Why is Antitrust a Big Deal?

Several Democratic presidential candidates are promising to reform antitrust policies to restore competition to markets—including agricultural markets. Some Republicans also have expressed concern about the monopoly power of corporations—particularly in social media and financial markets. As a candidate, Donald Trump talked about breaking up the big drug companies. However, political promises to restore competitive markets never seem to gain much traction among the voting public.

Perhaps this is because past candidates have consistently failed to carry through with such promises—at least since the 1980s. Or maybe most people just don’t understand why economically competitive markets is a “big deal.” Admittedly, the economic concept of competition is a bit abstract and complex, but it’s sufficiently important to justify the effort of understanding.

Antitrust policy is a big deal in capitalist economies because capitalism simply cannot serve the economic interest of society without sufficient competition to ensure that markets can’t be manipulated. The ability to manipulate markets is sometimes called monopoly power. Monopoly power historically was gained by forming business “trusts,” thus the term antitrust. Corporate consolidation is the common means of gaining monopoly power today.

In order for markets to be “economically competitive,” they must meet specific conditions. These conditions are necessary to ensure that the pursuit of individual economic self-interests contributes to the economic well-being of society as a whole. Absent these conditions, Adam Smith’s “invisible hand” of free markets cannot transform “individual greed into the common good.” Contrary to popular belief, “economic” competition is not like a survival-of-the-fittest, or winner-take-all, free-for-all street fight. Instead, economic competition is like a publicly sanctioned contest or sporting event that is carried out within defined bounds and played by rules that ensure outcomes that serve the public interest as well as the individual interests of competitors.

In the days of Adam Smith in the late 1700s, the economic bounds and rules essential for competitive markets were characteristic of the local markets in which people met most of their economic needs. Economic relationships were local and personal, so there was little need for government regulation to ensure the integrity of market transactions. By the late 1800s, with growth in industrial corporations and geographically dispersed markets, government intervention had become imperative in maintaining economic competition. The “trust-busting” legislation and antitrust regulations of the early 1900s were logical responses to this necessity.

Four major conditions are essential for economically competitive markets. First, each identifiable market must have a sufficiently large number of sufficiently small economic enterprises or businesses to ensure that no single business has the ability to affect overall market price or conditions of trade. There may be differences in prices associated with differences in quality or services associated with the same basic products, but any business doubling its production or going out of business must not significantly affect overall market prices or terms of trade.

Second, it must be relatively easy for new producers who can offer buyers better products or better conditions of trade to gain access to existing markets. The large start-up capital requirements needed to compete in markets dominated by large corporations are obvious impediments to new entrants and thus to economic competition. Businesses such as Apple, Facebook, and Starbucks are examples of successful startups in corporate consolidated markets. However, these companies essentially created “new markets” by developing fundamentally different products or approaches to marketing. Once such firms gain positions of dominance in their new markets, it becomes difficult for new entrants to survive. In addition to ease of entry, those with inferior products who cannot compete with new entrants must be able to go out of business without disrupting the overall market. If any corporation becomes “too big to fail,” it obviously is too big to accommodate an economically competitive market.

The third and fourth conditions are accurate information and consumer sovereignty, which are closely related. Consumer sovereignty means that buyers of products are “free to choose” among an assortment of alternative goods and services offered by sellers. Consumers are truly free to choose only if they have accurate information regarding relative prices and the ability of alternatives to meet their needs or preferences. Whenever consumers are intentionally misled into choosing goods or services that do not meet their expectations, their sovereignty is violated. Whenever consumers are manipulated through persuasive advertising, social media, or peer pressures to spend money for things they don’t need or want, or aren’t good for them, the “invisible hand” of competitive markets simply isn’t working for the good of the individual or society.

All four of the essential market conditions could be met by maintaining a large number of small enterprises that do business primarily, but not necessarily exclusively, within their local communities. With small enterprises, barriers to entry and exit would be minimal. Positive personal relationships, which would be essential for economic success, would also ensure accurate information and consumer sovereignty.

However, an inherent conflict exists between the potential for economic efficiencies of large-scale production and the economic competitiveness of markets. In some instances, large corporations can produce comparable products with lower costs of production than costs incurred by smaller businesses. Large businesses need to rely on markets beyond their local areas in order to achieve these “economies of scale.” In other cases, geographic specialization linked to climate or natural resources allows significant economic efficiencies, again requiring expansion beyond local markets.

The potential for lower consumer prices and wider varieties of products resulting from economies of scale and geographic specialization cannot be ignored. But neither can the potential costs of failing to maintain competitive markets. If corporate consolidation allows large corporations to manipulate market prices, they can retain profits in excess of those possible with competitive markets. This not only allows corporations to deprive consumers of the potential benefits of lower prices but also to prevent suppliers of raw materials and corporate workers from receiving the full market value for contribution to the production process. The latter is called “monopsony,” rather than monopoly, and is common in agricultural markets.

The resulting distortions in prices paid by consumers and payments received by workers and suppliers divert the allocation of natural and human resources from uses that would best meet the economic needs of society as a whole to instead maximize profits for corporate investors. The “invisible hand” is manipulated to serve “corporate greed rather than the common good.”

In a previous post, I wrote about the abandonment of antitrust policy in the U.S. during the early years of the Reagan administration. The rationalization then was that antitrust policies were restricting the ability of corporations to achieve maximum economies of scale. The basic contention was that consumers would benefit from lower prices, product innovations, and continuing economic growth made possible by larger corporations. Little if any apparent consideration was given to the collective economic cost to society of abandonment of the economic competitiveness essential for efficient capitalist economies. The pursuit of economies of scale soon degenerates into a quest for economic and political power. Even if we were getting “more cheap stuff,” there was nothing to ensure that we were getting “the right stuff” to meet our needs or our actual preferences.

Perhaps most important, the pervasiveness and effectiveness of advertising and product promotion, coupled with planned obsolescence and superficial technological innovation, is driving seemingly insatiable consumer demand for continuing economic growth. Market economies are fundamentally incapable of ensuring, or even considering, the purely social and ethical needs of society; this is the responsibility of government. In the absence of appropriate and necessary government restraints, economic growth is being achieved through relentless extraction and exploitation of natural and human resources, resulting in ecological degradation and growing economic inequity. A fundamental responsibility of government is to ensure the basic rights of people, which includes protection from economic exploitation. Any government that fails to maintain the economic competitiveness of its markets eventually will lose its ability to carry out its social and ethical responsibilities to ensure the rights of people—including those of future generations.

Most nations have mixed economies, with characteristics of capitalism and socialism. Unrestrained market economies eventually will take control of democratic, socialist, or even authoritarian governments. None of these negative consequences are inevitable consequences of markets. They are, however, natural consequences of the failure of the government to maintain the competitiveness of markets. Enforcement of effective antitrust policy is a “really big deal.”

John Ikerd