Cafe Hayek

Let Fly Real Competition

My friend (and co-blogger at Market Correction) Andy Morriss sent this superb letter yesterday to the Financial Times:

Sirs, 

Something very large is missing from your story on the possible Delta-Northwest and United-Continental airline mergers (“Delta and Northwest near deal,” Feb. 7): any mention of non-US carriers.  Because the United States does not allow foreign carriers to own U.S. airlines, well-run airlines like Air France-KLM, British Airways, Singapore Airlines, Virgin, or Emirates, the most logical merger partners for the money-losing U.S. legacy carriers, are prohibited from joining the game.  What the U.S. aviation industry desperately needs is a dose of competition from competently run airlines, not another round of “consolidation” of poorly managed ones. Merging four failures into two solves nothing; what’s needed is competent management that can figure out how to make money in one of the world’s biggest markets for air travel.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Don on antitrust

Here's a video (sort of) of Don discussing antitrust at EconTalk. Let me know if you like this.

If This Is Monopoly In Action, Bring It On

Today I sent this letter to the Gray Lady:

You allege that Intel is guilty of "abuse of market power to protect [its] monopoly" ("F.T.C. Goes AWOL," October 29).  Sounds terrible - until we read that Intel's offense is to offer "big discounts and rebates to computer makers who minimize the use of processors made by rival Advanced Micro Devices." In other words, to keep customers, Intel keeps its prices low.

Monopolists raise prices; firms facing competition do not.  Intel keeps its prices low, meaning that it behaves competitively.  Yes, Intel's pricing practices make life more difficult for AMD and other rivals, but that's what competition is supposed to do.

Sincerely,
Donald J. Boudreaux

Robber Barons

Here is the latest EconTalk—Don Boudreaux makes the case for getting rid of antitrust laws. It seems a hard case to make but Don points to evidence that the genesis of antitrust was not consumer protection and that large enterprises often bring lower prices rather than higher ones. He has much more to say. Check it out.

Meanwhile, I'm reading parts of Capitalism, Socialism, and Democracy as I prepare to interview Thomas McCraw for next week's podcast. He's the author of a recent bio of Schumpeter, Prophet of Innovation. Here is Schumpeter on the claim that the monopoly power of large enterprises at the end of the 19th century must have exploited consumers:

If we list the items that enter the modern workman's budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them, i.e., each year's money prices divided by each year's hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before...As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms  that work under conditions of comparatively free competition but precisely to the doors of the large concerns...and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of living than with keeping it down.  (Capitalism, Socialism, and Democracy, Third Edition, pp. 81-82)

Why were the Robber Barons so generous? Why did the workmen of the day have a higher and higher standard of living? One answer is that the robber baron's feared regulation and a political backlash. Another is that they weren't robber barons after all, they were selfless people who wanted to help others. The third answer and it is the answer of Schumpeter, (and Don Boudreaux) is that the robber barons faced competition or at least potential competition. At a point in time, they had monopoly power. But rather than exploit it and invite competition, they chose to expand their profits via lower prices rather than higher ones.

Competiton is a Dynamic Process

Fred Smith, founder and president of the Competitive Enterprise Institute, explains -- in today's edition of the Washington Times -- one of principal problems with the antitrust theory that still motivates bureaucrats such as those at the Federal Trade Commission (FTC).  Here's a key paragraph:

Antitrust theory ignores the permeability of the boundaries of all markets. True, the first company to break into a market can charge higher prices and realize higher profits. After all, it takes time for established competitors to adapt to meet a newcomer's challenge. And the changes are obvious even to a casual observer — witness traditional supermarkets' adoption of organic foods. But potential new competitors are always waiting in the wings.

Elsewhere in his op-ed, Fred correctly reasons that the FTC's attempt to block the merger of Whole Foods with Wild Oats was preposterous.

Why I Don't Fear Predatory Pricing

My recent posts (here and here) on antitrust matters brings this question, by e-mail, from someone named Rhonda: "How can you be sure that dominant firms like Whole Foods do not use their privileged position to underprice their weaker rivals.  It seems to me this tactic is used often."

