoly;infacttherewere137
suppliersintheoilrefiningindustry.However,StandardOilwasconvicteddespiteitseconomic
performanceforendingcompetitionbetweenitsveryownsubsidiaries(Armentano1).
Antitrustpolicyisoftenpresentedinthenameofconsumerwelfare,yetitultimately
regulatesinnovationandconsumerchoice.InthecaseofMicrosoftvs.Netscape,thegovernment
allegedthatMicrosofthadintenttomonopolizeinviolationoftheShermanActbyintegratingits
browserInternetExplorerintoWindows98andillegallyexcludingNetscapeNavigatorfrom
competingforbrowsermarketshare.Thisdebatespannedoveradecadebeforeitwasdismissed,
largelyduetoalackofempiricalevidence.Inreality,Netscape,notMicrosoft,heldthe
dominantpositioninwebbrowserswhenallegationsbegan,andNetscapewasneverprevented
fromcompetinginthemarketsincePCusersdownloadedmillionsofcopiesofthebrowser
(Armentano2).Theentirecasewasbuiltonfalseaccusationsandwithoutanyempirical
evidence.Thisisbutoneexampleofhowantitrustpolicycurbsinnovationandconsumerchoice.
Antitrustalsorestrainsfreemarketcompetitionandhampersanefficientallocationof
resources.PresidentObamaannouncedatthestartofhissecondtermthathewouldpresent
vigorousantitrustenforcementinhisadministration.Thebigproblemisthatthereisabsolutely
noempiricalevidencethatantitrustenforcementofanykindpromotestheinterestsof

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consumersandgivesthemanyallegedbenefit;thus,hispolicyisilladvised.Wedonotneed
antitrustinterventioninfreemarkets,butratherantitrustprotectionfromfraud.Itisfoolishto
argueforthecompleteeliminationofantitrustenforcement;itisnotthatsimple.Theyareneeded
toprotectagainstfraud,suchasBernieMadoffsinfamousponzischemeofdefraudingthe
market.Competitive,freemarketsarefundamentallyandlegallyopentoallfirmsincludingthe
dominantonesandthusconsumersdecidewhowinsandloses,ratherthanthegovernment.
Scholarsandjudgesbroadlyagreethatantitrustshouldbeusedtoprotectconsumersby
guardingagainstinefficientmonopolization.However,antitrustlawsmustbeusedcarefully;if
usedvigorously,theycanhavemanyperverseeffects.Privateplaintiffsandgovernmentagencies
frequentlymisuseantitrustlawstostiflecompetitionbyfalselyaccusingrivalsof
monopolizationandpredatorypricingwhenmostfrequently,theserivalsareguiltyofnothing
morethansatisfyingconsumerdemandsforlowerprices.Therehasbeenaninterestingshiftin
PresidentObamaspolicytowardsantitrustbehaviorthatsignificantlyincreasesthechancesof
thisoccurring.Inhisfirstterm,ObamaofferedstructuralremediesinSection2oftheSherman
Acttoreorganizeandregroupcompaniesinresponsetoantitrustallegationsregardingmergers.
Nowhowever,tothedelightofantitrustproponents,hehasshiftedtobehavioralremedies,
whichestablishtheDOJandFTCtoactaswatchdogsoverhowfirmsrespondtomandated
remedies.Byfundamentallychangingthenatureoftheseorganizationsfortasksthattheyarenot
wellsuited,theyarenowmoresusceptibletobribesandrentseekingfromoutsideparties.
BoudreauxandKleitarguethattheplausibilityofmanyclaimsofpredatorypricingcan
begaugedbylookingatwhodoesandwhodoesnotcomplainaboutallegedthreatsof
monopolization.Infact,JusticeLewisPowellsaid,Cuttingpricesinordertoincreasebusiness

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oftenistheveryessenceofcompetitionmistakeninferenceincasesareespeciallycostly,
becausetheychilltheveryconducttheantitrustlawsaredesignedtoprotect(20).Everymarket
isfulloffirms,suppliers,rivals,andcustomerswithincentivestoensurethatcompetition
prevailsandpredatorypricingschemesfail.Thus,thereisnoneedforadministrativeagencies
andcourtstopoliceagainstattemptedmonopolization(Bork328).Also,courtsandenforcement
bureaucracieshavenoincentivesorskillsthatallowthemtodeterminewhenpricecutswilllead
tomonopolies;theysimplylacktheknowledgetobeabletonuanceandcharacterizethevarious
industriesthattheyaretoruleover.AccordingtoBoudreauxandKleit,Tobelievethatajudge
hearinganantitrustcasecanlearnenoughabouttheindustrytorenderandinformedopinionis
tobelievetheimpossible(14).
Politiciansandrivalfirmsoftenuseantitrustpolicyasaweaponagainstlargerfirms.For
example,inthecaseagainstMicrosoft,themostsuccessfulentrepreneursoftheSiliconeValley
allegedlyusedtheirpoliticalinfluenceandpowertobringdowntheircompetitorintheNorth
West(Levy2).Proponentsofantitrustpolicywouldarguethatlargecompanieswanttocontrol
thepaceofinnovation;thus,regulationcanenablesmallcompaniestotrynewthingsandcome
upwithpioneeringtechnology.Largerfirmshoweverfrequentlyexperiencetheinjusticeof
beingforcedtosharethetechnologiestheyveresearchedanddevelopedwiththeircompetitors,
whichdestroysincentivesforinvestorstoinvestinthesecompanies.Becauseofthis,firmsmust
oftenconsiderwhethertheirinnovationwillgivethemunfaircompetitiveadvantageorbe
consideredpredatorybyantitrustregulatorsorcompetitors(Armentano54).Antitrust
interventionhaspreventedefficientcompetitiveprocessesinthenameofpreservingcompetition.
Eliminatingtheuseofantitrustlawtostiflecompletionwillforcerivalfirmstocompeteinways

