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Source link: http://archive.mises.org/4492/platonic-competition-reconsidered/

Platonic Competition Reconsidered

December 28, 2005 by

Last week Mises.org reprinted Dr. Reisman’s 1968 essay criticizing “pure and perfect competition” doctrine. I would note that the political application of that doctrine to antitrust policy, however, does not generally employ the precise economic fallacies discussed by Reisman. In other words, the approach taken by contemporary economists to competition theory is not what motivates the lawyers at the Federal Trade Commission or the Department of Justice’s Antitrust Division.

Earlier this year, I filed a comment with the Antitrust Division criticizing the government’s imposition of conditions on the sale of Bumble Bee Seafoods to a private investment group. The group already marketed several brands of sardine snacks—that is, a small part of the overall sardine market—and the Bumble Bee acquisition would have added additional brands. The Division said this would illegally reduce competition by giving one firm control over brands constituting 76% of market sales. Hence, the larger Bumble Bee acquisition could only proceed if the group sold several sardine snack brands to a DOJ-approved buyer.In my comment, I argued that any exercise of “market power” by Bumble Bee would be irrelevant, since consumers could easily switch brands or stop buying sardine snacks altogether in the event of a post-merger price increase. The Antitrust Division replied that this was irrelevant, because their only concern was preventing controlling short-term prices:

Certainly consumers could switch to premium or ethnic sardines if the combined Connors/Bumble Bee firm raised the prices of sardine snacks–they could even switch to canned tuna, salmon or sausages. The relevant issue, however, is whether sufficient numbers of sardine snack consumers would switch to other food products to make it unprofitable for a hypothetical monopolist of sardine snacks to raise prices.

The United States’ delineation of the relevant market is based on the specific facts of this case, which were developed in a thorough investigation that included numerous interviews of executives from retail outlets that buy sardine snacks, as well as other sellers of sardine products. In their business judgment, if the sellers of sardines raised their prices by a small but significant amount, insufficient numbers of sardine snack buyers would switch to premium or ethnic sardines in order to make that price increase unprofitable.

Perfect competition doctrine, as Reisman described it, deals with all sorts of fantasy elements—a market where everyone has perfect information, no barriers to immediate entry, products that are indistinguishable (i.e., no advertising), constant price fluctuations in response to demand, and so forth. But the DOJ’s prosecutorial agenda has little to do with this Utopianism. In the sardine snacks case, the Antitrust Division’s goal was not to create a large number of competitors or impose a homogeneous product definition. To the contrary, the DOJ sought nothing more than to preserve a status quo where there were two firms instead of one. The pre-merger sardine snacks market was no closer to “pure and perfect competition” than the post-intervention market.

So what were the DOJ’s motives? If you’re part of the career staff at the Antitrust Division, you’re simply trying to “make quota” by objecting to enough mergers per year to justify your position and the Division’s budget. For senior political appointees, the policy goal is to create the illusion that the government can control short-term prices through selective merger challenges. (And on a personal level, political appointees generally exploit their “experience” as regulators to generate higher income upon their return to the nominal private sector.) As the post-Katrina furor over gas prices demonstrated, political hacks from both parties exploit short-term price increases to justify additional government intervention.

Consider the Antitrust Division’s position that the proposed sardine snack merger was illegal because “insufficient numbers” of customers would substitute other sardine products, or cease buying sardine snacks altogether, to make a post-merger price increase unprofitable. This argument flies in the face of the oft-repeated platitude that antitrust is about protecting the consumer. In this hypothetical scenario, customers aren’t injured, because they choose to pay more despite the obvious existence of other options. The DOJ is just as upset with the consumer for accepting a price increase as it is with the producer for proposing one. But more importantly, the DOJ is opposed to any short-term price increase regardless of what the market will bear. Such market activity independent of state intervention undermines the argument for even greater intervention in the future. This is the motive for the DOJ’s merger intervention policy, not a genuine belief in perfect competition doctrine.

That’s not to suggest that perfect competition doctrine doesn’t play a role in antitrust policy. But this role is akin to the plot of a formulaic Hollywood action movie—it’s there to create the appearance of a narrative framework to brush past the logical contradictions. Perfect competition doctrine gives the appearance of economic logic and consistency to what is, in fact, the arbitrary and capricious enforcement policy of antitrust regulators.

{ 4 comments }

Sudha Shenoy December 28, 2005 at 4:17 pm

In other words: intervention for the sake of intervention. A perfect bureaucracy.

Roger M December 28, 2005 at 4:28 pm

As a motive, I would add the general dislike of large business among government types. Government wants you to succeed, but not too much. An imaginary line related to size exists, in this case 76% of the market even though that’s a long way from a monopoly, where if you cross it, the government will thump you!

Sam December 28, 2005 at 9:49 pm

a thorough investigation that included numerous interviews of executives from retail outlets that buy sardine snacks, as well as other sellers of sardine products.

I’m glad the Justice Department asks experts who are completely disinterested in the actions of the Justice Department and would have no incentive whatsoever to slant their answers. It would be like asking Ford executives what they thought when Daimler bought Chrystler (sp?).

tz December 29, 2005 at 3:26 pm

The problem is we want perfect competition when we consume but no competition when we produce. We want the most money for our labor or product and want to spend the least when we buy something. We all are on both sides of the equation, and I think that probably could lead to a way to evaluate if something is fair (think “Golden Rule”).

I may have just changed my mind about Anarchocapitalism as I think Labor unions would thrive under such a system – they would provide both security services (we won’t smash your property or beat your scabs) as well as the generally needed services, carefully bundled (just think of having to pay a millwright and plumber in addition to an electrician in the same way the Microsoft bundles the browser and media player with the operating system). Scabs with Pinkertons and repair competing with the UAW or the Teamsters. The latter “package” might be cheaper.

Meanwhile you will note the DoJ isn’t going after the granted monopolies like the music and entertainment industry … (I’ve suggested in other fora that one way to get rid of pornography is to deny it copyright protection, or if they insist on state supported DRM, add a “ratings” tax starting with no tax on G rated, and something confiscatory on XXX, much like cigarettes – the tax would be on the copyright or the DRM enforcement, not the content so as to avoid “free speech” problems).

As to the sardines, you say customers aren’t harmed because they can “choose to pay more”. Yet I thought “opportunity cost” was something still taught in economics. Post-merger, if there are monopoly (increased) prices, a consumer who buys one can of sardines will now have to forgo more things of lesser value. He has fewer choices. Or is “fewer choices” somehow more freedom? I would think just the opposite. And this applies in the opposite direction – if the merged company can lower prices, it might drive another sardine company (who might have some flavoring some consumers might prefer) out of business, thus also reducing choices.

Good or bad? Or maybe it is properly amoral in the same sense that we will get a certain amount of rain, which will be the best for some, too dry for others, too wet for yet others. A sardine merger might result in higher or lower prices, but these effects should be looked upon like a change in the weather – neither good nor bad, but natural.

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