Here's an article that I wrote several years ago (with Jim Gattuso) explaining my reasons why I never worry that so-called "predatory pricing" will ever lead to consumer harm.  (The article is rather long; the germane part of it is the section entitled "The Economics of Predation.")

Unwholesome Antitrust

What is it with antitrust authorities and supermarket mergers?  Here's a letter that I sent today to the Wall Street Journal:

Arnie Celnicker argues that the Federal Trade Commmision's challenge of Whole Food's merger with Wild Oats is justified by various "market nuances" (Letters, July 7).  Among these is the fact that "financial markets have deprived Wild Oats of the capital to compete head on with Whole Foods" and the fact that consumer demand for organic foods is skyrocketing.

How in the name of free-range chicken do these facts justify government blocking this merger?  Precisely because consumers now want more and more organic products, financial markets have every incentive to invest in firms catering to this growing market if these firms are well-managed.  Wild Oats' inability to get adequate private financing in this growing market is strong evidence that its assets now are poorly managed.  It's only natural that Whole Foods spots and seizes this opportunity to use these assets more effectively at meeting consumer demands.  The FTC's interference - an unwholesome additive to the market - jeopardizes consumer well-being.

Sincerely,
Donald J. Boudreaux

Anti-Antitrust

Chicago Tribune columnist Steve Chapman is one of the very best at his craft.  He is consistently interesting and on-target correct.

Today he tackles the ludicrous antitrust action by Uncle Sam against the proposed merger of satellite radio suppliers XM and Sirius, and the similar action against the proposed merger of Whole Foods and Wild Oats.

Here are some snippets:

In both cases, the rationale is that fewer companies will mean fewer choices and higher prices. But consumers who want what these firms provide have more options than the Milky Way has stars.

Organic food consumers would not be the suffering captives of this new company. Every grocery store has a raft of organic offerings, and chains from Wal-Mart to Trader Joe's are fighting to get their share of sales. If the bigger Whole Foods tries price-gouging, customers can easily find other sources for what they want - from farmers markets to online suppliers.

The key government error is defining the market as a narrow sector isolated from other sectors that provide reasonable substitutes. That same mistake explains the FCC chairman's aversion to the satellite radio deal.

And another snippet from the same column, one that refers appropriately to the 1990s-era fear that Microsoft would "conquer" the market for computer software:

Meanwhile, other companies, notably Google, have trounced the Big Meanie in other areas. Over the last decade, says Thomas Hazlett, a professor of law and economics at George Mason University, "Microsoft has seen its market position erode, and it has virtually nothing to do with the antitrust case."

Antitrust was born in late 19th-century America as a devious means of protecting politically influential producers from the competition posed by new, entrepreneurial firms.  It was never economically sensible.  And it is not so today.

Satellite Radio Competition

Sirius and XM Radio want to merge. There could be lots of reasons for merging. Economies of scale. A desire to exploit consumers and make huge amounts of money. A desire to avoid bankruptcy.

I have no idea if there's room for two satellite radio companies or whether there's room for 50. What I do know is that there is no meaning to the idea of satellite radio market share. After this merger, the new company, SiriXM, say, will have a complete and total monopoly of the satellite radio market. But that is meaningless. Satellite radio has to compete with my regular radio, internet radio, my CD collection and my iPod. Oh, and my TV and talking on my cell phone with friends and a thousand other ways to pass the time.

Five years ago there was no satellite radio. When one company came along (I don't know who was first, Sirius or XM), should the FCC have shut them down for daring to monopolize the market? So why is it now that there's two going back to one we have a potential calamity that the government has to worry about?

Look at this absurd complaint (HT: Drudge) by the head of the FCC:

Kevin J. Martin, the chairman of the Federal Communications Commission, has privately questioned recent Congressional testimony by the architect of a proposed merger of the nation’s two satellite radio companies that subscribers would both pay the same monthly rate and receive significantly more programming.

As he sought to sell the proposed merger of Sirius Satellite Radio and XM Satellite Radio to Congress, and by extension to regulators like  Mr. Martin, Mel Karmazin, the chief executive of Sirius, vowed last Wednesday that prices would not be raised and that listeners would benefit enormously by getting the best programming from both companies.