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thattrulypromoteconsumerwellbeing,suchascuttingprices,improvingefficiency,and
enhancingproductquality.
Antitrustpolicycanbeevaluatedasatypeofindustrialplanningbythegovernment.As
such,itissubjecttoHayekspretenseofknowledgecriticismthatisfrequentlypresented
againstgovernmentplanning.Hayeksaidthatpolicymakersattitudeisdecidedlyunscientific
inthetruesenseoftheword,sinceitinvolvesamechanicalanduncriticalapplicationofhabits
ofthoughttofieldsdifferentfromthoseinwhichtheyhavebeenformed(Hayek58).Hayeks
theorysuggeststhatgovernmentpolicyalwaysassumestheexistenceofinformationthatis
requiredforintelligentdecisionmakingconcerningsocialefficiency.Inotherwords,policy
makersmakedecisionsbasedonassumptionsandinformationthatdoesnotexistinreality.If
policymakersandjudgescannotobtainaccurateinformationaboutsocialcostsandbenefits,
thennoruleofreasonispossible.Thisisclearlydemonstratedinthehistoricdivestmentand
breakupofAT&Tin1956.ProponentswouldarguethatthebreakupofAT&Twascredited
withreducedequipmentandphonecosts,lowerlongdistancerates,andincreasedindustry
productivity.Whiletheseoutcomesmaybetrue,howdidpolicymakersknowthatthefuture
benefitsofdivestiturewouldexceedtheircosts?TherewasnoevidenceofAT&Tsverticaljoint
economies,whichmadeitimpossibletoprovethatdivestiturewasnecessaryforenhancing
consumerwelfare.Infact,thelargestbarriertoentrywasnotverticalintegration,butrather
barrierstoentryofgovernmentregulation!TheFTChistoricallyrestrictedentryintolong
distancetelecommarketsandregulatedAT&Tsrates.Similarly,stategovernmentsregulated
entryintolocaltelephonemarketsandpriceschargedforpublicutilitiesbyAT&T(Armentano
30).Hadtherebeencompletederegulation,thedifficultiesofAT&Tsallegedvertical

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integrationwouldhavenaturallydisappeared,andtherewouldhavenotbeentheneedfor
divestitureorenforcement.Thus,regulation,notmonopolypower,wasthesourceofcontention.
Thoseinfavorofantitrustwouldarguethatdespiteitslackofempiricalevidenceand
assessment,antitrustenforcementfundamentallyhassignificantdeterrenceeffectsforfirms
engaginginillegalactivity.Theseproponentsarequicktoforgetthattheinfluxofforeign
competition,deregulation,theentryofnewfirms,andtheemergenceofnewtechnologyhave
createdanextremelycompetitiveenvironmentforUSfirms.Yes,antitrustauthoritymaydeter
firmsfromactionsthatdecreasesocialwelfare,butweoncemoredonothaveameasureofhow
enforcementaffectsthedeterrenceitself.Itisimportanttorememberthatinamarketeconomy,
theconsumerisultimatelyincharge.Intheabsenceofgovernmentmandates,nobusinesscan
becomepowerfulorprofitableunlessitcanpersuadeconsumerstopurchaseitsproduct.
ProponentsofantitrustwouldreferencethecurrentmarketforcableTVasforcingconsumersto
choosebetweenonethreemaincompetitors:AT&T,Comcast,andTimeWarner.Theironly
optionistopayunreasonablepricesforqualityservice,orgowithoutInternetatall(Patel1).
Wheretheyereisindefiningtheirrelevantmarket.ConsumerslookingforTVarenotrestricted
tooneofthreeproviders,butmaylookelsewherelikesatelliteandInternetTV.Thisexample
illustratesthatantitrustproponentsstruggleineffectivelyidentifyingrelevantmarketswhen
presentingantitrustallegations.
Inconclusion,currentantitrustenforcementandpolicydoesnotenhanceconsumer
welfare.Developingadeeperviewofitseffectsrequiresaskingthoughtprovokingquestions.
Forexample,howcanstaticantitrustpolicybeimprovedtoresponddynamicallytochanging
marketsinitsenforcement?Despitealackofempiricalevidence,howcangovernmentandfirms

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evaluatetheeffectsofprospectiveantitrustpolicy?Ifmarketsbecomemorederegulated,howare
consumerstobeprotectedfromaggressivebusinesspracticesandlackofcorporate
responsibilitycanweexpectfirmstoactethically?Also,howcantherebeasystemofchecks
andbalancestopreventunfoundedwhistleblowingandrentseekingamongstrivalfirms?
Finally,howareChristianstorespondasagentsofthedivinemandatetosubduetheearthand
takedominionoverit?Askingthesequestionsdemandssomemiddlegroundandagreement
betweenbothsidesofthedebate.Antitrustpolicyisnotsimplyblackandwhite,butitisclear
thatthecostsoutweighthebenefits.
Bibliography
Armentano,DominickT.,andDominickT.Armentano.Antitrust:TheCaseforRepeal.Rev.
2nded.Auburn,Ala.:Mises,1999.Print.
Patel,Nilay."TheInternetIsScrewed(butWeCanFixIt)."TheVerge.VoxMedia,9July2014.
Web.13Nov.2014.
Hayek,FriedrichA.Von,andFriedrichA.VonHayek.AFreemarketMonetarySystem.
Auburn,AL:LudwigVonMisesInstitute,2008.Print.
Bork,RobertH."BarrierstoEntry."TheAntitrustParadox:APolicyatWarwithItself.New
York:Basic,1978.Print.

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