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Antitrust law doesn’t get a lot of attention these days. People tend to take for granted that monopolies are bad, and that government needs to intervene in markets to prevent them, as well as any other behavior that could be considered anticompetitive or bad for consumers. Hence, the Federal Trade Commission, the Department of Justice, and various other agencies have been charged with enforcing antitrust laws without any serious scrutiny from the people.
Sen. Rand Paul (R-KY), however, is not content to let the status quo go unchallenged. His new bill, entitled the Anti-Trust Freedom Act, would dismantle 125 years of antitrust law in a single paragraph, making all voluntary economic agreements between individuals or groups of individuals legal notwithstanding longstanding statutes like the Sherman Antitrust Act of 1890 and the Clayton Act of 1914.
The implications of such legislation would be huge. So much so that we probably can’t fully anticipate all of them. The question is, would the results be good for consumers and the economy, or bad? Conventional wisdom holds that antitrust laws prevent evil monopolists from abusing and exploiting consumers, but there are plenty of reasons to doubt that this is actually the case, and to suppose that, in fact, antitrust laws do more harm than good.
To begin with, the idea of the exploitive monopolist emerging in a free market is largely hypothetical. There are not really any historical examples of monopolies that persisted for any length of time without government support. Instead, these arrangements, when they do arise, tend to be quickly undercut by newer, leaner, more efficient competitors, who manage to innovate around the monopoly. On the other hand, almost all the examples we have of legitimate monopoly were created or actively maintained by government. Utilities, transportation, emergency services, even copyrights are all instances of government regulations granting exclusive privileges to certain producers. Without debating the relative merits of these monopolistic arrangements, we can admit that the market-based monopoly is largely a boogeyman used to scare people rather than an actually observed phenomenon.
All too often, the laws purportedly designed to protect consumers do just the opposite. To see how, let’s examine the most famous antitrust case in recent history, the suit brought against Microsoft for allegedly abusing its market power. The computer pioneer spent years in court and expended vast amounts of money to defend itself from the charges. And what was its crime? Simply put, Microsoft got in trouble for including a free web browser with its operating system.
What? How can that possibly be illegal? How does that hurt consumers? These are all reasonable questions. The government’s argument was basically this: Microsoft had a large market share for operating systems. Almost everyone at the time was using Windows, because it was cheaper and easier to use than most of the other alternatives. But there were still a lot of other companies producing web browsers, which were still a relatively new innovation at the time. By including a free browser, Internet Explorer, with its software, Microsoft was undercutting other producers trying to sell their products separately for a price. Why would anyone buy Netscape Navigator when they already had Internet Explorer included on their computer when they bought it?
It should be clear that this case was not about helping consumers, who were happy to receive free software, but about protecting Microsoft’s competitors, who were unable to replicate that company’s success. In his book Antitrust: The Case for Repeal Dominick Amentano sums this problem up nicely. He writes, “[T]he history of antitrust regulation reveals that the laws have often served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors. This protectionism is most obvious in private antitrust cases (in which one firm sues another) which constitute more than 90 percent of all antitrust litigation.”
This problem is compounded in that most antitrust regulations are extremely arbitrary, and enforcement relies on second guessing what might or might not be good for consumers. For example, the index used to determine whether a merger will result in a company that is “too large” has nothing to do with what the actual market looks like. It’s just an arbitrary number, based on how much of a particular “market” a company controls. Trying to define what the “market” actually is creates a whole new set of problems. Does Coca-Cola compete in the market for “Colas” or for “Sodas” or for “non-alcoholic beverages” or for “all beverages”? Is root beer a competitor for Coke? Is coffee? Is beer? The answers to these questions have huge impacts on what is or isn’t considered “anticompetitive” even though the actual conditions faced by consumers don’t change.
Armentano continues: “[T]he enforcement of antitrust laws is predicated on the assumption that regulators and the courts can have access to information concerning social benefits, social costs, and efficiency that is simply unavailable in the absence of a spontaneous market process.”
This problem is well-illustrated in the case of predatory pricing, a practice banned by various antitrust statutes, but which is notoriously difficult to distinguish from beneficial competition. Predatory pricing is basically when an established company prices its products extremely low, absorbing losses in order to drive upstart competitors out of business. After the competition is gone, they can then jack up the prices again. The problem is that very low prices can be a legitimate element of competition that benefits consumers, and it’s hard for bureaucrats enforcing rules to tell the difference. It’s simply impossible for a central authority to know, in a given place and time, what will turn out to be good for consumers. A lot of factors go into determining a market price, and it's simplistic for government to say a particular price is "too high" or "too low" or "too similar to what others are charging." It requires a level of knowledge not available to central planners.
Way back in 1776, Adam Smith, while expressing some worries about businesses conspiring, admitted that no law “consistent with liberty or justice” could ever prevent voluntary arrangements among businesses. While Rand Paul’s bill is audacious in its approach, it’s clear that he recognizes that voluntary agreements are mutually beneficial by definition, and that it is inconsistent with freedom to apply blanket restrictions to such agreements. This kind of bold debate over big ideas needs to happen more in Congress, and Sen. Paul should be commended for bouncing back from his presidential run with such a major statement of principle.