But in separate conversations with two people after Mr. Karmazin’s testimony to a House committee, Mr. Martin said that subscribers may be surprised to learn they may actually have to pay more than the current monthly rate of $12.95 if, for example, they want to receive all the games of Major League Baseball (now available only on XM) as well as all the professional football games (now only on Sirius).

Mr. Karmazin, reached on Tuesday, said his testimony was not misleading and that he meant to say two things: subscribers wanting to keep their existing service would not face a price increase, and listeners who wanted the best of both services would pay less than the combined rate of $25.90.

This is ridiculous. Right now, both services offer lots of music of lots of different flavors. But one has the NFL and one has MLB. So if you want both of those, you currently subscribe to both. Most people make a choice and choose one or the other. So the debate between Martin and Karmazin is over whether consumers who want both under the merged scenario will pay just $12.95 or something more than that. I assume they'll pay more. So does that mean Karmazin lied? Oooohhhhh. Gotcha.

Let them merge. Get out of the business of trying to figure out how many angels can dance on the head of a pin, that is, trying to figure out whether a merger is good or bad for consumers or dictating what the price of service should be for customers of the new company and particularly, trying to figure out the "real" market share of the new company. A merged Sirius and XM can't hurt consumers. There are too many choices. Hey, FCC. Get out of the way.

Steely Inconsistency

Here's a letter that I sent today to the Baltimore Sun, in response to this op-ed:

To the Editor:

You rightly criticize the Antitrust Division's requirement that, as a condition of merging with Arcelor, Mittal Steel sell its Sparrows Point mill ("Getting the Point," Feb. 22).  But you miss an acute incongruity behind this requirement: the world steel market is so competitive that U.S. steel makers must sometimes be protected from it.

Or, at least, the Bush administration thought so in 2002 when it raised tariffs on steel imports in the hope that protection from low prices on the world market would enable U.S. steel producers to "restructure." Do these producers now have such dreadful market power that Arcelor Mittal cannot be trusted to keep the mill at Sparrows Point?  I doubt it - but if so, surely part of the blame rests with President Bush.

Sincerely,
Donald J. Boudreaux

And people -- many intelligent people -- continue to suppose that government policy-making is generally coherent, even noble, from the standpoint of ordinary citizens seeking economic well-being.

See also this insight from Dan Ikenson.

Always Low Prices

I love this letter that appears in today's Wall Street Journal:

I was surprised to learn from your editorial that Hugo Chávez is allowed to sell oil to Joe Kennedy's Citizens Energy Corp. at a 40% discount. Surely a price this far below market runs afoul of the "antidumping" policies beloved by many in Mr. Kennedy's party. Shouldn't the American public be protected from lower prices on oil in the same way they've been protected from lower prices on bicycles, frozen concentrated orange juice, tissue paper, footwear, fishing tackle, hot-rolled carbon steel, televisions, replacement windshields, shrimp and several hundred other imported items. If Democrats allow lower prices here, they may even have to tolerate Wal-Mart.

Bruce E. Ikawa
Professor of Business and Economics Hillsdale College
Hillsdale, Mich.

(Hat tip to Mike LaFaive.)

The Sausage Factory

A number of people are glad that Jack Abramoff is headed to jail.  In this unintentionally funny Washington Post story (rr), we discover one such group.  The story opens:

ELTON, La. -- The dizzying downfall of lobbyist Jack Abramoff means more than just another Washington political scandal in this rural outpost of tin-roofed homes and fraying trailers.

It is a measure of vengeance.

Led on by what they say were his false promises of political access, leaders of the Coushatta Tribe of Louisiana, which is based here, paid Abramoff and his partners about $32 million for lobbying and other services -- more than $38,000 for each of their 837 tribal members. By their accounting, they got very little in return.

I first read this story in the print version of the Post where it was a front page story.  That $38,000 figure gave me some pause.  Where does any group of 837 people find $38,000 apiece to pay for lobbying services?  Why would any group be willing to pay someone $32 million for lobbying services?  But the focus of the piece is instead the injustice of those fees:

It was thievery, tribal members said, that echoes the historic losses of Native Americans to European settlers.

