Category Archives: Anti-trust

Do no harm?

A recent conversation with a friend highlighted the fact that even among conservatives there is a pervasive belief that “unfettered” markets require some level of “control” by the government. The poster child for this viewpoint is Rockefeller’s Standard Oil which at its peak achieved 90% market share. The formation of such a “monopoly” (it wasn’t, a monopoly would be 100% market share – something only a government can achieve in the many areas it deems worthy of nationalization) is sufficient proof in their minds of both ill deeds and ill intent. Unfortunately the facts do not support a narrative of ill will. In 1865 when Rockefeller was just starting and had virtually no market share kerosene cost 58¢/gallon. By 1870 Standard Oil’s (SO) share was a mere 4% and yet they had driven the price down to 26¢. Only 10 years later SO’s market share had shot up to 90% and did prices skyrocket as well under this “monopoly”? No, prices declined to 9¢. And by 1890 still at 90% market share prices fell even further to 7¢.  So who exactly was harmed here? Certainly not the consumers of kerosene.

One could argue that the competitors were “harmed” but so what? SO achieved its market position by becoming more efficient so that it could profitably charge lower prices. It did not engage in violence or the threat of violence to achieve its goals, as the state/government is wont to do. Mere “harm” cannot be the nebulous standard by which we invoke the necessity of state intervention. If five people apply for a job then the four that did not get the job are arguably harmed, so, should the state step in and penalize the person who got the job by making him or her share it with the others? When two sports teams play each other is not the losing team “harmed”? Upset fans, potential decreased ticket sales, lower potential ad revenue – all these things constitute types of harm, yet no one is (yet) screaming for the state to step in. Most likely because all recognize the solution would be absurd – they would simply mandate all games end in a tie or that wins and losses must be equalized. We certainly can’t have an unequal “win” distribution, how unfair.

One type of specific harm that anti-trust proponents say must be banned is the practice of “predatory pricing”. This is the practice of a competitor temporarily lowering their price and losing money in order to drive out competitors that can’t afford to lose money as long (the economic equivalent of a game of “chicken”). Problem is, this has never actually happened. Sure there might be temporary “price wars” between competing retailers that go on for a few days, but neither side gets ahead and at the end of the day no company has ever actually been driven out of business this way. The reason for this is the following: either you have to buy up the whole world (impossible) or the act of driving competitors into bankruptcy creates replacements that can more readily compete on price. For example, if a competitor went into bankruptcy then someone else would buy up their assets at pennies on the dollar and reopen the business with a much lower operating overhead. Now they are in a much better position to compete with you. Not a useful outcome.

But lets say for the sake of argument somehow it all worked and you could drive out competitors this way. Where is the natural rights violation? What is essentially happening here is large competitor A is using their deep financial resources (savings) to compete with small competitor B in a way that B is incapable of because of their smaller size. Is this unfair? Well before you answer that consider that this goes on all day long in the business world. Larger companies can spend a lot more of their financial resources (savings) on: more sales personnel, larger R&D budget, improving efficiency through automation and so on. That is deemed perfectly fair, however using those exact same resources to facilitate deep pricing discount is not. Simply put, there is no reason to arbitrarily single out such a practice and threaten to throw people in cages if they engage in it. It is no more of an excuse for state intervention in the market than is a dislike of the font in a company’s logo.

As long as no aggression (fraud, violence, or the threat of violence) is occurring then any and all actions or businesses or products should be permitted. No one should live in fear that men with guns will throw them in cages because of someone’s subjective opinion of what constitutes fairness or harm. Opinions are fine, but opinions backed up by a threat of violence violate everyone’s natural right to liberty and the pursuit of happiness.

Not Neutrality

“Net neutrality” certainly sounds appealing, doesn’t it? Who could possibly be against “neutrality” given its ability to evoke an emotional tie to equality, fairness, impartiality and egalitarianism? Only someone who is sufficiently ethically consistent that they will aver the use of aggression in all situations, rather than merely when popular opinion provides a safe harbor for that stance. Neutrality is not neutral when imposed at the barrel of a gun. Proponents of net neutrality seek not neutrality, but rather protectionism. For example, applying the principle of net neutrality one could legitimately argue that the state should restrict the ability of some companies to spend more money on marketing or R&D than their competitors. If they were allowed the freedom to spend as desired this might promote a competitive disadvantage leading to a market no longer consisting of “neutral” players. Competition bad, neutrality good.

Net neutrality has been in the news this past week due to a not-so-secret-secret vote by the FCC concerning some proposed Internet traffic rules. Proponents of net neutrality want the FCC to reclassify the Internet as a Title II medium (telecommunication service) from its current Title I designation (information service). This would transform the Internet (in the US) for all practical purposes into a public utility. Now consider the reputation that public utilities have for innovation, choice, and service and the whole notion of net neutrality should make you shudder. Free or low cost phone service over the Internet? Well you can say goodbye to that if the FCC is ever allowed to micromanage the net. Be grateful Congress did not allow the FCC to regulate cable; had they done so we’d still be stuck with three channels and rabbit ears.

