Common Belief vs. Reality

Part 2: Antitrust

Most people believe that antitrust is made to follow the general public’s interest and protect consumers from companies that restrict their output, misallocate economic resources, retard technological advance, and increase prices. The claim is that, in the free market, businesses could prosper greatly by eliminating competition through mergers and acquisitions and by “monopolizing in restraint of trade” or by practicing “deception” and “unfairness”. However, where do people base the ideas that there exists a monopoly issue in the free market? Are they even based on reasonable facts or are they simply made arbitrarily? Historical cases show us that antitrust is really just anticonsumer. Allow me to explain.

In the free market, the attempt to control the whole supply of raw material, products, or services would mean that you would have to buy all of them. If this action were to be committed, it would take lots of money to achieve and therefore, it is inconvenient. Just imagine being a dentist and you try to control all the raw material, all the products and all the services (monopolize) of dentistry in your city. You would have to buy all the dentists, all the clinics, all the material dentists use for treatments, etc. to become the only one capable in your city of supplying the medical services.

Then, by monopolizing everything and restricting output to raise prices of your medical services, you would give competitors from other cities the opportunity to come to yours, be free to innovate, free to increase supply, free to increase output, free to better the services, all at the lowest cost and price, and end up destroying you economically. Free consumers would go after the better products or services that are given for the lowest prices. This is possible in the free market. Any attempt to monopolize in the free market would give profitable opportunities to competitors and potential competitors. Of course, this is done by assuming that the market is legally open to new suppliers and consumers are legally free to support the new suppliers.

When consumers choose to favor a specific firm, they do so in the means that it is the one that satisfies them the most. If consumers “monopolize” a business because it is the best to allocate resources and offers products or services at the best quality possible and at the lowest price, then I bet that this “monopoly” has nothing to do with antitrust laws for it was consumers who chose to favor that business and make it a temporary monopoly supplier. It will be a monopoly until other competitive firms can obtain the raw material at a lower cost and be able to supply the product at the lowest price in that specific market.

Also, the criticism that declares some companies use predatory pricing (lowering prices to the maximum without counting costs to ruin competition) is without a firm foundation. When a consumer sees the price of a product extremely lowered (for example a tooth paste that costs two dollars lowered to one dollar), the consumer will buy more of that product and in the future it will buy less of it. Why?

Assuming that the predatory pricing prevailed long enough to momentarily ruin the competition, the firm that engaged it might pretty well have these problems. First, it ran out of input and/or output supply. Second, the consumers bought enough of the product to last months. Third, counting the first two problems, when the company raises prices to their normality once again, it will barely have enough of the product to offer. If they produce more of it, no one will buy because the consumers have stuffed themselves with it. In the end, that company would end in economic ruin and allow competition to most certainly prosper in a near future. Therefore, predatory pricing is a thoughtless strategy no one would dare to enforce in a free market economy.

When in the free market a business becomes a monopoly, it does so, because it promotes consumer welfare. For this reason, it is not necessarily a hazard and does not fit antitrust regulations. The benefits of a free market temporal monopoly are low costs, greater outputs, lower prices, and free consumer choice. Antitrust reduces and sometimes shatters preferential consumer choice and keeps prices high.  There are historical cases that prove antitrust is a fallacy used by the government to eliminate companies that supposedly “restrained trade” and raised prices to limit competition, but actually, lowered prices, increased output, and stimulated free consumer choice.

Then, out of the free market the government takes charge in monopolizing a company in a specific industry (like a cab company) and places a law that does not allow any other competition to arise or even come into existence. This type of government regulation is a disadvantage that directly affects the consumer. When a company is the only one that exists they will have no incentive to better the product, innovate, lower prices, increase output, and the consumer will obviously be hurt.

Before I present the cases, I want to mention that the government says that it is good to have lots of competition. It is good to have competition because it lowers prices, however, too much competition, as the government proposes is absurd. If we had 100,000 car companies and each sold about 500 cars, they would never recover from their tremendous investment and immediately go out of business. It is better to have a fewer amount of businesses to not injure the economy on a whim.

I have mentioned before, that we should never guide ourselves by what they (most people or everybody) say. We should search deep for the truth until we are certain that it is the truth. Well, one of the most misunderstood and propagated with false information of monopoly cases is the one of the U.S. vs. Standard Oil of New Jersey in 1911.

