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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.

Reader Discussion

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on October 31, 2017 at 10:30:22 am

"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."

Is there? - or is it a case of "opening" up other markets and or eliminating unfair foreign governmental support for competitors of American firms?

Also, one may want to examine the "benefits" of highly active capital markets - i.e., stock offerings and the consequent impact of those same markets upon the behavior of corporate managers. It is not all peaches and cream. On the contrary it leads to a distortion of corpoarte behavior / motivations and objectives.

No, sir, I will take my monopolies the "Old School" way, where the Rockefellers, Carnegies, etc made corporate decisions without fear of negative responses from 25 year old stock analysts. In short, they had guts and did what they perceived to be in the best interests of the firms - not the stock price. Risk avoidance is the mantra of the day for fear of a declining stock price and a negative review from a young lad / lassie in knickers.

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gabe
on October 31, 2017 at 16:03:45 pm

Good arguments in general--until we reach the last paragraph:

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.

McGinnis couldn’t have said it better if he were Alan Greenspan himself. Remember Greenspan—the guy who insisted that markets were basically self-regulating, and thereby contributed to a $20+ trillion financial collapse? So when people start talking about the burdens of Dodd-Frank, let me know when those burdens add up to $20 trillion—‘cuz until then, I’m not impressed.

Moreover, anyone who has followed the Trump Administration’s forays into the electricity markets, or proposals to pull the broadcast licenses of TV networks, of selection of contractors to repair Puerto Rico knows that the propensity to interfere in markets foreign and domestic is bipartisan.

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nobody.really
on October 31, 2017 at 17:44:19 pm

",,,the propensity to interfere in markets foreign and domestic is bipartisan."

Ahem!!! Let us say it is de riguer.

It is, in fact, the bread and butter of politico's.

Which, of course, raises this question:

If the gubmint had not ventured into so many nooks and crannies in the first place, would we even be arguing whether this tendency is bipartisan?

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gabe
on October 31, 2017 at 17:59:27 pm

Then again:

"... let me know when those burdens add up to $20 trillion—‘cuz until then, I’m not impressed. "

Look to the next essay on Janet Yellen. looks like we run the risk of another $20 (possibly $100) trillion fiasco as the policy of QE (the Queen will not be pleased, BTW) is itslef being *eased* and placing at risk all of those inflated stock valuations and home prices.

Yep, bipartisan it is.

Thank goodness, the grandkids and I have big piggy banks!

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gabe
on November 01, 2017 at 10:02:49 am

Remember Greenspan—the guy who insisted that markets were basically self-regulating, and thereby contributed to a $20+ trillion financial collapse? So when people start talking about the burdens of Dodd-Frank, let me know when those burdens add up to $20 trillion—‘cuz until then, I’m not impressed.

Look to the next essay on Janet Yellen. looks like we run the risk of another $20 (possibly $100) trillion fiasco as the policy of QE (the Queen will not be pleased, BTW) is itslef being *eased* and placing at risk all of those inflated stock valuations and home prices.

Good point, gabe: The eventual cost of quantitative easing—a policy adopted to help offset the damage caused by the financial collapse—needs to be added to the cost of that collapse. This adds further context for evaluating the whimpers about how burdensome Dodd-Frank is.

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nobody.really
on November 01, 2017 at 17:46:04 pm

Nobody:

Seriously here:

Would you agree that there are some areas of Dodd-Frank that are burdensome and in some instances actually imposed greater costs upon the consumer. I am thinking of credit processing services and the rates mandated under Dodd Frank (If I am remembering this correctly). It appears that the end result was higher payments to consumers as a "rebound" effect from *burdens" (in the credit processors eyes, of course) placed upon them.

I do know from personal friends in the finance industry that some of the reporting requirements are onerous and add costs.

Why not attempt to keep what is of value and scrap the rest?

As for QE, I am at a loss to understand what is going to happen. Waller makes a good point when he states that the Fed HAS the power to resist any move to "mark to market" Hey what is good for the goose is not good for the gubmint gander. But it may serve to *ease* the "easing."

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gabe
on November 01, 2017 at 18:13:19 pm

oops - forgot this: And don't go claiming that the information is invalid because the link came from the Spectator; The US Treasury cannot be equated with the Spectator, can they?

https://spectator.org/repealing-the-cfpbs-arbitration-rule-a-win-for-american-consumers/

"CFPB Director Richard Corday sent a letter a few days ago to President Trump asking him not to sign the CRA rule repeal, claiming that in the end, it came down not to studies and data but to what’s best for American consumers. It is true that our elected officials should look to what’s best for the American people, and in this case, it is precisely by protecting our economic freedom to contract and ability to engage in arbitration.

Furthermore, the CFPB Director’s aversion to data and studies in the letter may not be coincidental, as a recent study by the U.S. Treasury Department revealed that the CFPB did not properly study the extraordinary costs on consumers the rule would likely have.

The Treasury Department believes the rule in the next 5-years would add over 3,000 new class-action lawsuits and cause businesses to spend $500M+ in legal fees. Trial lawyers would benefit with an estimated $330M+ in new legal earnings, but 87% of cases are estimated to give essentially no reward to consumer plaintiffs."

So there are some costs associated with Dodd-Frank that may be considered burdensome - unless of course one is a trial lawyer.

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gabe

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.