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catallaxy in technical exile

Classical liberalism and the economics of antitrust policy

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Antitrust policy, known as ‘competition law’ in Australia has as its aim the seemingly contradictory task of ‘regulating to promote competition’. The bulk of Australia’s antitrust law can be found in Parts IIIA and Part IV of the Trade Practices Act. Some short reflections on Part IIIA which regulates ‘essential facilities’ can be found in this old post. This blogpost is more addressed at the arguments for and against the kinds of competitive conduct regulations found in Part IV of the TPA. A recent report on Part IV was prepared by the Australian Treasury here. Just going through the various provisions quickly, Part IV consists of regulations that:

  • Prohibit a merger that would ‘substantially lessen competition’. However such mergers can be ‘authorised’ on demonstration of a public benefit.
  • Prohibit a corporation with a ‘substantial degree of market power’ from taking advantage of that power for various proscribed ‘anti-competitive’ purposes.
  • Prohibits certain conduct as ‘per se’ anti-competitive, in particular – price fixing, ‘exclusionary conduct’, some kinds of ‘exclusive dealing’ and resale price maintenance.
  • Prohibits agreements that would lead to a ‘substantial lessening of competition’
  • However exemptions are available for these prohibitions upon appeal to the Australian Competition and Consumer Commission.

    There is a bit more detail to the laws than all this but these are the gist of the most important regulations. The Treasury handed down a series of recommendations on the TPA but I don’t want to go into the detail of those since I’m more interested in stimulating a debate on the big picture.

    In particular, what is the appropriate classical liberal view of antitrust policy? Is the whole concept of ‘regulating to promote competition’ so fraught with contradiction that on balance it is better to pare such regulations down to a minimum or to do away with them totally? What of the economics of antitrust? There is no doubt that many specific interventions can be justified on a case by case basis (e.g. prohibitions on price fixing) but what of the long-term dynamic effects? Which way do they point us towards? Are the benefits of the system as a whole in correctly removing some privately created barriers to competition that may well be transitory in the long run worth the costs incurred in terms of litigation, uncertainty and costs created by erroneous judgements? On the one hand, to take the arguments of close relatives of classical liberals, the famous Ordoliberals who restored the workings of a market economy in Germany after WW2:

    According to Ordoliberalism (also called German neoliberalism), the state must create a proper legal environment for the economy and maintain a healthy level of competition through measures that adhere to market principles.[1] The concern is that, if the state does not take active measures to foster competition, firms with monopoly (or oligopoly) power will emerge, which will not only subvert the advantages offered by the market economy, but also possibly undermine democracy itself, since strong economic power can be transformed into political power.

    To some extent such arguments also form the traditional neoclassical economic justification for antitrust policy. A good introduction to these neoclassical economic arguments is provided by antitrust skeptic Dominick Armetano in his work Antitrust: The case for repeal (PDF):

      Early IO (Industrial Organisation) economists generally came to accept a deterministic relationship between market structure and economic performance. If markets were competitively structured (small firms, homogeneous products, and ease of entry), then the market process led automatically to an allocationof resources whereby price, marginal cost, and minimum average cost were all equal. Alternatively, high market concentration, collusion among firms, economies of scale, or product differentiation could create barriers to entry and market power that would misallocate economic resources. Early empirical data on market concentration and firm profitability appeared to support the general IO hypothesis that competitively structured markets performed better than concentrated markets.
      If poor market structure led to economic inefficiency, then government antitrust regulation might correct such “market failures.” For example, antitrust regulation could reduce or restrain industrial concentration (anti-merger policy), restrict predatory practices, prohibit horizontal price and output agreements (anti-collusion rules), and discourage other agreements within and among firms (prohibitions against tying agreements and resale price maintenance) that might restrain trade and competition. Barriers to entry that appeared to shelter so-called dominant firms (product differentiation, for example) could be attacked under the antitrust laws to make the marketplace more efficient. The structure-conduct-performance perspective became the primary intellectual justification for traditional antitrust policy in the 1950s and 1960s.

    However, the SCP (structure conduct performance) justification has since given away to new justifications, the latest being based on game theory.

    Some of these arguments for antitrust have obviously found their way into the thinking of even the most noted libertarian thinkers, notwithstanding their long held skepticisms towards government intervention. Even many Chicago school economists accept the case for some antitrust intervention though not to the same extent as more activist antitrust scholars – for instance, they might accept the case for prohibiting cartels while being against restrictions on bundling (which was one of the issues of contention in the Microsoft case).

    Interestingly enough, one libertarian scholar who is usually seen as more ‘moderate’ than the rest seems to have expressed more skepticism about antitrust than even the Chicago school economists. This is Hayek who wrote on p. 265 of The Constitution of Liberty (TCL):

      So far as the enforcement of general rules … can curb monopoly powers, such action is all to the good. But what can be done effectively in this field must take the form of that gradual improvement of our law of corporations, patents and taxation … I have become increasingly skeptical, however, about the beneficial character of any discretionary action of government against particular monopolies, and I am seriously alarmed at the arbitrary nature of all policy aimed at limiting the size of individual enterprises. And when policy creates a state of affairs in which, as is true of some enterprises in the United States, large firms are afraid to compere by lowering prices because this may expose them to antitrust action, it becomes an absurdity.
      Current policy fails to recognise that it is not monopoly as such, or bigness, but only obstacles to entry into an industry or trade and certain other monopolistic practices that are harmful. Monopoly is certainly undesirable, but only in the same sense in which scarcity is undesirable … It does not make sense to … attempt to create conditions ‘as if’ competition were effective. The law cannot effectively prohibit states of affairs but only kinds of action …

    On the other hand, perhaps it is not so surprising that an Austrian school economist like Hayek, however ‘moderate’ he was on many other policies might express more skepticism about antitrust given the ‘process oriented’ view of competition that Austrian thinking encourages, compared to Chicago school economists.

