Yesterday I participated in the Mercatus Center’s 2nd annual Antitrust Forum. After welcoming remarks by my Mercatus Center colleague Alden Abbott, a few words from me in defense of the consumer-welfare standard, and introductions by GMU Law’s James Cooper, George Washington University law professor Bill Kovacic (pictured here) delivered an excellent opening address.
Following Bill’s address, we heard from the American Antitrust Institute’s Diana Moss, who argued for more active antitrust enforcement. Alas, her arguments were unpersuasive – and one argument especially so.
Among Ms. Moss’s arguments is a call for more stringent challenges to vertical mergers. (Vertical mergers are mergers of firms or operations that have with each other a supplier-buyer relationship, as when Ikea a few years ago bought forests in Romania and the Baltics.) Ms. Moss’s line of reasoning is this: (1) Defenders of vertical mergers claim that these mergers create efficiencies. (2) This claim is sometimes, and perhaps often, false. (3) A notable example of this claim being false is the failed merger of AT&T with Time-Warner. As Ms. Moss emphasized, less than four years after this merger was completed it was effectively undone. (4) Vigorous antitrust policing against vertical mergers therefore is needed to protect the economy against inefficient vertical mergers.
There are many weak arguments for active antitrust enforcement, but few are as weak as this one. First, no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies. Antitrust bureaucrats have neither strong incentives on this front nor sufficient experience in each of the many industries that they would police if Ms. Moss’s proposal became reality.
Second, we live, inescapably, in an uncertain world. This uncertainty is only intensified at the industry level when the economy is truly competitive, for truly competitive economies are innovative and dynamic. Of course there will be mistakes. There’s no avoiding them. Identifying privately arranged mergers that prove after-the-fact to be mistaken is evidence only of inescapable economic uncertainty. Ms. Moss noted that she doesn’t oppose all vertical mergers; she opposes only those vertical mergers that will not generate the promised efficiencies. Yet she – rather amazingly, in my view – offered not a word to explain why she obviously believes that antitrust bureaucrats and courts are in a position to better predict the future than are firm owners and managers.
Third, Ms. Moss – also surprisingly – did not, as I recall, offer any evidence against the widely shared view that vertical mergers do nothing to increase genuine monopoly power. In other words, her argument against vertical mergers contained no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.
Fourth and most obviously, as soon as the AT&T – Time-Warner merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust!
The AT&T – Time-Warner merger is evidence as solid as evidence gets against the proposition that antitrust is needed to police against inefficient vertical mergers. The fact that Ms. Moss confidently presented this merger as an excellent case-study in favor of active antitrust policing against vertical mergers testifies to the deep confusion in which so many antitrust proponents find themselves.
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A final note: If, contrary to fact, the logic of Ms. Moss’s argument for antitrust oversight of vertical mergers were sound, then she should also support antitrust oversight of vertical spin-offs. After all, it’s possible that a firm that chooses to sell its division X that supplies inputs to its division Y will later discover that that decision to sell division X was a mistake. Yet I doubt that Ms. Moss would wish to subject to antitrust oversight firms decisions to make such sales – that is, to reduce the extent of their ‘vertical’ operations.
In the end, antitrust is what it has always been and what it cannot avoid being for as long as it exists – namely, industrial policy masquerading as pro-competition policy.
