Nothing New: Antitrust is Unnecessary

A solid candidate for the Most Wildly Mistaken Economic Myth is the belief that antitrust keeps markets competitive.

In fact, antitrust typically hamstrings competition. My favorite example remains Judge Learned Hand’s 1945 condemnation of Alcoa for having the audacity to “embrace each new opportunity as it opened” and face “every newcomer with new capacity already geared to a great organization, having the advantage of experience, trade connections, and the elite of personnel.” For vigorously competing, Alcoa was broken up.

But Alcoa is old-economy. What about our new economy? Does it threaten consumers with novel dangers that can be thwarted only by antitrust?

Two chief charges leveled by Uncle Sam against Microsoft are old antitrust chestnuts: tying (each Windows program included Internet Explorer) and predatory pricing (Microsoft charged no extra for Internet Explorer). As in countless old-economy cases, the evidence showed only that Microsoft harmed some competitors. No evidence showed consumer harm. Consumer harm allegedly would emerge only in the future when rivals are bankrupted.

As plausible as this allegation might initially appear, no real-world example can be cited of a firm that destroyed its rivals through tying or predatory pricing and then raised prices to monopoly levels. No single example! The reason is that, in free markets, literally millions of people are free to tackle any challenge. While 99.9% of us cannot figure out how to compete profitably against any currently “dominant” firm, for each challenge in each industry consumers need only one person – one out of hundreds of millions who are now part of the global economy – to creatively see how to compete more effectively for consumer dollars.

Consumers are never let down. All it took was one Henry Ford to see how to make cars affordable to the masses – one Sam Walton to revolutionize retailing – one Fred Smith to create economical overnight package delivery – one Jeff Bezos to discover the secret of successful Internet retailing. None of these entrepreneurs relied on antitrust bureaucrats to clear their paths. Profit opportunities in free markets are sufficient to protect consumers from monopolists.

Remember, Japanese and German industrial skill did far more than antitrust lawyers to keep Detroit automakers competitive. No lesson in economic history is clearer than that firms without special government favors are forever threatened by competition.

This fact is so even in the face of “network externalities” and “path dependency” – two supposedly common new-economy problems. Purportedly, a firm can secure monopoly power by producing a network good, such as the Windows operating system, whose value to consumers rises as more of them use it. The idea is that if the bulk of consumers are using one network good, the producer of that good is a monopolist because consumers can’t easily switch to a competitor’s version.

As with tying and predatory pricing, this claim might sound plausible in theory, but available evidence tells a different story. Markets are agile in allowing consumers to switch from older, less efficient network goods to newer and better ones. For example, twenty years ago all consumers played vinyl LPs; consumers today play CDs. And a similar switch is underway now from VCRs to DVDs. No government coordinated these switches. And no real-world example of consumer harm from a network monopolist has been found.

The new economy differs from the old in its faster speed at bringing new technologies to market and its much larger, global scope drawing competitors from around the world. These differences make antitrust even less necessary. With new technologies sweeping in more rapidly and with potential competitors now found across the globe, the risk of monopoly in Windows, widgets, or whatever is practically nonexistent.

These differences from the old economy are real. But at a deeper level the new economy is the same as the old. The quest for profits still drives entrepreneurs to try to outperform each other, and striving entrepreneurs continue to be immeasurably more creative than politicians and bureaucrats at satisfying consumer wants.

Does anyone really believe that the legalistic, bureaucratic minds of antitrust regulators can outperform the profit-driven imaginations of millions of entrepreneurs? Is it even remotely plausible that a political institution, inevitably influenced by producer lobbies, will act as consistently in the interest of consumers as will countless entrepreneurs who can profit only by convincing consumers to buy their products?

The new economy, even more than the old, contains its own internal anti-monopoly protection. It won’t work perfectly, but as with the old economy, its effectiveness at meeting consumer needs will only be reduced by antitrust regulations.