Antitrust and Monopoly

Saturday, Feb 12, 2011

This study... will argue that orthodox competition and monopoly theory is inherently flawed and misleading and cannot rationally support any antitrust policy. Further, it will demonstrate that the business organizations under indictment in the classic antitrust cases were expanding outputs, reducing prices, improving technology, and engaging generally in an intensely competitive process. It will conclude that both antitrust theory and history are an elaborate mythology with no solid foundation in either logic or fact.

Many volumes on the subject have presented a welter of antitrust cases, void of relevant conduct and performance information. Consequently, any serious consideration of the indicted firms' actual behavior have been conspicuously absent. Apparently, these volumes expect readers to assume that the firms indicted under the antitrust statutes were actually raising prices, reducing outputs, producing shoddy products, colluding successfully with competitors, driving competitors from the market with predatory practices, and generally abusing consumers in the marketplace.

Antitrust and Monopoly: Anatomy of a Policy Failure, Dominick Armentano, 1996, http://www.amazon.com/Antitrust-Monopoly-Anatomy-Independent-Political/dp/0945999623/.

The industries accused of "monopolization" by Senator Sherman and his colleagues in 1890 were expanding production four times more rapidly than the economy as a whole for the decade prior to the Sherman Act (some as much as ten times faster) and were dropping their prices even faster than the general price level was falling during that deflationary period.

The trusts "have made products cheaper, have reduced prices," admitted Congressman William Mason, who nevertheless was in favor of an anti-trust law. He was in favor of the law because he, and most of his congressional colleagues, wanted to protect less-efficient businesses in their districts from competition. Antitrust has always been a protectionist racket.

Standard Oil caused the price of refined petroleum to fall from over 30 cents per gallon in 1869 to 5.9 cents by 1897 while stimulating an enormous amount of innovation in the industry... For this great service to consumers, Rockefeller was prosecuted and forced to break up his company.

In his masterpiece, Antitrust and Monopoly: Anatomy of a Policy Failure, Dominick Armentano carefully examined fifty-five of the most famous antitrust cases in U.S. history and concluded that in every single case, the accused firms were dropping prices, expanding production, innovating, and generally benefiting consumers. It was their less-efficient competitors who were "harmed," as they should have been.

For example, the American Tobacco Company was found guilty of "monopolization" in 1911, even though the price of cigarettes (per thousand) had declined from $2.77 in 1895 to $2.20 in 1907, despite a 40 percent increase in raw material costs.

In 1962 the government forbade the Brown Shoe Company, which had 1 percent of the shoe market, from acquiring Kinney Shoes, which also had a 1 percent market share. A company with 2 percent of the shoe market, according to the government, constituted a monopoly.

In 1962 the government forced the Schwinn Bicycle Company to divorce itself from its network of dealers; foreign competition eventually drove Schwinn into bankruptcy.

General Motors was never prosecuted, but because of the company's fear of antitrust it was official company policy from 1937 until 1956 to never let its market share top 45 percent, for any reason. This fear of antitrust prosecution contributed to the industry's dramatic losses in market share to the Japanese and German automakers during the 1970s and '80s.

RCA was prohibited by antitrust regulators from charging royalties to American licensees, so the company licensed its products to Japanese companies. The entire Japanese electronics industry is based on this.

Antitrust regulation killed Pan American World Airways by forbidding it from acquiring domestic routes. Lacking "feeder" traffic for its international flights, the company went bankrupt.

Anti-trust, Anti-truth, Thomas J. DiLorenzo, June 1st, 2000, http://mises.org/daily/436.

The recent era of antitrust reassessment has resulted in general agreement among economists that the most successful instances of cartelization and monopoly pricing have involved companies that enjoy the protection of government regulation of prices and government control of entry by new competitors. Occupational licensing and trucking regulation, for example, have allowed competitors to alter terms of competition and legally prevent entry into the market. Unfortunately, monopolies created by the federal government are almost always exempt from antitrust laws, and those created by state governments frequently are exempt as well. Municipal monopolies (e.g., taxicabs, utilities) may be subject to antitrust action but often are protected by statute.

One of the most worrisome statistics in antitrust is that for every case brought by government, private plaintiffs bring ten. The majority of cases are filed to hinder, not help, competition. According to Steven Salop, formerly an antitrust official in the Carter administration, and Lawrence J. White, an economist at New York University, most private antitrust actions are filed by members of one of two groups. The most numerous private actions are brought by parties who are in a vertical arrangement with the defendant (e.g., dealers or franchisees) and who therefore are unlikely to have suffered from any truly anticompetitive offense. Usually, such cases are attempts to convert simple contract disputes (compensable by ordinary damages) into triple-damage payoffs under the Clayton Act.

