Competition and Prosperity: Prices, Progress, and Politics

1
Competition and Prosperity Prices, Progress,
and Politics

• Jonathan B. Baker
• Washington College of Law
• American University
• NMa Conference on Measuring the Economic Effects
  of Competition Law Enforcement
• October 18, 2007

2
Competition PolicyQuestioned or Ignored

• No-bid contracting (US)
• Energy and healthcare debate (US)
• Trade protection
• Antitrust enforcement

3
Why Competition Matters Automobiles During the
1970s

• The Big Three Choose a Quiet Life
• US automakers 1950-1970
• 1970s demand shift to small cars
• Toyota and Nissan benefit
• Not VW or the Big Three

4
Why the Japanese Automakers Succeeded in the US

• Not distinctive production innovations
• Big Three had less incentive to compete
• Seemingly limited competitive threat from small
  rivals and imports
• Small car innovation risky during 1970s
• Innovation in small cars would cannibalize
  profitable large care sales
• Incentives, selection, and spillovers

5
Benefits of Competition PolicyCast Iron Pipe
(late 1890s)

• Limited antitrust enforcement
• Express bid rigging agreement
• Reserved cities for local govt. procurement
• Courts hold violates Sherman Act
• Then twelve firms (3/4 capacity) merge
• 1890 to 1904 dominant firms created by mergers
  in 150 industries
• American Can, DuPont, Eastman Kodak, Intl
  Harvester, Otis Elevator, U.S. Steel, etc.

6
Other Informal US Experiments with Non-Enforcement

• Great Depression
• NRA Codes of Fair Competition
• Appalachian Coals
• Exemption for export cartels
• Mid-1980s airline mergers review at Dept. of
  Transportation
• Conclusion need antitrust enforcement

7
What About Innovation?

• Circa 1980, relationship unclear
• Theory Arrow vs. Schumpeter
• Empirics inverted-U
• Yet competition, not oligopoly, spurred
  innovation in 1970s automobiles
• Case for competition fostering innovation looks
  stronger today

8
Competition and Innovation Today Theory

• Encourages Innovation
• Innovation competition
• Pre-innovation product market competition
• to escape competition

• Discourages Innovation
• Anticipated post-innovation product market
  competition
• Preemptive RD investments

9
Competition and Innovation Today, contd

• Escape competition motive dominates empirically
  
• Cross-industry inverted-U studies questioned
• Cross-national within-industry studies
• Antirust enforcement is targeted to promote
  innovation
• E.g. monopolization cases in winner-take-most
  markets

10
Charles River Bridge (US 1837)

• Bridges over the Charles River in 1835

Charlestown
Cambridge
Atlantic Ocean
Boston
Charles River
11
Policy Argument for Protecting Economic Rights

• If the government means to invite its citizens
  to establish bridges, or turnpikes, or canals,
  or railroads, there must be some pledge that the
  property will be safe and that success will not
  be the signal of a general combination to
  overthrow its rights and to take away its
  profits. (Justice Story at 608)

12
Policy Argument for Fostering Competition

• Let it once be understood, that such charters
  carry with them these implied contracts to
  exclude rivals, and you will soon find old
  turnpike corporations awakening from their sleep,
  and calling upon this Court to put down the
  improvements which have taken their place.
  (Chief Justice Taney at 553)

13
Story vs. TaneyStrategy for Economic Growth

• Story threat of ex post appropriation of rents
  discourages ex ante investment
• Fears special-interest rent-seeking
• Fears majoritarian rent-seeking (debtor-relief
  laws)
• Taney Coasian renegotiation costly
• Entrenched interests favored
• Fears delay, impasses and litigation impeding
  economic development

14
Competition and ProsperityAfter Charles River
Bridge

• Taneys view narrowly prevails
• Legal challenges to development cut off
• Investment and development appear unaffected or
  enhanced

