Deregulation Is Best for Competition, but Antitrust Can Be Second-Best

Over at our sister site, the Library of Economics and Liberty, David Henderson has a post taking some issue with my view that the Obama administration’s antitrust division should not have agreed to the US Airways/American Airlines merger. He argues that the better course is not to block the merger and instead to permit the building of more airport landing slots and allow foreign airlines to fly between U.S. cities.

I agree entirely with these deregulatory measures. Indeed in prior posts, I have called for some of them. But the soundness of such policy proposals does not advance the case for this merger. The Justice Department has no power to deregulate airport construction; such zoning is controlled by state and local authorities. Even foreign airline entry is controlled by another agency: the Department of Transportation. By law and competition theory, the Department should take the world as it finds it.

As a matter of law, the antitrust merger guidelines tell competition regulators to consider ease of entry as part of assessing whether an industry is too concentrated to permit a given merger. And these guidelines make sense. If entry is easy, concentration of incumbents becomes less relevant, because they remain price takers, deterred by fear of new competitors from raising prices above competitive levels. But when entry is difficult, that crucial discipline is absent.

More generally, antitrust regulators cannot assume a world that does not exist, because that premise makes the perfect the enemy of the good. Intervention in the market for mergers is almost always a second best solution. In a world with only sound regulations, free trade, and open capital markets, entry should generally be easy. But it does not follow that mergers should always be permitted in our politically fallen world, where these conditions are absent.

In my previous post, I showed that after the merger of American Airlines and US Airways, American Airlines was engaging in bizarre behavior that makes sense only in an industry that has become more oligopolistic and egregiously so. That is why the Obama DOJ should be criticized, although I agree that so too should be its Department of Transportation and state and local zoning authorities. In modern America, sadly, there is already a lot of ruin in the nation and lot of criticism to go around.