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The FTC Strikes Again

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The Federal Trade Commission has once again dealt a blow to our allegedly free enterprise economy. The FTC plans to move against a proposed merger between Staples and Office Depot, two office supply chains. The commission claims the merger would violate the antitrust laws. Displaying its standard confusion over how markets work, the FTC says the merger would bring higher prices.

This case again demonstrates how powerfully the government regulates our economic lives. It is like a god that has to be placated in order to avoid its wrath. In anticipation of FTC opposition, Staples meekly offered to transfer 60 stores with $400 million in revenues to rival Officemax, which said it wasn’t interested. Staples was also willing to legally pledge to pass any savings from the merger to consumers. The FTC said no dice, but added it’s willing to consider other sacrificial offerings.

This is free enterprise?

The FTC usually worries about big companies merging because the resulting market share would be too large. That is said to lead to uncompetitive conditions and higher prices. Even if that were a valid concern, in this case the merged companies would have only 6 percent of the market. No one could possibly believe that is a dominant share. Even some FTC insiders think the commission has pushed antitrust law beyond accepted limits. The head of the FTC’s antitrust division, William Baer, disagrees, saying similar actions have been taken in innovative retail markets such as this one. That’s how innovation is rewarded in America.

Obviously, the newly merged firm would not have monopoly power. But that should not be the issue anyway. Concern with market share at any given moment betrays a misunderstanding of the competitive process. Since the antitrust laws are built on the same misunderstanding, they should be abolished — along with the FTC, which exists only to interfere with voluntary exchange.

For the FTC, competition requires many firms in a market, each with only a tiny slice of the business. That is supposedly in the consumers’ interest. But that notion of competition is based on a theory of the marketplace that includes such preposterous assumptions as perfect knowledge and fixed consumer preferences. A more suitable view holds that since the real world is full of uncertainty, we need an economic system that encourages discovery of our preferences and the methods to satisfy them.

Policy-makers in ivory towers cannot know what they would have to know to manage the economy. They are in no position to see which mergers would benefit consumers and which would not. To believe otherwise, Nobel-prize-winning economist F. A. Hayek said, is a pretence of knowledge. The relevant information is generated by the market process itself and cannot be known beforehand.

So the alternative to the flawed “perfect competition” theory is one that stresses that the market’s central discovery function is a dynamic, rivalrous process. If that function is to work, there must be no legal barriers to honest economic activity. Market share speaks only to a firm’s success at serving consumers. As long as the government does not impede entry, potential competition influences existing companies every bit as much as actual competition. When big companies get complacent they suddenly find new challengers. Venture capitalists are always on the lookout for just such opportunities.

And no one need fear a large firm’s high profits. As economist Dominick Armentano emphasizes, high profits are a magnet for new competition. If a large firm wants to keep competitors out of their market, they would be better off holding profits down.

The economic theory is conclusive: competition unrestricted by government is best for all. The moral theory is equally clear: in the land of the free, our peaceful economic activities should be beyond the reach of government.

This post was written by:

Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.