Antitrust versus Market Dynamism
Antitrust regulation of monopolies and mergers is largely a second-best policy. In a nation open to trade with well functioning capital markets and without regulations that burden incumbents and exclude entrants, monopoly prices are hard to sustain. Like a dinner bell, they are instead a signal to others to come and get some juicy profits. These profits not only encourage existing firms to expand their operations but also entice entrepreneurial individuals to enter these markets. But if regulations make markets less dynamic, the price mechanism won’t work nearly as well. Regulations can make it harder for new firms to enter and for incumbent firms to expand.
In applying its merger policy, the Justice Department should take more account of the relevance of economic dynamism — or the incentives to enter and exit markets — and thus of the regulatory landscape companies face. While I am not privy to all the details, two recent cases make me doubtful that it is doing so. In one, DOJ approved the merger of American and US Airways, and in the other, it sued to prevent Swedish- owned Electrolux’s proposed takeover of GE’s electric appliance business. But the airline merger took place in a marketplace burdened with regulations that make competition sluggish, while there seem to be few regulatory barriers to vigorous competition in the appliance market.
The obstacles imposed by government to competition from both new entrants and established players in the airline market are manifold. First, various local regulations impede the expansion of old airports and the building of new ones. The resulting limited number of landing slots impedes competition. Second, national law also restricts foreign carriers from operating in the United States. Finally, airlines are heavily unionized, yet another form of government regulation. Unions tend make firms less nimble. They also represent a force that will use government to try to prevent competition. Indeed, unions were an enthusiastic political lobby for the merger of American and US Airways. They are also now arguing for even greater restrictions on foreign carrier entry into the United States.
In contrast, there seem to far fewer regulatory barriers in the appliance market. As the presence of Electrolux itself shows, there are few obstacles to foreign appliance companies selling in the United States. While there are some unions in the appliance business, the presence of companies around the world means that is much harder for them to use a particular government as a force to restrain competition.
Perhaps the Justice Department made the right calls here. But I am doubtful, because the merger guidelines put too much weight on the current market shares of companies in determining whether to let a merger proceed. But a merger must be measured by its future effects. The world is not static, and the dynamism of the market is a crucial determinant of the future.