I grew up believing that Monopolies were against the law.

I was wrong, and here is why.

ANTITRUST LAW & ECONOMICS REVIEW

I. ANTITRUST OVERVIEW

LAISSEZ-FAIRE, MONOPOLY, AND GLOBAL INCOME INEQUALITY:

LAW, ECONOMICS, HISTORY, AND POLITICS OF ANTITRUST

Charles E. Mueller, Editor

Antitrust Law & Economics Review

Demise of 'Fairness' and 'Justice'

For more than 8 decades--from 1890 to around 1975--U.S. antitrust was grounded in notions of "fairness" and "justice." Citizens had a right to start business enterprises and succeed or fail on their own economic abilities, without fear of being bankrupted by unfair practices, those that had nothing to do with competition on the merits, i.e., on the basis of efficiency (cost), price, and quality. The federal courts handed down decisions cast in the ancient language of the law--deciding according to what was just and right--and thus used skills honed by centuries of direct judicial experience. Today, one can look in vain through volumes of U.S. antitrust decisions without encountering the words "justice," "fairness," or any comparable concept.

Sherman, Clayton, and FTC Acts

The antitrust laws were originally designed precisely to prevent, along with conspiracies and monopolies against the consuming public, unfair practices against smaller competitors. Below-cost pricing to kill competitors, for example, was one of the "monopolizing" acts that were banned by the original Sherman Antitrust Act of 1890. Congress expanded that list of condemned practices in the Clayton Act of 1914 to include price discrimination, exclusive dealing, and mergers, along with a general ban on "unfair" acts, practices, and methods of competition in the Federal Trade Commission Act of that same year.

Treble Damages

"Tying" arrangements, boycotts, territorial divisions of markets, and other practices that unfairly disadvantaged competitors or injured consumers were eventually condemned under both the Sherman and FTC Acts. Most importantly of all, a potentially effective remedy was provided: Injured competitors (and consumers) were not only permitted to take their complaints to two government agencies--the Justice Department and the Federal Trade Commission--but were allowed to file their own private cases in the federal courts and, if successful before juries, to receive three times their proven damages.

'Political Counterattack'

This enforcement program became increasingly effective over the years, with those two federal agencies filing nearly a hundred antitrust cases each in the peak year of 1977 and injured private plaintiffs filing 1,611 that year. As a result, the U.S. economy was becoming less concentrated in its major industrial sectors and thus more competitive. The country's larger firms, however, were not happy with these developments and launched a carefully planned--and handsomely financed--political counter- attack, the core of which centered around a capture of the federal judiciary. Since the judges get the last word in antitrust enforcement--and since the federal judges are relatively few in number (around 1,000)--a plan was developed to run them all through an indoctrination program in which they would be taught that the antitrust laws were, as a matter of "economics," misguided--were in fact harmful to the consuming public.

'Repealed by the Judges'

It worked. As recounted in the two articles by Aron et al below (Vol. 24:4 and 25:2), a number of major corporations and corporate foundations were persuaded to finance a "law and economics" movement that includes a series of 2-week economic "seminars" for the federal judges (at over $5,000 per judge, all-expenses paid at Florida luxury resorts) taught by a group of hand-picked economics professors from the University of Chicago and similarly "conservative" campuses, with no opportunity for economists of opposing views to participate.
In the 20 years since this judicial teach-in began (1976), over 2/3rds of the entire federal bench has attended these indoctrination programs. Over that same period, those judges have transformed American antitrust law, in effect legalizing anticompetitive mergers and the various monopolization techniques Congress had legislated against. Today, only a handful of antitrust cases are filed each year and a recent study found no victories for the plaintiffs involved. On the books, the laws still read the same as they did in 1976; in practice, they've been repealed by the judges.

