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Wednesday, April 18, 2007

Market Failure in Everything: The Lack of Antitrust Enforcement Edition

Is the Justice Department's antitrust division too reluctant to take steps to ensure markets are reasonably competitive?:

For Consumers, the Raw Deal by Steven Pearlstein, Washington Post: The Bush administration may have failed in its efforts to roll back Franklin Roosevelt's New Deal, but it's racking up more success with Teddy Roosevelt's Square Deal. Health and safety regulation. Labor protections. And certainly the centerpiece of progressive-era economic policy, the antitrust law.

It should tell you something that when Sallie Mae, the big kahuna in the college loan business, agreed this week to be bought by a group that included two of its three biggest rivals, Bank of America and J.P. Morgan, the question of whether this would reduce competition barely came up. Estimates vary, but the merged company would control 25 to 40 percent of the college loan business. ...

Ten years ago, there was little doubt this transaction would have faced an uphill fight. Not only would regulators have found the combined market share troubling, they would have worried about how the three players would use their clout to drive out small competitors, prevent new ones from entering and punishing those who got too aggressive about price-cutting. They would have worried about Sallie & Friends spreading around even more largesse to get themselves onto colleges' preferred-lender lists. Or that the combined company would have made it harder for competitors to package loans and sell them to investors.

But these days, antitrust enforcement has become so lax that even lawyers who might have questions about a deal are advising clients to give it a try. That was one of the conclusions reached by two well-known academics, Jonathan Baker of American University and Carl Shapiro of the University of California at Berkeley, in a paper presented yesterday at an antitrust conference organized by Georgetown University Law Center.

Baker and Shapiro asked 100 of the country's top antitrust lawyers whether mergers between firms in the same industry are more likely to be approved than they were a decade ago. On a scale of 1 to 5, with 5 being "significantly more favorable," the average score was 4.9.

And there's good reason for the changed perception. Analyzing the percentage of proposed mergers and acquisitions that have been challenged by regulators, Baker and Shapiro found the rate had fallen only slightly at the Federal Trade Commission but by more than half at the other agency that reviews proposed deals, the Justice Department's antitrust division.

Robert Pitofsky, a former FTC chairman, opened the conference by asking whether the pendulum had swung too far -- from antitrust enforcement that interfered too much in business dealings to enforcement that interfered too little. From the papers and discussions, there was a general feeling that it had.

Among the cases frequently cited was the Justice Department's approval of the recent merger of Whirlpool and Maytag, with a combined market share of 70 percent, which rested largely on the premise that because an Asian manufacturer had gained a toehold in the U.S. market, it and other foreign companies would provide sufficient competition.

To the surprise of many, the Bush Justice Department tried to block the merger of business software rivals Oracle and PeopleSoft. But even that effort was overturned by Judge Vaughn Walker of U.S. District Court in Northern California. ... Judges like Walker, and regulators like Justice Department antitrust chief Tom Barnett, have adopted the same kind of rigid, ideological approach that liberal judges and regulators took until the 1980s...

This is a view unsupported by economic theory or real-world evidence. And if allowed to prevail, it threatens to suck the diversity, vibrancy and innovative potential from what has been the world's most competitive economy.

I don't think it would hurt, and it might even help quite a bit in some instances, if a little more attention was focused on the degree of competition present in some markets.

Update: From the WSJ, an econoblog looking at whether allowing manufacturers to set minimum prices at the retail level hurts or benefits consumers. Two antitrust economists, F. M. "Mike" Scherer, former chief economist at the Federal Trade Commission, and Larry White, a former director of economic policy at the U.S. Department of Justice's Antitrust Division to discuss the economic core of the case.

Update: Jim Hamilton on patent protection.

    Posted by on Wednesday, April 18, 2007 at 01:42 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (33)


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