"Abramoff and his partner are the contemporary faces of the exploitation of native peoples," said David Sickey, a member of the tribal council. "In the 17th and 18th century, native people were exploited for their land. In 2005, they're being exploited for their wealth."

Pretty poignant, huh?  But where did that money come from to pay Abramoff?  And why did tribal leaders agree to it?  After a discussion of Abramoff's insulting language in emails about tribe members and how the Tribe used to only deal with Democrats until Abramoff came along, we discover that the tribe did get something in return for their investment:

In some instances, the Coushattas got what they paid for: Abramoff was able to help quash a rival tribe's proposed casino, protecting the Coushatta Casino Resort.

Okay, that's something.  Just how valuable was that service?  A partial answer to that question comes about half way through the story and tells us what might have been worth mentioning nearer to the top of the piece:

Revenue from the operation is estimated to be about $300 million a year, and each tribal member is given a quarterly sum from the profits. Tribe finances are not disclosed publicly, but estimates of those checks per member have ranged from $30,000 to $40,000 annually. Members also receive free medical care and education, as well as financial aid to buy a home. Many have used the money for better cars and better homes.

That's $30,000-$40,000 per member.  Does that mean that a family of four would get about $140,000?  The article doesn't say, but it does tell us:

The per capita prosperity has also kicked off a baby boom, tribal leaders said, and today 342 of the tribal members are under the age of 18.

I suspect it isn't the prosperity that's encouraging the baby boom but the incentives implicit in how casino revenues are divided.

Any time the government hands out monopoly rights, it's not surprising that the beneficiaries will pay large sums of money to keep those rights intact and free from competitors.

I sure would like to know how the Coushattas rather than another tribe came to be chosen for the casino in that area.  I have a feeling it wasn't a lucky spin of the roulette wheel or drawing the high card.

An Open Letter to My Libertarian Friends Who Don’t Understand My Opposition to the War in Iraq

Dear Friends:

The issue today on which libertarians are most divided is the war in Iraq. I am decidedly in the anti-Iraq-war camp; others – many of whom are people whose opinions and judgment I respect enormously – are in the pro-Iraq-war camp. Quite a few of these friends take issue with me for opposing the war. "Don’t you understand," they ask, "the unseen costs of not going to war? Didn’t Chamberlain’s appeasement of Hitler teach you anything?"

I’m well aware that failure to take action when it should be taken can cause ill consequences just as much as can taking action when action should not be taken. I am also aware that being weak and irresolute invites bullying. Nevertheless, the truth of these general principles is insufficient to justify this war.

Before I spell out my reasons for believing the war in Iraq to be unjustified, I emphasize that I am no pacifist. That is, I don’t believe that love (or negotiation) can conquer all; I don’t believe that violence used in self-defense is inappropriate; I don’t believe that proclaiming a commitment to peace is sufficient to prevent others from aggressing against you; and I do not believe that the fist used by Saddam Hussein to crush the Iraqi people was anything other than iron. Hussein is a beast who deserves no mercy.

Still, the war in Iraq is unjustified. By this I mean that the justifications offered for the war by the Bush administration have proven to be mistaken or empty. Most obviously, Hussein had no weapons of mass destruction. Nor is there any credible evidence that the 9/11 attackers were in any material way aided by Saddam Hussein. And while it’s true that Hussein was an evil tyrant, this fact is neither among the chief reasons first offered by the administration for going to war in Iraq, nor is it a sufficient reason for going to war.

The world is full of evil tyrants. But given the nature of government, it’s not the role of government A to sit in judgment of government B. The most legitimate role for any government is to protect its own people from violence. Whenever Uncle Sam unleashes his mighty military in foreign countries for the purpose of protecting foreign citizens from their own governments, he weakens his ability to protect Americans.

This weakening takes place on three fronts. One is that troops, munitions, and other resources are diverted away from the task of protecting Americans. Even a country as wealthy as the United States does not have unlimited resources to devote to military excursions.

The second (and I think more serious) reason that such interventions imperil Americans is that no one – often including the intended beneficiaries of our intervention – likes a powerful entity unilaterally throwing its weight around. The reasons for resenting even well-intentioned foreign interventions by powerful militaries are complex, likely involving a suspicion that the intervening military really has a hidden motive, or that despite its good intentions, a foreign power has too little understanding of the nuances of the situation to do anything beyond kill today’s bad guys.