The popular view is that the company totally monopolized not just the petroleum refinery, but the whole production, transportation, refining, and distribution of the oil industry, through predatory pricing and by raising prices. Something that is practically impossible by reasons mentioned previously. So, what really did happen?

First of all, Standard Oil never monopolized anything. Its market share was actually declining over time, years before the case. In addition to this, it had 134 competitors in oil refining (like Shell, Gulf, Texaco) in 1911, the year of the antitrust case. Standard Oil never engaged predatory pricing. I think they would have been more mindful than to do that. Neither the trial court nor the Supreme Court ever found anything specific that proved the guilt on the charges of predatory pricing over the company.

What really happened is that the production of the company was increasing and the prices were declining for decades in the time when the company was supposedly monopolizing. The main product of the industry was Kerosene and in 1869, it was worth 30 cents per gallon, a price that fell to almost 6 cents a gallon in the times of the trial.

Nevertheless, the company was accused of “attempting” to monopolize the industry and broken up by the Supreme Court through this accusation. No proof of harm to consumers was found and if the company had tried to monopolize the market, they had never succeeded. What was the real purpose of the trial? A mere whim. Yet, most people have commentated and said that antitrust policy is supposedly efficient because of what they say in the success of the case presented with Standard Oil.

Next, there exists the case of Alcoa (Aluminum Company of America) in 1945 vs. the United States. This is a renowned embarrassing “antimonopoly” case admitted by those in charge of enforcing antitrust laws. The government had followed the company for two years, when in 1939, Judge Caffey,  in charge of the trial dismissed about 150 separate government charges against Alcoa . Part of the charges was that the company had supposedly taken control of waterpower sites to produce electricity and monopolized raw material from which aluminum is made. The judge also said that Alcoa innovated quickly, expanded its outputs, its refining capacity was extended, and had been lowering ingot prices for the last 50 years.

However, in 1945 the company again was taken into trial, now before the Supreme Court. Someone decided that increasing output and lowering prices excluded rivals from the opportunity to compete and therefore, it was an illegal activity against antitrust laws. If Alcoa would have not been an efficient consumer provider and, in this way, had given competition opportunities to compete, they would have not been accused of monopoly. In other words, Alcoa had to produce horribly in order to not be a monopoly, its economic efficiency was against the law.

This is what Judge Learned Hand said, “It was not inevitable that it (Alcoa) should always anticipate increased in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel.”

In 1949 came another similar case to Alcoa. It was the United States versus American Can. The company had convinced consumers to sign long-term leases where it offered large price discounts for large can orders. The court alleged that the company had “coerced” its consumers into accepting the leases. Think about it, if a company “coerced” you to accept something, would you accept it or not want to buy anything form the company and never hear from it again? Yet the court stated that the company had to raise its prices to make the industry more competitive. Why? Because it had been generous in offering discounts to its consumers and become an efficient firm economically. In the end, it was the wallet of the consumers who felt the decision of the court the hardest.

Other examples of the fallacy of antitrust laws are IBM who was harassed for 13 years because it held 65% of the market share. When the government finally gave up on the case, its competitors had already overtaken the company. In the beginning of 1937 General Motors made it part of its policy for the next two decades to not gain more than 45% of the automobile industry because of the fear of being prosecuted by antitrust. My last example is that in 1962 the government prohibited the Brown Shoe Company (which had a “monopoly” of one percent of the market share) to not acquire Kinney Shoes, who also had a “monopoly” of one percent in the market share.

Antitrust is not what we have been made to believe it is. It is truly a policy that attacks mainly the companies who increase their output, lower their prices, benefit the consumer in a great manner, and are made a monopoly because of free consumer choice, not predatory pricing, not restraining trade, and not monopolizing through mergers and acquisitions.

“American business is being harassed, bled, and even blackjacked under a preposterous crazy guilt system of laws, many of which are unintelligible, unenforceable, and unfair. There is such a welter of laws governing interstate commerce that the government literally can find some charge to bring against any concern it chooses to prosecute. I say that this system is an outrage.” – Mid-20th century, Cowell Manson, Federal Trade Commission

 

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