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Monopolies versus the Free Market, Part 1

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Market domination that has been achieved in the private sector through efficiency and consumer satisfaction is a phenomenon of a free-market economy. Even without any competition, such a business can never take customers for granted because of the possibility that new entrants will enter the marketplace to compete. Indeed, big, well-established companies with large market share must constantly strive to satisfy consumers.

A monopoly created through the legal protection and the police powers of a state is something completely different. Here, the state makes it illegal for competitors to enter the market. This kind of privileged power inevitably institutionalizes inefficiency and discourages innovation.

Owners of big, successful businesses can never be sure that they will retain their strong position no matter how dominant they may look at a particular point in time. However, state monopolies are in a very different situation. They have a unique no-competition guarantee backed by the force of the state.

State enterprises with monopoly or quasi-monopoly powers can also draw on the inexhaustible powers of the government for tax dollars. But the damage done by state monopolies is greater than the billions of dollars in subsidies paid out by taxpayers. These adjuncts of the state can legally keep out would-be innovators who could put them out of business through competition.

State monopolies have an infamous background. One thinks of the salt or vodka monopolies conferred on politically connected court favorites or of monopolies invoked by divine-rights monarchs from Charles I to Russian tsars to German governments of the late 19th century and early 20th century. German governments, both imperial and democratic, organized more than 2,100 legally sponsored cartels. And woe unto the person or group that tried to compete with the state-backed enterprises.

By contrast, businesses that achieve total — or almost total — market share of what they produce are not protected from competition by laws. Such businesses depend entirely on customer satisfaction that comes from the business’s successfully fulfilling the wants of consumers. Such success is often short-lived. Despite the temporary strength of a successful business, it cannot force people to accept its products.

Neither Microsoft nor Wal-Mart, for example, can legally force a consumer to buy its products. Today these are large companies. But 10 or 20 years from now, they may well have gone the way of F.W. Woolworth’s. The latter was once a strong retailer. A previously strong company — such as IBM or Kmart —could become weak and vulnerable as market forces pull it down.

Today Microsoft is a software giant. But its commanding market share is by no means assured. That’s because its power is non-coercive and, therefore, it must worry about competitors. Even today, Google, Mozilla, and Linux pose challenges to Microsoft’s domination. Microsoft must also always worry about new competitors offering new kinds of technology that could suddenly take away market share.

Yet antitrust regulators have had Microsoft in their sights for many years. In the 1980s, the regulators had IBM in their cross-hairs, only for their antitrust case to collapse after some 15 years of futility. In going after Microsoft today, or Wal-Mart tomorrow, the regulators may well be hurting a firm that will no longer be dominant in a few years because of market forces. In the meantime, that same firm could be continuing to successfully serve the wants and needs of millions of people.

Thus, here is one of the flaws in American antitrust law. The state goes after businesses that have become large precisely because they have been free to prosper by helping consumers.


The sorry record of antitrust laws

Possibly worse than state monopolies themselves have been the state efforts for more than a century to regulate and sometimes break up firms whose success is owed to their efforts in the marketplace. Yet the irony is that the government, which is the agency that has enacted and prosecuted antitrust laws, is the creator of some of the biggest monopolies. It is as though a convicted criminal had suddenly been put in charge of law-enforcement efforts.

Here is the philosophy of all antitrust thinking: Some prosperous American businesses are too powerful and, therefore, must be broken up or more closely regulated. Powerful monopolistic government enterprises with statutory powers to bar competition are beneficial and should be nurtured and supported.

In other words, don’t break up the U.S. Postal Service, which has a statutory monopoly for first-class mail delivery. But break up, or severely regulate, IBM, General Motors, Microsoft, or other business that has achieved its success in the marketplace.

By now, the process by which the government goes after large companies for antitrust violations is predictable. A business comes out of nowhere to dominate its field. It delivers a quality product at a dirt-cheap price (Wal-Mart) or provides rebates to favored customers (Standard Oil). Sometimes, it gives away some of its products (Microsoft).

At this point, competitors, backed up by consumer-interest groups, raise a ruckus and insist that the Justice Department intervene. Indeed, according to economist Dominick T. Armentano, 90 percent of all antitrust litigation has been brought by one firm against another. Armentano also points out that the

history of antitrust regulation reveals that these laws have often served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors.