'Constitution Was Wrong'

How did the judges do it? First they took away the right to a jury trial. Under the U.S. Constitution (7th Amendment), "the right of trial by jury shall be preserved," but the judges decided on their own--after their new "economic" training--that, in antitrust cases, the Constitution was wrong. So they began to either dismiss antitrust complaints as insufficient on their face or (again before trial) by simply deciding they didn't believe the plaintiffs could prove what they were alleging (granting "summary judgment" for the defendant). In the handful of cases that were actually allowed to go to trial, the judges have either granted a "directed verdict" for the defendant at the end of the plaintiff's case or, after the jury had returned its verdict for the plaintiff, set it aside ("judgment notwithstanding the verdict") on the ground that they didn't think it was "reasonably" supported by the evidence presented. In the rare case where an antitrust plaintiff has been allowed to go before a jury and hasn't had his jury verdict set aside by the trial judge, the court of appeals has almost uniformly overturned it (for alleged flaws in either the law as applied by the trial judge or in the evidence).

'Consolidation' by Judicial Fiat

What had happened was that the U.S. judges, "educated" to believe that the bigger the firm the more efficient it must be, had reached the logical conclusion that the ultimate in efficiency is an industry or market with only 1 or 2 firms. From this it followed that, if the largest firm in the industry either bought up or bankrupted the others, that industry's total (and unit) costs would be lowered and the price to the consumer would therefore fall. "Consolidation" of U.S. industry had thus become the implicit goal of the federal judiciary. To reach that goal, the antitrust laws (being still on the books) simply had to be "bent." New standards of proof were provided for them by their laissez-faire tutors: Make the plaintiff prove not just that the defendant has committed the anticompetitive act but that the act's results are going to be higher prices for the consumer.

Cost Disadvantages of The 'Big 3'

Here we have the setting for the typical antitrust case. The "big 3" of an industry--grown old, powerful, and inefficient--are confronted by a newcomer who's brought in the latest in plant, equipment, and management methods. Its unit costs are so far below theirs--e.g., the 23% to 48% cost disadvantage of the 5 major U.S. airlines relative to discounter Southwest and the other new startups--that they face the appalling choices of (1) matching its prices and losing money on every sale or (2) maintaining their inflated prices and watching the newcomer take away all their customers. Either way, bankruptcy looms. What to do?

Protectionism Via Predation

Again, the alternatives are to attack the newcomer, buy him out, or collude with him. He's unlikely to be interested in the latter--raising his prices to their level--since it's precisely his lower costs and prices that give him the competitive advantage with the customers and thus his large growth (and profit) potential. That same factor is similarly likely to make him uninterested in selling out; greater profits lie ahead through rapid growth, thanks to his huge cost advantage. That leaves only the attack route, e.g., one or more of the predatory practices that large firms frequently use to get rid of smaller, more efficient competitors.

'Strategies' for Monopolization

A popular book by economist Michael Porter of Harvard, Competitive Strategy--one used as a text in Harvard's MBA program and in that of other leading U.S. business schools--includes the following "strategies" for monopolization:

Exclude competitors from distribution channels;
Buy up competitors and potential competitors;
Use predatory [below-cost] pricing to eliminate competitors;
Raise scale-economy barriers;
Increase "market power and hence profit potential";
Study the industry's "potential" structure and ways it can be made less competitive;
Arrange for a "rise in entry barriers to block later entrants" and "inflict losses on the entrant";
Buy up firms in other industries "as a base from which to change industry structures" there;
"Find ways to encourage particular competitors out of the industry";
"Send signals to encourage competition to exit" the industry;

'Intimidate' Competitors

Raise "mobility" barriers to keep competitors in the least-profitable segments of the industry;
Let little firms "develop" an industry and then come in and take it over;
Engage in "promotional warfare" by "attacking shares of others";
Use price retaliation to "discipline" competitors;
Establish a "pattern" of severe retaliation against challengers to "communicate commitment" to resist efforts to win market share;
Maintain excess capacity to be used for "fighting" purposes to discipline ambitious rivals;
Publicize one's "commitment to resist entry" into the market;
Publicize the fact that one has a "monitoring system" to detect any aggressive acts of competitors;
Announce in advance "market share targets" to intimidate competitors into yielding share;

