The Best Competition Policy: Free Trade, Deregulation, and Open Capital Markets
Many people are worried about increasing levels of economic concentration in United States industries. As a result, they call for expanding the interventionist reach of antitrust law. That would mean encouraging the Justice Department to reject more mergers and bring suits against more companies alleged to have monopoly power.
One difficulty with this approach is that it is difficult to determine whether a company possesses monopoly power, let alone figure out whether a merger will result in more monopoly power rather than invigorate competition. Moreover, attacks on monopoly discourage businesses from trying to obtain monopolies, an effort that itself brings innovation and benefits for consumers.
Three policies would decrease concentration far better than expanding antitrust law: making our trade freer, cutting back on regulation, and getting out of the way of efficient capital markets. Together, these policies would make the monopolization provisions in antitrust law much less needed.
Free Trade: The most powerful competition against domestic firms with market power can come from abroad. While other domestic firms can discipline a monopolist only by expanding their production, which often takes time, an importer can more immediately redirect supply that is selling in other parts of the world to the United States. In other words, allowing foreign suppliers free access to our domestic markets makes them far more contestable and thus less concentrated.
Deregulation: When I teach antitrust, I tell my students that if they see an enduring monopoly, they should search for the regulations that may be causing it. Monopoly sounds a dinner gong to the rest of the world: it tells other companies to come and get the super-competitive profits that are available in this industry. But regulation can deter and prevent such entry. And regulation tends to particularly hurt the small competitors of a monopolist, because there are economies to scale in complying with regulations. The more units a company sells, the less compliance costs per unit. Thus, de-regulation is itself a de-concentration policy. Permissionless innovation can create pervasive market discipline.
Open and Efficient Capital Markets: To break into a new market, an existing company needs capital to expand and a start-up needs capital to begin. That capital can come from a variety of sources, including banks, venture capital firms, or public offerings of stock. The more efficient and open are capital markets, the easier for companies to contest the power a monopolist and reduce concentration in an industry.
The Trump administration is moving to improve competition policy by generally deregulating and by improving the efficiency of financial markets through rolling back the excesses of Dodd-Frank. On the other hand, while the administration has not yet cut back substantially on trade openness, there is reason for concern that it well might. The Democratic party, in contrast, favors both increasing regulation and burdening capital markets with more regulations. Thus, sadly many of the same people who are decrying concentration of industries want to unleash the forces that will increase concentration.