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Is it time to strengthen antitrust laws?
COMPETITION is dying. That's the latest complaint against American business. We have too many super-sized firms, excessively large and unnaturally profitable. Dubious mergers - permitted by toothless antitrust laws - boost companies' market power and squash rivals. The lifeblood of a dynamic economy is competition; its erosion - if true - would be a momentous event.
But is it true? Let's see.
Superficially, there's ample corroborating evidence. Facebook, Google, Microsoft, Apple and some other tech firms are massive and have dominant market positions in their chosen fields. Google - to take one obvious example - has about 90 per cent of the Internet search market.
Mergers and acquisitions among large firms are also common, with antitrust laws providing only limited restraint. Just recently, the Justice Department (which shares antitrust enforcement with the Federal Trade Commission) approved the US$69 billion healthcare merger between CVS and Aetna. Earlier, the department challenged the US$85 billion merger between Time Warner and AT&T, but a federal court backed the companies.
A number of studies indicate that economic consolidation - fewer firms providing goods and services - is occurring in many industries. The best-known report came in 2016 from President Obama's Council of Economic Advisers (CEA). It found that all US corporate mergers and acquisitions totalled about US$2.5 trillion in 2015, "the highest amount in a year on record". At the same time, rates of business startups have dropped by almost 50 per cent from 1977 to 2012, the CEA noted.
So, it seems the economy is increasingly ruled by older and more mature firms. Just what has caused this is an unsettled question, but some entrepreneurs may be deterred by the growing market power of established companies. Barriers to entry may have risen. "Antitrust policy and practice ... have been too permissive," wrote economist John Kwoka of Northeastern University, a critic of present policy.
The Obama CEA reached a similar conclusion. "Competition may be decreasing in many economic sectors," it said. "When there is little or no competition, consumers are made worse off if a firm uses its market power to raise prices, lower quality or block entry by entrepreneurs."
But you should be sceptical. The explanation is a bit too pat. For example, economic consolidation may reflect superior firms squeezing out inferior rivals. If surviving firms have so much market power, why didn't they raise prices more often? From 1990 to 2017, consumer price increases averaged only 2.4 per cent annually; since 2013, the average was even lower at 1.4 per cent. Other forces at play seem to determine inflation.
The economy may - or may not - have become less competitive in recent decades, but it's clearly more competitive over a longer period - say 1970 to the present. During these years, the economy experienced three huge competitive jolts from: (a) foreign competition; (b) deregulation - air travel, oil and gas production, television (the rise of cable), telephone service; and (c) personal computers and the Internet.
Competition's benefits were enormous. As late as 1980, the Big Three (General Motors, Ford and Chrysler) dominated car sales. Now, 15 or more vehicle manufacturers compete on quality and price. In the 1960s, NBC, CBS and ABC owned the airwaves. Cable customers today can view dozens of channels. Consumer choice has expanded dramatically.
Similarly, before airline deregulation, the Civil Aeronautics Board (CAB) set fares and limited airlines' flights between various cities. Abolishing the CAB in 1978 reduced fares and increased flights. The average domestic fare was US$344 in 2016, about half the comparable figure of US$616 in 1979 (both in inflation-adjusted 2016 dollars), wrote Robert Poole Jr in Reason magazine. Over the same period, the number of annual domestic passengers rose from 317 million to 849 million.
As for cyber companies, they merit special treatment. The major problems involve the effects of technology on society more than the industry's competitive structure. Can we protect the country from disruptive cyberattacks? What privacy rules should we adopt? Can we monitor the Internet to prevent lies without crippling free speech? These are all very hard questions.
None of this justifies all mergers and acquisitions. Many don't make sense. Wasteful and inefficient, they reflect executive over-confidence, ambition or self-interest (bigger companies usually mean bigger executive pay packages). But government is ill-equipped to make these judgments. In its clumsy way, the market is a better disciplinarian. If companies become too big or diversified, investor pressures will push for changes. Antitrust policy should remain modest, concentrating on "horizontal" transactions where a company buys a direct competitor.
What this debate is ultimately about is politics, not economics. The object is to lay blame for the economy's ills at the doorstep of corporate America, justifying tougher antitrust and competitive regulations. In practice, this would amount to an "industrial policy" favouring and disfavouring different companies and industries. It's a path best not taken. THE WASHINGTON POST WRITERS GROUP