Proliferate Brand Names

Contract with customers to "meet all price cuts," thus denying rivals any hope of growth through price competition;
Get a big enough market share to "corner" the "learning curve," thus denying rivals an opportunity to become efficient;
Acquire a wall of "defensive" patents to deny competitors access to the latest technology;
"Harvest" market position in a no-growth industry by raising prices, lowering quality, and stopping all investment and advertising in it;
Create capital scarcity;
Introduce high advertising-intensity;
Proliferate "brand names" to make it too expensive for small firms to grow;
Get a "corner" on raw materials, government licenses, subsidies, and patents;
Build up "political capital" with government bodies;
overseas, get "protection" from "the host government";

'Vertical' Barriers

Practice a "preemptive strategy" by capturing all capacity expansion in the industry so as to "deny competitors enough residual demand" to be efficient and develop enough power to "credibly retaliate" and thereby "enforce an orderly expansion process" to prevent overcapacity;
Create "switching" costs;
Impose vertical "price squeezes";
Practice vertical integration so as to gain a "tap into technology" and marketing information in an adjacent industry; to defend against a supplier's too-high prices; to "defend against foreclosure"; to "protect proprietary information from suppliers"; to raise entry and mobility barriers against competitors; to "prove that a threat of full integration is credible"; and to get "detailed cost information" in an adjacent industry (but don't integrate into a "highly competitive industry");
"Capture distribution outlets" by vertical integration to "increase barriers";

'Consolidate' the Industry

Send "signals" to threaten, bluff, preempt, or collude with competitors;
Use "fighting brand" (a low-price brand used only for price-cutting);
Use "cross parry" (retaliate in another part of a competitor's market);
Harass competitors with antitrust suits;
Use "brute force" ("massed resources" applied "with finesse") to attack competitors;
Use "focal points" to collude with competitors on price;
"Load up customers" at cut-rate prices to "deny new entrants a base" and force them to "withdraw" from market;
Practice "buyer selection," focusing on those that are the most "vulnerable" (easiest to overcharge);
"Consolidate" the industry so as to "overcome industry fragmentation... Pay-off to consolidating a fragmented industry can be high because... small and weak competitors offer little threat of retaliation";
Time one's own capacity additions; never sell old capacity "to anyone who will use it in the same industry";
and buy out "and retire competitors' capacity."

Sherman, Clayton, and FTC Acts

The antitrust laws were originally designed precisely to prevent, along with conspiracies and monopolies against the consuming public, such unfair practices against smaller competitors.

'Judiciary Has Disgraced Itself'

The language used now in the antitrust cases can only be called "econobabble," terms wrenched from economics textbooks but assigned meanings that have no known counterparts in the world of empirical economic researchers. The judges have become, sua sponte, the nation's uncredentialed "economists," shaping U.S. industrial policy according to their own newly-acquired "economic" notions. They've opted for a consolidation of American industry--not competition and not justice--and done so on the basis of theories taken from a closed forum. That this astonishingly successful corporate purchase of the minds of the U.S. judiciary has not been treated as an intellectual and political scandal is an ongoing puzzle: History will almost certainly record this judicial era as one of heroic gullibility (or worse). Intellectually, the U.S. judiciary has simply disgraced itself in antitrust.

Presidents who owe their elections in significant part to monopolists are of course more likely to put political and corporate shills in charge of the country's antitrust agencies than serious, competent enforcers.

'Wretched Spirit of Monopoly'

Fortunes built on the inflated prices of market power have no moral legitimacy and those who scheme to amass them can take no more honest pride in their so-called achievement than that of the successful burglar, embezzler, or swindler. The difference is that the petty criminal steals relatively small amounts on an intermittent, ad hoc basis, while the monopolist steals vast sums on a systematic schedule, day in and day out, with every ring of its cash register. Those who assist in--or profit from--this sorry trade ought to be ashamed of themselves. Adam Smith said it well in 1776 when he spoke repeatedly of "the wretched spirit of monopoly," the "mean rapacity, the monopolizing spirit" in which "the oppression of the poor must establish the monopoly of the rich." CLICK

-- Cherri (jessam5@home.com), May 20, 2001

Close, Damn tag!

-- Cherri (jessam5@home.com), May 20, 2001.