Who among us trusts a powerful and heavily armed foreign behemoth – an alien giant capable of killing millions in short order – merely because the behemoth assures us that it means well? Who among us would not be inspired to do all that we can to terrorize that behemoth if we feared (accurately or not) that it really intends to harm our homeland and loved ones?

The third and related way in which even ‘benevolent’ foreign interventions put Americans in deeper peril is that our interventions are too likely to backfire. Even if everyone from the President down to the junior janitor at Lockheed Martin intends only to help foreigners escape the grips of their home-grown tyrants, political and cultural situations are always more complex than politicians imagine them to be. Why was Saddam Hussein ruling Iraq? Were Iraqis just incredibly unlucky that such a vile dictator somehow grabbed power and ruled ruthlessly for so long? Or was Hussein’s tyranny at least as much a consequence as a cause of a dysfunctional cultural, political, and economic situation? If so, then removing the dictator does not remove the complex underlying causes that fueled his tyranny.

Removing a dictator is child’s play for a military as awesome as that of the United States. So Hussein is now history. But because the underlying causes that put him in power to begin with are still in place in Iraq, that country likely will soon revert to another dictator – one different in name and different in style, but a brute nevertheless. He will oppress, kill, and impoverish. (The notion that a poweful military can uproot dysfunctional cultural, political, and economic root causes of tyranny strikes me as naive in the extreme.  Just as your local policeman can protect Ms. Jones from her husband's physical abuse but can't hope to counsel their marriage into a happy one, so, too can a military remove a tyrannt like Hussein but can't hope to cure that society of what really ails it.)

And Americans will be blamed for this tragedy. The fact that our President meant well will matter little to people tyrannized by the government that replaced the one we abolished. Americans will be hated more intensely, and suffer greater danger of terrorist attacks.

Of course, the Bush administration insists that removing Hussein from power was done not just to help ordinary Iraqis but also to help protect Americans – that this war is in America’s self-interest.

Perhaps. Those of us not privy to the intelligence that the President receives cannot say for certain that, in early 2003, it was unreasonable to suppose that Hussein posed a serious-enough threat to Americans to justify a military invasion. The fact that weapons of mass destruction were not found in Iraq doesn’t prove that the risk that was then perceived wasn’t high enough to justify the invasion.

But surely in matters of war we must hold leaders to a super-high standard of accuracy. Because military intelligence is secret (meaning that ordinary people have no knowledge of its details), it's simply too easy for politicians to lie about it or to misrepresent it -- to use it for political purposes. This reason alone counsels that we insist that those who exercise power in a free society be especially cautious before launching military invasions.

But when combined with the fact that even many people who distrust the government to deliver mail and regulate factory safety lose their reservations of that same government when it is off on military adventures, the case for heightened skepticism of military adventures grows even stronger.

Why should we believe George Bush that Saddam Hussein’s regime posed a significant threat to Americans? Because he says so? He also says that ‘price-gougers’ are a real villains who should be punished. Why should we believe him when he assures us that U.S. troops and guns will eventually bring freedom and prosperity to Iraq? Because he says so? He also said that steel tariffs will help the American economy.

What reason is there – beyond the mere will to trust leaders who send troops into harm’s way in foreign lands – to believe that these politicians are acting wisely and non-politically?

Without very hard evidence that American lives were at real risk of violent attack by Saddam Hussein, I cannot help but suspect that those in power in the U.S. have abused the vast trust that Americans give them in military matters. Libertarians properly don’t trust government to run our pension plans, to deliver health care, to educate our children, or to provide disaster relief. Why be so trusting of government to wage war?

Higgs on the Incentives of the Political Class

After reading my antitrust post, Bob Higgs offers this explanation for why politicians, bureaucrats, judges, juries, and prosecutors

have an incentive to do the WRONG thing with respect to economic efficiency and justice. For such "public" actors, even putting aside workaday personal corruption, all the incentives are to GIVE THE IMPRESSION of having done the right thing. Thus, they pander not only to active special-interest pressures but also to every species of public ignorance and viciousness. It serves their interest, say, to put Martha Stewart in prison--to name just one typically stupid and unjust action.

