What are antitrust laws for, when competition is normal with businesses?
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So, capitalism is not a stable economic system. In fact, no economic systems are stable. Capitalism’s stability requires external intervention because we like to think of competition within markets as an inherent property of capitalism, it’s not.
Capitalism’s inherent property is that capital assets, things like factories are privately owned and run (vs the govt owning/operating it), labor is secured through wages (cash), and any gains from those capital assets are kept by the private owners. And the way that capital is allocated is through prices – basically, consumers decide what goods and services we want and spend accordingly, and that’s what determines what capital assets are good investments, and also where jobs go.
Competition only exists in capitalism as a mechanism for that pricing function. But where most capitalist systems desire competition within a market, it doesn’t require that. A market can form a monopoly – say there’s only one supplier of apples. And that monopoly can set prices at whatever level they want, because the are no competing apple sellers. You still have *some* competition to set prices because consumers could buy pears or oranges instead, so there’s some constraint on prices, but only because consumers are willing to go without certain kinds of goods.
This is seen as undesirable in a free society. So in Liberal countries (Liberal being the political philosophy where capitalism and democracy serve as foundations, not the conventional use of ‘liberal’ as used in the US) consumers ability to have broad access to goods and services is highly valued. As such, having a single supplier of a good is undesirable, even though that’s not incompatible with capitalism. As such these countries tend to have antitrust laws in order to break up markets to encourage competition. This has the additional benefit of reducing market power because under Liberal philosophy, overly powerful corporate entities become a threat to democracy, so keeping them from being dominant is also a stabilizing effort.
So, you suggest that competition is normal for businesses, but it’s not. Just the opposite. The normal state is to take any market advantage you get and use that to eliminate competition – buy competitors, force them out of regional markets, dump products below cost to make them unable to make money, etc. Without these regulations, all markets would eventually consolidate around a single player. And that was the state of things that caused the US to introduce antitrust laws.
In some circumstances, there are barriers to entry. For example, where I live in NY, there is only one utility company (PSE&G). When you talk about the initial investment (poles and probably a million miles of cabling, substations, etc., as well as people to set it all up), it’s basically impossible for new competition to enter the market.
And, WHAT A SURPRISE, we have the most expensive residential electricity in the country. Antitrust laws attempt to stop things like this.
For the most part antitrust laws are government solution to a government created problem, and as such rarely improve anything. The fact is that collusion rarely lasts because one of the companies eventually figures out that it’s more profitable to undercut the other. Or other entrepreneurs discover a market that is artificially overpriced and do the same thing.
The real motivation for the act was not to break trusts, as the name implies, but to punish a political rival of Senator Sherman for blocking his bid for the presidency. President Benjamin Harrison confirmed as much after the passage of the bill, stating, “John Sherman has fixed General Alger” (the political rival in question).
Like almost every government bill it is bestowed with a name that evokes a certain picture with which no rational person could disagree, but in reality does little, if anything to live up that name.
As others have noted, companies can team up instead of competing, thus screwing over consumers.
But even if there is no deliberate collusion, one company becoming a monopoly also screws over consumers. It makes it very difficult for viable competitors to emerge. Good antitrust laws and enforcement will stop that as well.
Competition between businesses is inherent to capitalism. However, when one company starts to eat up all the others and customers can only buy from that one company (something called a “monopoly”), that decreases competition and makes it harder for the rest of the businesses in that sector.
Antitrust laws help restrain and break up that big company, so competition can continue.
Because strategy beats competition.
Suppose you and me are both selling widgets. If we are in competition, we can both make a profit selling widgets for $100; so we end up selling at that price. However, if instead we agree to sell widgets for $150, we both end up making a lot more money.
And we see that in practice. In the US, there have been massive cases of multiple companies making secret agreements to raise the prices of things they are selling or lowering the prices of things they are buying. It’s happened in railroads, in dealing with labor (agreeing not to pay workers more than a certain amount), in telecom (phone services, internet, cell phone service), in food (buying food from farmers; selling food to consumers), and in a lot of other cases.
Acting against the trust might get you more business in the short term – but in the long term, you’re much better off cooperating with the trust. And left to their own devices, most industries would engage in this. Because individuals usually can’t cooperate in the same organized way; governments take steps to even the playing field and limit how much industries can cooperate internally.
Yes, competition is so good and normal for business that there are laws in order to protect it. Antitrust regulation aim to combat not competition but anticompetitive practices.
Some examples are companies colluding in order to keep prices high, which are, simply put, not competing.
Other examples may be dumping tactics, where a bigger company with deep pockets start to offer super cheap prices in order drive competitors into bankruptcy. Thus, the antitrust laws are there to ensure that all the players are actually competing and trying to offer better services, products and prices.
So one of the problems with monopolies I don’t see a lot of mention of yet is that they end up spilling over to other areas, and that tends to be when anti-trust legislation really gets used.
For example, Microsoft had (and arguably still has) an effective monopoly on desktop operating systems (other options exist, but had small market shares). Nobody really batted an eye at that, but then when the internet started becoming popular and web browser software became important, Microsoft created Internet Explorer as a web browser and added it into the operating system. That’s when regulators took notice, as they were using their monopoly power over operating systems and using it to try and establish a monopoly over web browsing software, creating unfair competition in that space. (they probably could have/should have had action taken against office software as well, with things like Lotus and WordPerfect going away once Microsoft started pushing Word and Excel)
You have a lemonade stand on your street and I have one on mine.
We could compete, which would force us to come up with better and cheaper recipes over time to try to be better than the other.
But that’s too much effort. We could team up, agree on the same high price that would benefit both of us.
What if a third guy wants to start a stand on his street as well? We could use the money that we gained from our artificially high prices to pay the mayor to come up with some law or regulation that we can easily comply with, but we know he can’t.
I was in IT in the late 80s/early 90s. Microsoft was a monster.
Whenever a smaller company had a successful product, Microsoft would give them two options. Sell to Microsoft at whatever price they decided to pay or Microsoft would come up with a similar product and bankrupt them.
I saw lots of good companies get steamrolled. Definitely stifled competition and innovation.
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