 

This destructive alliance calling for antitrust action usually claims that the big, successful firm is exercising quasi-monopoly powers. It is supposedly crushing small competitors and soon it will be the only company in its field. Therefore, regulators, often at the urging of politicians and the press, presume that this big business — because of its rising market share or low prices or unique business practices — must be up to no good. It must have violated antitrust laws to have achieved its success.

So the antitrust reasoning, which has developed over decades, is that IBM must be punished. Microsoft must be broken up. Ruthless rate-cutting railroads should be taken over by the government. That last point was the suggestion made by myriad leaders in the Progressive Era, such as William Jennings Bryan and Herbert Croly.

The Progressives were influenced by the 19th-century populist-realistic fiction of Frank Norris. His unfinished trilogy of wheat novels painted a grim picture of an American economy swallowed by trusts. Another celebrated novelist of this period was Edward Bellamy, whose book Looking Backward in the 1880s predicted a perfect society that had abolished private property. This anti-capitalist, sometimes utopian, literature became contagious. It is perhaps why many of these monopoly statutes are unclear and not based on a logical or coherent economic theory.


The illogic of antitrust

The classic antitrust monopoly case is not brought by government against a company but rather by one company against a competitor. Usually, the “offense” is that the competitor has engaged in aggressive price-cutting. But is it a case of “predatory pricing,” which antitrust laws prohibit, or is it simply a case of a competitor’s trying to attract larger market share and larger gross profits with a lower price?

Obviously, it’s hard to tell. Antitrust enforcement can become an “absurdity,” warned F.A. Hayek. “Large firms are afraid to compete by lowering prices because it may expose them to antitrust action,” he wrote.

But if a firm is trying to expand market share by lowering prices, aren’t regulators and those looking to the government to protect them doing a disservice to the consumer? Access to the company’s products at below-market prices are a boon for consumers, many of whom presumably would be unable to buy the products without the company’s aggressive pricing strategies.

Moreover, how can the regulators know whether cost cutting, expanding market share, or even attempting to “corner the market” is the actual goal of the company? Of course, another obvious question arises: Why is it necessarily a bad thing if there is only one efficient company in a particular sector?

Often only after numerous complaints from competitors that were once the top players in a field will regulators and lawmakers proceed against a business giant that has gained dominant market share or appears to be in a position to do so. Governments enact and enforce measures to stop the new business titan because it is supposedly engaging in “unfair business practices.” For example, in New York City, zoning and other regulations have kept Wal-Mart out. That’s despite the obvious advantages this retailer would provide for city consumers, who face some of the highest prices in the country. (See my article “Wal-Mart’s Not Coming to Town” in the October 2005 issue of Freedom Daily.)

Sometimes the federal government begins an investigation of the newly successful business. It takes many years and hundreds of millions of dollars of public funds. There are years of controversy and compelling newspaper copy. Debates go on in the courts and the halls of Congress. But frequently the cause célèbre ends with a whimper, and the case is settled out of court with a small penalty. Other times, the government just walks away from what was obviously a weak case.

Often the grounds for a supposed violation of the antitrust laws become moot over the years simply because the offending firm is no longer quite so strong as a result of a change in market conditions. For example, IBM, in the 1950s and 1960s, was the Microsoft of its time. Does anyone now want to initiate an antitrust action against the bedraggled Big Blue? I doubt it. An antitrust lawsuit against Wal-Mart would be welcome in many quarters today. But who wants to go after Sears or Kmart, two former giants who have fallen on hard times?

The Pennsylvania Railroad once was so strong that it was said to control state legislatures and regional economies. It had big, beautiful stations in many parts of the country, stations that are monuments to once-mighty railroads. The Pennsylvania Railroad rarely missed paying a dividend for more than a century. Yet where is the once-mighty Pennsy today?

Nevertheless, antitrust advocates continue to believe that, through their huge market power, such private concerns can impose their will on the consumer.

Antitrust officials claim to be representing this average person against the supposed unfair power of corporations. The officials claim that corporations exert too much market power that must be corrected by government, which of course requires extraordinary government powers to undo these economic injustices. Given these supposed economic injustices, antitrust advocates claim that big, successful businesses must be either broken up or highly regulated by the government.

Part 1 | Part 2

This article originally appeared in the September 2006 edition of Freedom Daily. Subscribe to the print or email version of The Future of Freedom Foundation’s monthly journal, Future of Freedom (previously called Freedom Daily).

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  • This post was written by:

    Gregory Bresiger, an independent business journalist who works for the Sunday New York Post business section and Financial Advisor Magazine, is the author of the book Personal Finance for People Who Hate Personal Finance.