The second most frequent private case is that brought by competitors. Because competitors are hurt only when a rival is acting procompetitively by increasing its sales and decreasing its price, the desire to hobble the defendant’s efficient practices must motivate at least some antitrust suits by competitors. Thus, case statistics suggest that the anticompetitive costs from “abuse of antitrust,” as New York University economists William Baumol and Janusz Ordover (1985) referred to it, may actually exceed any procompetitive benefits of antitrust laws.

Antitrust, Fred McChesney, The Concise Encyclopedia of Economics, http://www.econlib.org/library/Enc/Antitrust.html.

I was amazed when I started researching antitrust that no economist had ever actually looked into the notion that trusts of the late 19th century were actually restricting or expanding output. I couldn't find any book... I looked at hundreds of sources and I couldn't find any data at all. It was just an assumption that was thrown out there. So when you read things like this, always look for the evidence. And if there's none, you should be suspicious of that and look for it yourself. (47:36)

American industry as a whole was intensely competitive in the period from 1875 on. Many industries, including the railroads, had overexpanded and were facing a squeeze on profits. American history contains the myth that the railroads faced practically no competition at all during this period, that freight rates constantly rose, pinching every last penny out of the shippers, especially the farmers, and bleeding them to death. Historian Kolko shows that:

Contrary to the common view, railroad freight rates, taken as a whole, declined almost contiuously over the period [from 1877 to 1916] and although consolidation of railroads proceeded apace, this phenomenon never affected the long-term decline of rates or the ultimately competitive nature of much of the industry. In their desire to establish stability and control over rates and competition, the railroads often resorted to voluntary, cooperative efforts.

The two major means used by competitors to cut into each other’s markets were rate wars (price cutting) and rebates; the aim of business leaders was to stop these. Their major, unsuccessful, tool was the “pool” which was continuously broken up by competitive factors.4 The first serious pooling effort in the East, sponsored by the New York Central, had been tried as early as 1874 by Vanderbilt; the pool lasted for six months. In September 1876,a Southwestern Railroad Association was formed by seven major companies in an attempt to voluntarily enforce a pool; it didn’t work and collapsed in early 1878. Soon it became obvious to most industrial leaders that the pooling system was ineffective.

In 1876 the first significant federal regulatory bill was introduced into the House by J. R. Hopkins of Pittsburgh. Drawn up by the attorney for the Philadelphia and Reading Railroad, it died in committee.

By 1879, there was “a general unanimity among pool executives ... that without government sanctions, the railroads would never maintain or stabilize rates.”5 By 1880, the railroads were in serious trouble; the main threat was identified as “cutthroat competition.”

Far from pushing the economy toward greater centralization, economic forces indicated that centralization was inefficient and unstable. The push was towards decentralization, and smaller railroads often found themselves much less threatened by economic turns of events than the older, more established and larger business concerns.

Thus the Marxist model finds itself seriously in jeopardy in this instance, for the smaller forms and railroads, throughout the crises of the 1870s and 1880s often were found to be making larger profits on capital invested than the giant businesses. Furthermore, much of the concentration of economic power which was apparent during the 1870s and on, was the result of massive state aid immediately before, during, and after the Civil War, not the result of free market forces. Much of the capital accumulation – particularly in the cases of the railroads and banks – was accomplished by means of government regulation and aid, not by free trade on a free market.

Also, the liberal and conservative models which stress the supposed fact that there was growing centralization in the economy and that competition either lessened or became less intense, are both shaken by historical facts. And we already have seen that it was the railroad leaders, faced with seemingly insurmountable problems, who initiated the drive for federal government regulation of their industry.

Rate wars during 1881 pushed freight rates down 50 percent between July and October alone; between 1882 and 1886, freight rates declined for the nation as a whole by 20 percent. Railroads were increasingly talking about regulation with a certain spark of interest. Chauncey Depew, attorney for the New York Central, had become convinced “of the [regulatory commission’s] necessity ... for the protection of both the public and the railroads.6 He soon converted William H. Vanderbilt to his position.7

Agitation for regulation to ease competitive pains increased, and in 1887, the Interstate Commerce Act was passed. According to the Railway Review, an organ of the railroad, it was only a first step.