Net neutrality, like all appeals for regulation, is about fear i.e. fear of hypotheticals. It is a solution in search of a problem. Indeed anti-trust legislation is based upon a similar principal. It seeks to destroy that which has never existed (a market monopoly) before it can do that which it has never done (raise prices). If one proposes dragon slaying as a solution, chances are they will be motivated to uncover dragons where none exist. Net neutrality is likewise the latest in a long line of state sponsored dragon quests. Net neutrality proponents have an irrational fear that dragons (big companies) will take over the forest (dominate the Internet) and thereby incinerate the little guy. The problem with this of course is that these dragons don’t exist. The Internet has been very much non-neutral since day one and none of their fears have come to pass. Under this benign regulatory neglect we have witnessed not oligopolization but rather innovation, growth, competition and more, not less, access for the “little guy” (Twitter, YouTube, Facebook, etc). Their fears of the Internet turning into a virtual walled garden are not supported by 20 years of unregulated growth.

Companies like Netflix, Hulu or Apple pay big money to ensure the pipes carrying their content remain full. Why? Because we, the paying customers, demand it (anything to avoid the dreaded “buffering, buffering” message)! The network providers in turn use those big bucks to build out infrastructure to ensure content delivery occurs as promised. But if net neutrality proponents have their way, such premium payments would be disallowed, because everyone’s content must be treated “equally”. How again exactly does that help us, the customer?

If the public demands faster internet and prioritized content then the only means to achieve this is through the same process that has brought the internet to the state it is in today: an unregulated free market where individuals, not internet czars at the FCC, choose what services they want by voting with their dollars.

Think Different, Think Free

It is a peculiar characteristic of US anti-trust law (Sherman Anti-Trust Act) that competition itself can be characterized as “anti-competitive”. The recent e-book price-fixing case against Apple (in which Apple was ruled against on July 10) is a prime example. The case is rather “weedy” so I will provide a pared down synopsis, however for those interested in the details please see this article for an excellent summary. Prior to Apple’s entry into the e-book market in 2010, Amazon was in a monopsony position in the wholesale e-book market and a monopoly position in the retail e-book market. No, I did not misspell “monopoly” – monopsony is a situation where a market has just one buyer (as opposed to just one seller with monopolies). In this case Amazon was the only (over 90% market share) buyer of e-books from the “Big 6” publishing houses. As such it was in a position where it could dictate the terms of sale to the publishers. Amazon sold every e-book for $9.99 and often lost money on these sales. The publishing houses were not happy with this situation as they felt Amazon’s low prices tended to devalue hardcopy books in the consumer’s mind and thereby potentially weaken their sales position further in retail book outlets (as people balked at paying high prices for print copies when e-books could be had for so much less).

In comes Apple to save the day. It’s a win-win situation for Apple and the publishing houses. Apple wants to chip away at Amazon’s dominance in the e-book market and the publishers want to have an alternate buyer for their e-book wares. So the upshot of all this? E-book prices went up, Amazon made more money (due to not losing money anymore), the publishers made less money (due to decreased sales resulting from higher prices) and Apple got a foothold into the e-book market. Unfortunately the judge ruled against Apple, citing that “depriv[ing] a monopolist of some of its market power is [not] pro-competitive” merely because some e-book prices rose after the fact. In other words, for competition to be permissible in this country it must fall into a narrow and arbitrarily subjective standard of behavior. If you enter a market and cause prices to rise too much then you are a monopolist. If you enter a market and causes prices to fall too much then you are a ‘predator’. And finally, if you enter a market and charge the same price as everyone else, then you are a cartelist.

The irony is that government should be the one prosecuting supposed anti-competitive behavior when it is government itself that is the sole source of monopolies and anti-competitive behavior. For example, this country still engages in New Deal era agricultural price controls intended to prop up prices by limiting production. Tariffs, subsidies, grants, regulations, certificates of need, insurance commissions, utility boards, public schools – all are either outright government granted monopolies or are examples of policies that have the direct effect of limiting market entrance or production and thus raising prices and stifling competition.

All “anti-trust” legislation should be abolished. Such legislation is akin to anti-witch legislation; a pointless attempt to prevent something that cannot nor did exist prior to enactment in 1890, myths of “Robber Baron” monopolies notwithstanding. Trusts, cartels, and monopolies – such things cannot exist in a free market for any appreciable length of time as long as competition is not short-circuited by arbitrary government edicts. To the extent a monopoly could exist in a free market it would be a testament to the degree to which such an entity is satisfying the preferences and demands of its consumers.

The government has spent millions of dollars prosecuting Apple over its behavior in a market for a luxury good that did not even exist 5 years ago. Perhaps it never occurred to anyone that if e-book prices were too high then people would simply stop buying them? Ultimately it is the consumer, exercising control over the purse, that dictates what will and will not succeed in the market. Government “anti-trust” witch hunts do nothing but harm the consumer by scaring off potential competitors who fear censure for not competing in precisely the manner prescribed by our wise overlords.