Is Antitrust Worthwhile?

by Don Boudreaux on February 5, 2005

in Antitrust

Does the evidence show that antitrust enforcement is worthwhile? Robert Crandall and Clifford Winston say no.

I would make an even stronger case than Crandall and Winston make against the necessity or merits of antitrust enforcement – namely, there’s every reason to suppose that private markets police better and more effectively than does government against market power that harms consumers.

Here are just some reasons to rely upon policing by private markets and to reject policing by political units:

1) Capital funds are extraordinarily fluid, demanding, and sophisticated. If genuine profit opportunities exist, private investors and entrepreneurs have powerful, personal incentives not only to detect these opportunities but to exploit them in optimal ways. For example, if supermarkets in Los Angeles currently face too little competition and, in response, do not serve consumers as well as possible, an opportunity for profit exists for entrepreneurs and investors who notice it. They open more supermarkets in the area and eliminate the undue market power. But if it only appears that supermarkets in L.A. are exercising undue market power – as it might if textbook models, economic experts, or consumer advocates are the guides – then private entrepreneurs and investors are more likely to detect the truth of the matter than are bureaucrats and judges. In this case, the lack of action by market participants is the right (non)move, while antitrust intervention is the wrong move.

2) Not only do rivals and potential rivals have incentives to uncover and challenge existing failures to serve consumers optimally, firms vertically related to each other often have incentives to keep each other competitive. For example, suppose that Barnes & Noble wants to bankrupt Borders and Amazon by pricing best-selling books at give away prices – say, $1 each, a retail price well below the price that B&N pays to publishers. This strategy is destined to fail for many reasons. But suppose that, say, executives at Doubleday, a large publishing house, believe that chances are reasonably good not only that B&N’s strategy will succeed but that, if this strategy succeeds, book retailing will be monopolized by B&N.

Are these executives disinterested? No. They don’t relish the idea of selling in the future to a monopsonist. Are they helpless? No. They can charge B&N a higher price for Doubleday’s books than the prices charged to B&N’s rivals, thereby raising B&N’s costs of pursuing monopoly power. And if it weren’t for antitrust regulations (!), Doubleday could (1) cooperate with Houghton Mifflin, Scribner’s, Norton, and other publishers to raise B&N’s costs achieving monopoly power, and (2) sell its books to B&N only on the condition that B&N not charge retail prices for these books below a price specified in the contract.

On these possibilities, see these papers, here and here, that I wrote in the mid-1990s with Penn State’s Andy Kleit.

3) If the market fails to detect undue monopoly power and, hence, fails to send in entrepreneurs and capital to intensify competition, this failure is always subject to change; it’s only temporary. It may well fail today, and again tomorrow – but as soon as an entrepreneur notices the possibility, the failure ends. Because detecting genuine, correctable monopoly power in reality is quite difficult, we can concede that markets will always ‘fail,’ at least for a time, to detect and correct correctable monopoly power.

But so, too, will politicians, bureaucrats, judges, and juries fail. Indeed, precisely because politicians, bureaucrats, and court personnel are not specialized in serving consumers in markets, these people are less likely than are private market participants – entrepreneurs and investors – to properly assess existing market situations and understand just what steps are best taken in light of these situations to improve consumer welfare. Also, private market participants, unlike politicians and bureaucrats, aren’t easily swayed by special-interest groups.


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