Thursday, July 17, 2008

Antitrust and Special Interests

Consider the following story...

In my idyllic suburban hometown of Wellesley, Massachusetts, the police shut down a brothel a few days ago. According to the Wellesley Townsman, one of those arrested for running the business was a man named William Eastwick.The paper also notes that six months ago the Wellesley police shut down a similar operation nearby. That police action was based on a tip from the same William Eastwick. Oddly, when referring to the Eastwick tip, the town paper says "it is unclear why he did that."

From Reason: Hit and Run, July 4, 2008

If we teach our students well, they will know exactly why Mr. Eastwick made this tip to police - to stifle competition.

Using the government to thwart business competitors has a long tradition in the United States. I contend that is largely what antitrust regulation is intended to do. I cannot identify one single antitrust case where the "monopoly" in question was shown to NOT benefit consumers. Indeed, the only group the "monopoly" in question hurt was its competitors.

Consider the following letter from Don Boudreaux, a George Mason economist, in the Wall Streent Journal...

Edwin Rockefeller accurately describes antitrust proceedings as "the debris of past political demagoguery" (Letters, July 10). Research shows that the 1890 Sherman Antitrust Act was not sparked by fears of high, monopoly prices: Real prices charged by the so-called trusts fell steadily during the decade leading up to the passage of that statute. Instead, that first national antitrust statute was the result of hostility to the low prices charged by the innovative entrepreneurs who pioneered the use of new technologies that, for the first time, enabled individual firms to serve a transcontinental market.
Populist hostility to the efficiency of firms such as Standard Oil filled congressional debate over the act. Congressman William Mason (R., Ill.), for example, thundered on June 20, 1890, that "Trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to the people of this country by the 'trusts' which have destroyed legitimate competition and driven honest men from legitimate business enterprises."

Donald J. Boudreaux

The pioneering piece of research to consult here is Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective," International Review of Law and Economics (June 1985).

This has clear implications for teaching. We always teach students about market power and monopolies. Associated with these lectures are illustrations of how antitrust regulation can (emphasis on the word can) improve societal welfare by preventing the formation of monopolies. Let us not forget to teach the realities of antitrust regulation, that it emanates largely from interest groups who are hurt by the success of rival companies, that it typically only benefits those interest groups who cannot compete, and that it rarely (if ever) benefits consumers.

For an excellent, insightful podcast on antitrust regulation, see the October 1, 2007 edition of the EconTalk podcast, available here.