The Causes and Consequences of Antitrust: The Public Choice Perspective. - book reviews

Reason, August-Sept, 1995 by David R. Henderson

Thirty years ago, economists began to analyze carefully the effects of government regulation and found, almost without exception, that such regulation reduced competition and raised prices. Whether in surface transportation, airline seats, milk, or cab rides, the story was the same. One big exception was natural gas, where a too-low federal price ceiling created a serious shortage instead.

It was only natural that curious economists would widen the net to look at the effects of antitrust regulation. Beginning in the early 1970s, economists studying antitrust found that it often created monopoly by preventing companies from pricing too low or expanding too much. Antitrust authorities, they found, often were more interested in preserving competitors than in preserving competition.

Economists also found that regulated industries often lobbied for the anti-competitive regulation in the first place. Consumers never asked for an Interstate Commerce Commission to prevent new truckers from entering the business. Nor had consumers been heard from when the federal government set up milk marketing boards to restrict the supply of milk and drive up the pride. The main players were truckers and milk producers, who wanted to limit competition. Quite naturally, then, some curious economists began to wonder how we ended up with antitrust laws.

Fred S. McChesney, a law and economics professor at Emory University, and William F. Shughart II, an economics professor at the University of Mississippi, were two pioneers in antitrust research. This book brings together, in one place, evidence of the harm done by antitrust and of the special interest lobbying that led to its adoption and that guides the antitrust agencies' policies. The book is a major step towards correcting a deficiency in economists' and the public's understanding of antitrust.

Part One presents evidence by various researchers that is inconsistent with the standard public interest view of antitrust. Part One's most striking article is Paul Rubin's "What Do Economists Think of Antitrust?: A Random Walk Down Pennsylvania Avenue." Rubin uses a simple but marvelously clever methodology. He takes all the antitrust articles cited in a major industrial organization textbook by Frederic M. Scherer and David Ross. Rubin notes that Scherer is a leading proponent of antitrust and that, therefore, any bias in the cases cited in the book would be in favor of cases where the antitrust authorities were acting to preserve or increase competition.

Rubin then summarizes each case and categorizes them, by the standards of the author writing about the case, as justified or unjustified. The bottom line: In the view of the economists writing the articles, there were 14 justified cases and nine unjustified ones. Moreover, the plaintiffs won a lower percentage of the justified cases (64 percent) than of the unjustified ones (78 percent). Concludes Rubin: "Factors other than a search for efficiency must be driving antitrust policy."

The articles in part two assess antitrust's actual effects. George Bittlingmayer examines the great merger wave between 1898 and 1902, in which more than 2,500 manufacturing and mining firms disappeared through merger. Economists have long been puzzled about what caused that wave: Bittlingmayer argues it was caused by antitrust. You probably thought that antitrust enforcement prevented mergers. It does now, but as Bittlingmayer shows, the Sherman Antitrust Act was used to prevent companies from making loose cartel agreements. So, prevented from colluding, the firms merged.

Not that cartels necessarily hurt consumers. In line with a recent strand in economics that University of Chicago economist Lester Telser began, Bittlingmayer argues that cartels can be an efficient way of preventing ruinous competition when firms' fixed costs are very high and their variable costs are low. If you doubt that that's a problem, take a look at airline profits since deregulation. The added cost of taking another passenger is close to zero, which is why airlines get into so many price wars and are often on the verge of bankruptcy.

Another article in Part Two by two of my former students, Espen Eckbo and Peggy Wier, finds that antitrust authorities do block mergers, but that the ones they block are pro-competitive. Eckbo and Wier point out that if a merger is pro-competitive - and therefore likely to reduce profits, to the benefit of consumers - then the stock price of the once-competing firms should fall when the merger is announced and rise when the government prevents it. This, they find, is what happened.

So promoting efficiency doesn't motivate the antitrust authorities to pursue cases. Part Three investigates what does. "Antitrust Pork Barrel" by Roger Faith, Donald Leavens, and Robert Tollison argues that political influence is an important determinant of actions by the Federal Trade Commission. Bottom line: If you want the FTC to hassle your competitor, move your firm to a congressional district whose member sits on a committee that controls the FTC's budget.