When the entrepreneur's bottom line is black, we know that he has moved less valuable resources into more valuable forms, places, and so forth, as judged by the entire market system of resource valuation; the public's IMPRESSION of what has been done has no bearing whatever on the realities of the situation; and the institution of bankruptcy insures that real values, not impressions, dominate the ultimate outcome.

In contrast, when "public" actors take an action, the only bottom line consists of rewards that accrue TO THEM (reelection, increased salaries, public acclaim, etc.), all of which bespeak only success in predation, the very opposite of what entrepreneurs do to benefit the public. To "succeed" as a public actor is nearly tantamount to acting in a shameful and (truly if not formally) criminal way.

How often does a john go into a bordello and pay the girl to read to him from the Bible? Men go into whorehouses for a reason. People engage in politics for a reason, too.

True dat.

Is Antitrust Worthwhile?

Does the evidence show that antitrust enforcement is worthwhile? Robert Crandall and Clifford Winston say no.

I would make an even stronger case than Crandall and Winston make against the necessity or merits of antitrust enforcement – namely, there’s every reason to suppose that private markets police better and more effectively than does government against market power that harms consumers.

Here are just some reasons to rely upon policing by private markets and to reject policing by political units:

1) Capital funds are extraordinarily fluid, demanding, and sophisticated. If genuine profit opportunities exist, private investors and entrepreneurs have powerful, personal incentives not only to detect these opportunities but to exploit them in optimal ways. For example, if supermarkets in Los Angeles currently face too little competition and, in response, do not serve consumers as well as possible, an opportunity for profit exists for entrepreneurs and investors who notice it. They open more supermarkets in the area and eliminate the undue market power. But if it only appears that supermarkets in L.A. are exercising undue market power – as it might if textbook models, economic experts, or consumer advocates are the guides – then private entrepreneurs and investors are more likely to detect the truth of the matter than are bureaucrats and judges. In this case, the lack of action by market participants is the right (non)move, while antitrust intervention is the wrong move.

2) Not only do rivals and potential rivals have incentives to uncover and challenge existing failures to serve consumers optimally, firms vertically related to each other often have incentives to keep each other competitive. For example, suppose that Barnes & Noble wants to bankrupt Borders and Amazon by pricing best-selling books at give away prices – say, $1 each, a retail price well below the price that B&N pays to publishers. This strategy is destined to fail for many reasons. But suppose that, say, executives at Doubleday, a large publishing house, believe that chances are reasonably good not only that B&N’s strategy will succeed but that, if this strategy succeeds, book retailing will be monopolized by B&N.

Are these executives disinterested? No. They don’t relish the idea of selling in the future to a monopsonist. Are they helpless? No. They can charge B&N a higher price for Doubleday’s books than the prices charged to B&N’s rivals, thereby raising B&N's costs of pursuing monopoly power. And if it weren’t for antitrust regulations (!), Doubleday could (1) cooperate with Houghton Mifflin, Scribner’s, Norton, and other publishers to raise B&N’s costs achieving monopoly power, and (2) sell its books to B&N only on the condition that B&N not charge retail prices for these books below a price specified in the contract.

On these possibilities, see these papers, here and here, that I wrote in the mid-1990s with Penn State’s Andy Kleit.

3) If the market fails to detect undue monopoly power and, hence, fails to send in entrepreneurs and capital to intensify competition, this failure is always subject to change; it's only temporary. It may well fail today, and again tomorrow – but as soon as an entrepreneur notices the possibility, the failure ends. Because detecting genuine, correctable monopoly power in reality is quite difficult, we can concede that markets will always ‘fail,’ at least for a time, to detect and correct correctable monopoly power.

But so, too, will politicians, bureaucrats, judges, and juries fail. Indeed, precisely because politicians, bureaucrats, and court personnel are not specialized in serving consumers in markets, these people are less likely than are private market participants – entrepreneurs and investors – to properly assess existing market situations and understand just what steps are best taken in light of these situations to improve consumer welfare. Also, private market participants, unlike politicians and bureaucrats, aren't easily swayed by special-interest groups.