Wednesday, 3 June 2009

How not to do antitrust (updated)

George L. Priest writes in the Wall Street Journal on The Justice Department's Antitrust Bomb. He says
As if commandeering the banking, finance and auto industries weren't enough, a couple of weeks ago the Obama administration decided to throw a bomb at modern antitrust law.

Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares.
I spent two hours in tutorials yesterday pointing out that size in and of itself is not a problem. Bigness, in terms of a large market share, may be necessary for market power but it is not sufficient. The most obvious counter example is a contestable natural monopoly. To be efficient you want only one provider, but because the market is contestable the monopolist would not have market power.

Priest continues
In her announcement last month she argued that "many observers agree" that our current recession reflects "a failure of antitrust" and "inadequate antitrust oversight."

This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It's insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe
Priest then asks
Why prosecute firms whose products large majorities of consumers have found most valuable?
and notes
Ms. Varney gives no principled reason.
The idea seems to be to move the US antitrust laws to more closely resemble that of Europe. Not a good idea. The basic reasons that the two approaches to antitrust diverge is that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis. Priest notes
U.S. antitrust laws condemn practices that are "in restraint of trade," which has been interpreted to mean harm to competition. The European Union, in contrast, condemns practices that constitute "abuse of a dominant position."
Priest discusses the recent $1.45 billion fine levied by the EU against Intel.
Although the EU has not released its full report documenting what violations it found, it appears that the principal concern was Intel's practice of giving "loyalty discounts" to repeat customers, presumably increasing Intel's dominance in the microprocessor business.

Should a firm be punished for giving discounts? A discount to a repeat customer is a ubiquitous business practice from local delis to auto repair shops, hardly monopolists in any sense. At various points in her presentation Ms. Varney stated that the ambition of antitrust law is to secure low prices for consumers.

Intel, of course, operates on a different scale than a deli. But the fact that it has been able to maintain roughly an 80% market share for decades provides strong evidence that it is producing a valuable product. The antitrust questions with regard to dominant firms should be: What is the source of dominance and how has it survived over time?

The EU complaint claims that Intel has practiced a variation of predatory pricing. As is well-established in U.S. law, predatory pricing claims are highly questionable in the intellectual property field.
Priest continues by noting that the antitrust problem is likely to become increasingly troublesome over time.
In a dynamic economy we should expect the development of novel business practices as firms attempt to attract consumers in order to maximize product sales. In the U.S. -- Ms. Varney's views aside -- success in competition is rewarded. In Europe it is suspect, a particularly perverse presumption given that national and international competition has been increasing and will continue to increase.
We need competition policy which recognises that competition is the major force leading to outcomes which maximie consumer welfare. Let us not follow Europe, and here's hoping the US doesn't as well.

Update: Don Boudreaux comments on the Priest article as only he can,
In today's Wall Street Journal, George Priest argues that it's a mistake for the Obama administration to change antitrust policy from one that, at least allegedly, is focused on protecting competition to one focused on restricting large and successful - "dominant" - entities from competing vigorously with less-successful rivals. Priest is right: this policy will help only weaker rivals as it harms consumers.

But if the administration insists on resurrecting this old-fashioned (and intellectually discredited) policy, it should do so consistently. It can begin by blocking the Democratic Party from taking advantage of its dominance over its much-weaker rivals. Given President Obama's apparent understanding of the competitive process, he must know that the G.O.P. and other minor parties can compete against the Democrats only if government prevents the Democrats from exploiting their current market dominance.

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