The Essence of Antitrust and Regulation

by Don Boudreaux on January 15, 2014

in Antitrust, Competition, Creative destruction, Crony Capitalism, History

Here are the opening lines of a report in today’s New York Times about a recent applause-worthy court decision:

Internet service providers are free to make deals with services like Netflix or Amazon allowing those companies to pay to stream their products to online viewers through a faster, express lane on the web, a federal appeals court ruled on Tuesday.

Federal regulators had tried to prevent those deals, saying they would give large, rich companies an unfair edge in reaching consumers.

Although the court decision and regulation in question are not formally about antitrust, the last sentence quoted above reveals the essence of antitrust – from its 1889 inception in the United States and throughout its history.  That essence is cronyism.  That essence is an effort to suppress competition – an effort that, of course, occurs also through regulatory channels, such as the Federal Communications Commission, other than ones that are formally “antitrust.”

Antitrust began in 1889, with the enactment of a dozen or so state statutes, as an effort to protect economically inefficient but politically influential producers (chiefly, local butchers) from the competition of more economically efficient but politically less popular producers (chiefly, the newly emergent Chicago meatpackers with their newfangled refrigerated railroad cars).  (See also here.)  The 1890 Sherman Act, at the national level, reflected this populist reaction against market-unleashed creative destruction.  The absurdity of antitrust reached its legislative zenith with the 1936 Robinson-Patman Act.

Of course, because it’s good p.r. for government (and for its cronies) to portray competition-suppressing intrusions as being pro-consumer – and because clever minds can always spin ingenious hypotheticals in which voluntary consumer actions today lead to consumer harms tomorrow – antitrust and other competition-suppressing exercises of government power almost always are served up with proclamations about how these or those government prohibitions of capitalist acts among consenting adults will protect consumers from being devoured by various species of nasty devils.

….

Read again the last sentence quoted above from the New York Times report:

Federal regulators had tried to prevent those deals, saying they would give large, rich companies an unfair edge in reaching consumers.

Translation:

Federal regulators had tried to prevent those deals, saying they would give large, rich companies an edge – earned through, and evidenced by, these companies’ past successes – in pleasing consumers.

If you worry that content providers such as Netflix and Amazon, now that they are “large” and “rich,” possess some “unfair” ability to rig markets in their favor at the expense of consumers, ask why internet service providers would go along with efforts by these companies to profit at the expense of consumers.  Internet service providers have every incentive to keep their products as attractive as possible to consumers.  Even if individual consumers have neither the incentive nor the ability to act today in ways that prevent “large, rich” companies from screwing them tomorrow, internet service providers certainly have such incentives and abilities.  (Andy Kleit and I wrote on this matter, in the context of predatory pricing, years ago.  See also here.)  But internet service providers also have incentives and abilities to craft deals with “large, rich” content providers such as Netflix and Amazon that improve consumer welfare even if such deals make life more difficult for less able and less successful content providers.

Government involvement in this matter will almost certainly rig the market in anti-competitive ways for political cronies.  The history of regulation in general, and of antitrust, in particular, gives no reason to think differently.

I would be remiss if I failed to mention here the pioneering work on antitrust by Dom Armentano.

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