    Hayek’s has not been the last word on antitrust skepticism but the basic ideas behind antitrust skepticism can be found in his reflection in TCL. As I mentioned before, one recent work on this is Armetano’s Antitrust: The case for repeal. I’ll conclude by reproducing for discussion some of the important arguments against antitrust policy that he sets out in this major work:

      … the laws misconstrue the fundamental nature of both competition and monopoly. Competition is an open market process of discovery and adjustment, under conditions of uncertainty, that can include interfirm rivalry as well as interfirm cooperation. Within this competitive process, a firm’s market share is not its market power, but a reflection of its overall efficiency. Monopoly power, on the other hand, is always associated with legal, third-party restraints on either business rivalry or cooperation, not with strictly free-market activity.
      …the 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) …In the name of preserving competition, the efficient competitive process has itself been impeded by antitrust intervention. Firms that intend to lower their prices may be restricted from doing so by antitrust law. Even more important and pernicious, firms that would innovate some new process or product must consider whether the innovation will give them an “unfair” competitive advantage or be termed “predatory” by the antitrust regulators or some competitor …
      …the enforcement of the antitrust laws is predicated on the mistaken 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. Antitrust regulation is often a subtle form of industrial planning and is fully subject to the “pretense-of-knowledge” criticism frequently advanced against government planning.

    Written by Admin

    November 14, 2006 at 10:15 pm

    Posted in Uncategorized

    10 Responses

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    1. I agree with the skeptics.

      The TPA was a Whitlamite reform. need we say more?

      Rococo Liberal

      November 15, 2006 at 7:33 am

    2. Further down from Jason’s quote (pg. 231 in the new Routledge Classics edition), “But the record of governments in this field is so deplorable that it is astounding that anyone should still expect that giving governments discretionary powers will do anything but increase those obstacles’ [artificial barrriers to entry].

      Harold Demsetz is very good in this area – but he is under-appreciated.

      Sinclair Davidson

      November 15, 2006 at 7:49 am

    3. The quotes from Hayek and Armetano seem to loosely support the type of regime we currently have under Part IV, in which the HCA has read s46 narrowly. Hayek seems to support prohibitions against price-fixing or similar agreements and the target of both authors’ concerns is ‘predatory’ pricing and other unilateral conduct (s.46). In this respect, I would agree with them, but as I said, s.46 is virtually impotent these days anyway. Addressing one of Hayek’s other points, fortunately we do not have divestiture powers here (outside the mergers context), which might be used to limit the size of particular firms.

      Rajat Sood

      November 15, 2006 at 1:24 pm

    4. Actually Rajat I interpreted ‘limiting the size of individual enterprises’ as restrictions on mergers as well. Bear in mind our restriction used to be (in prehistoric days) based on a dominance test but it is now a SLC test.

      Jason Soon

      November 15, 2006 at 1:28 pm

    5. Jason, fair enough on the interpretation. Either way, I’m not sure how much harm the mergers prohibition does, especially with greater consideration being given these days to international competition and potential competition and the possibility of authorisation. Put it this way and turning the usual question upside down, if I could get rid of any legislation, Part IV wouldn’t be at the top of my list!

      Rajat Sood

      November 15, 2006 at 1:35 pm

    6. The history of media reforms amendments in this country, which has produced an echo-chamber commentariat with a gift for missing the point and third-world technological delivery options, cry out against making competition law weaker than it is. The main danger to economic growth in this country, aside from skills shortage, is the tendency of capital in this country to lazy oligopoly.

      Andrew Elder

      November 15, 2006 at 2:02 pm

    7. Andrew, I think foreign ownership restrictions on media might be the real culprit rather than anti-competitive practices per se.

      Rajat Sood

      November 15, 2006 at 2:05 pm

    8. Really? Why?

      Oligopoly companies can be enormously lazy in the way they use capital, and their incentives for using it most effectively are low. This is true regardless of where they are based.

      Andrew Elder

      November 15, 2006 at 2:58 pm

    9. Andrew,
      The usual remedy for lazy capital in an open capital market is a takeover and redeployment of that capital by management that actually want to use it. The foreign ownership restrictions greatly reduce the pool of available purchasers.
      Legislative and other restrictions on hostile takeovers (as exist in most of Europe and Asia and to some extent here) also restrict the ability to redeploy that capital.

      Andrew Reynolds

      November 15, 2006 at 3:49 pm

    10. well this is precisely what Hayek was talking about. Govt creates entry restrictions. Then govt justifies other regulations on the basis of competition not working, in part because of these entry restrictions.

      Jason Soon

      November 15, 2006 at 3:59 pm

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