The Act was not enough, and it did not stop either the rate wars or rebates. So, early in 1889 during a prolonged rate war, J. P. Morgan summoned presidents of major railroads to New York to find ways to maintain rates and enforce the act, but this, too, was a failure. The larger railroads were harmed most by this competition; the smaller railroads were in many cases more prosperous than in the early 1880s. “Morgan weakened rather than strengthened many of his roads ... [and on them] services and safety often declined. Many of Morgan’s lines were overexpanded into areas where competition was already too great.”8 Competition again increased. The larger roads then led the fight for further regulation, seeking more power for the Interstate Commerce Commission (ICC).

In 1891, the president of a midwestern railroad advocated that the entire matter of setting rates be turned over to the ICC. An ICC poll taken in 1892 of fifteen railroads showed that fourteen of them favored legalized pooling under Commission control.

Another important businessman, A. A. Walker, who zipped back and forth betwene business and govenrment agencies, said that “railroad men had had enough of competition. The phrase ‘free competition’ sounds well enough as a universal regulator,” he said, “but it regulates by the knife.”9

In 1906, the Hepburn Act was passed, also with business backing. The railroad magnate Cassatt spoke out as a major proponent of the act and said that he had long endorsed federal rate regulation. Andrew Carnegie, too, popped up to endorse the act. George W. Perkins, an important Morgan associate, wrote his boss that the act “is going to work out for the ultimate and great good of the railroad.” But such controls were not enough for some big businessmen. Thus E. P. Ripley, the president of the Santa Fe, suggested what amounted to a Federal Reserve System for the railroads, cheerfully declaring that such a system “would do away with the enormous wastes of the competitive system, and permit business to follow the line of least resistance” – a chant later taken up by Mussolini.

In any case, we have seen that (a) the trend was not towards centralization at the close of the nineteenth century – rather, the liquidation of previous malinvestment fostered by state action and bank-led inflation worked against the bigger businesses in favor of the smaller, less overextended businesses; (b) there was, in the case of the railroads anyway, no sharp dichotomy or antagonism between big businessmen and the progressive Movement’s thrust for regulation; and (c) the purpose of the regulations, as seen by key business leaders, was not to fight the growth of “monopoly” and centralization, but to foster it.

The culmination of this big-business-sponsored “reform” of the economic system is actually today’s system. The new system took effect immediately during world War I when railroads gleefully handed over control to the government in exchange for guaranteed rate increases and guaranteed profits, something continued under the Transportation Act of 1920. The consequences, of course, are still making themselves felt, as in 1971, when the Pennsylvania Railroad, having cut itself off from the market and from market calculation nearly entirely, was found to be in a state of economic chaos. It declared bankruptcy and later was rescued, in part, by the state...

Mergers often were tried, as in the railroad industry, but the larger mergers brought neither greater profits nor less competition. As Kolko states: “Quite the opposite occurred. There was more competition, and profits, if anything, declined.” A survey of ten mergers showed, for instance, that the companies earned an average of 65 percent of their preconsolidation profits after consolidation. Overcentralization inhibited their flexibility of action, and hence their ability to respond to changing market conditions. In short, things were not as bad for other industries as for the railroads – they were often worse.

http://praxeology.net/RC-BRS.htm

Regarding historical evidence, if the thesis of the critics of capitalism were true, then one would have to expect a more pronounced tendency toward monopolization under relatively freer, unhampered, unregulated laissez-faire capitalism than under a relatively more heavily regulated system of "welfare" or "social" capitalism. However, history provides evidence of precisely the opposite result. There is general agreement regarding the assessment of the historical period from 1867 to World War I as being a relatively more capitalist period in history of the United States, and of the subsequent period being one of comparatively more and increasing business regulations and welfare legislation.

However, if one looks into the matter one finds that there was not only less development toward monopolization and concentration of business taking place in the first period than in the second but also that during the first period a constant trend towards more severe competition with continually falling prices for almost all goods could be observed. And this tendency was only brought to a halt and reversed when in the course of time the market system became more and more obstructed and destroyed by state intervention. Increasing monopolization only set in when leading businessmen became more successful at persuading the government to interfere with this fierce system of competition and pass regulatory legislation, imposing a system of "orderly" competition to protect existing large firms from the so-called cutthroat competition continually springing up around them.

A Theory of Socialism and Capitalism, Hans Hermann-Hoppe, 1989, http://books.google.com/books?id=OyjwjEtyo7IC&pg=PA176&lpg=PA176&source=bl&ots=JYCjddquXN&sig=oSBjMR0VJ4tYN3vA-oNjJWJ0qC8&hl=en&ei=CQGqTovUEIqIsALZq6ngDg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CB4Q6AEwAA#v=onepage&q&f=false.