15
Three Regulatory Frameworks

• Protect economic rights (contract, property)
• Create institutions that foster competition
• Industrial policy
• Provide public goods
• Boost emerging sectors
• Aid declining sectors
• Assist firms in international competition
• Displace market with regulation

16
Industrial Policy vs. CompetitionSteel Mergers
(1984)

• Challenges to large integrated US steelmakers
• import competition
• domestic mini-mills
• rust-bowl recession
• Two mergers proposed among leading firms
• LTV/Republic, US Steel/National

17
Industrial Policy vs. CompetitionSteel Mergers
(1984)

• Firms mergers will protect plants, jobs
• DOJ investigates, challenges
• Unusual intra-Administration dispute between DOJ
  and DOC
• Baldrige DOJ made world-class mistake
• Should the government help firms threatened by
  foreign competition?

18
Industrial Policy vs. CompetitionSteel Mergers
in the US (1984)

• Competition prevails
• One merger abandoned
• The other merger proceeds after DOJ negotiates
  fix
• Minor revisions to Merger Guidelines
• More recognition of global markets
• More leeway for firms to argue efficiencies

19
Competition Policy and Politics

• Regulatory framework a political choice
• Politics as interest group competition
• Large, diffuse groups must solve collective
  action problems to influence policy
• Incentive of victorious interest groups to
  appropriate rents and lock-in their victory
• How could society choose competition?

20
Competition Policy as a Political Bargain

• In repeated play, consumers and producers may
  adopt competition policy
• Regime may be self-enforcing
• Each group prefers competition to cycles between
  market power and price controls
• Welfare-enhancing institution is not inevitable
• But could develop endogenously

21
A Political Bargain Emerges

• Before 1940, US regulatory policy is politicized
• Sherman Act (1890) does not end political debate
• Standard Oil (1911) and the election of 1912
• Economic policy during the Great Depression (New
  Deal)

22
A Political Bargain Emerges

• Consensus norms develop after 1940
• Thurman Arnold reinvigorates antitrust
  enforcement
• Ratified by the courts, Congress
• Regulatory policy stable, reduced political
  salience
• one of the faded passions of American reform

23
Chicago School Revolution Reform Not Reneging

• Most antitrust doctrines reconstructed around an
  economic approach (1980s)
• Creates a political debate
• Business groups particularly push reforms
• Non-interventionists favor going farther
• but competition remains the norm
• Bipartisan endorsement of need for reform
• Inefficient structural era rules revised

24
Preserving Competition Policy Microsoft and AMC

• Microsoft challenged the legitimacy of US
  competition policy outside the courts
• Argued that DOJ case threatens its freedom to
  innovate
• Described DOJ as a pawn of its rivals,
  unsuccessful in the marketplace
• Lobbied to cut DOJ antitrust enforcement budget

25
Preserving Competition Policy Microsoft and AMC

• DC Cir. (2001) decision
• Affirmed liability unanimously en banc
• Antitrust Modernization Commission
• Did not propose major reforms

26
Non-Enforcement Arguments Merging Firms Love to
Make

• Effective competition generally requires only
  three, or even two, rivals
• The prospect of entry or rival expansion
  typically deters adverse competitive effects
• Mergers often spur competition and benefit
  consumers by enabling efficiencies

27
Non-Enforcement Arguments Defendants Love to Make

• Complaining rivals are selfishly manipulating
  the legal process
• If firms like us cannot extract all possible
  rents from using our intellectual property, no
  firm will invest
• Game theory arguments are not robust, so do not
  provide an adequate basis for enforcement

28
Uses of Economic Modeling and Empirical Analysis

• Ex ante economic analysis in individual cases to
  identify anticompetitive conduct
• Use of economic analysis to create sound and
  practical presumptions
• Retrospective analyses to improve methodologies
  and refine presumptions

29
Economic Analysis and the Political Legitimacy of
Antitrust

• Better enforcement decisions
• Protecting competition as the primary economic
  policy framework