Reynolds on the Return of Antitrust

By David Henderson.

"Cato Institute Senior Fellow Alan Reynolds is in true form in his article  “The Return of Antitrust?” in Regulation, Spring 2018. [Two disclosures: (1) In the late 1970s, Alan, more than anyone else, encouraged me to write for general-interest publications and not just for academic journals, and I still feel thankful; (2) I’m one of the regular contributors to Regulation, one of my favorite magazines.]

Some highlights follow:

Antitrust and Consumer Welfare

In the renowned 2004 study “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence,” Brookings Institution scholars Robert Crandall and Clifford Winston found “no evidence that antitrust policy in the areas of monopolization, collusion, and mergers has provided much benefit to consumers and, in some instances, we find evidence that it may have lowered consumer welfare.” But consumer welfare is not what drives populist/progressive Better Deal enthusiasts. Since the Chicago School shifted the emphasis of antitrust to consumer welfare, complains Pearlstein, “courts and regulators narrowed their analysis to ask whether it would hurt consumers by raising prices.” Pearlstein would like courts and regulators to pay more attention to “leveling the playing field.” [Lina] Kahn likewise argues that “undue focus on consumer welfare is misguided. It betrays legislative history, which reveals that Congress passed antitrust laws to promote a host of political economic ends.”

Recent Mergers?

Kahn claimed the Chicago School’s “consumer welfare frame has led to higher prices and few efficiencies,” citing a collection of studies John Kwoka discusses in his 2014 book Mergers, Merger Control, and Remedies. [Brookings Institution political scientist William] Galston and [his assistant Clara] Hendrickson praise the book as “a comprehensive study of recent mergers.” In reality, 10 of the book’s 42 “recent” mergers happened between 1976 and 1987, and 21 others happened in the 1990s. Those old studies were mainly focused on very few industries, including airline and railroad mergers enforced by the Department of Transportation and the Surface Transportation Board, rather than the Justice Department or Federal Trade Commission. Senator Schumer as well as Galston and Hendrikson allude to “recent” airline fares as a reason for tougher antitrust, even though five of the seven airline mergers in Kwoka’s book occurred in 1986–1987, and the other two in 1994.

New Competition that Pearlstein ignores

Pearlstein notes that Kwoka’s list of higher prices blamed on mergers includes “hotels, car rentals, cable television, and eyeglasses.” The goods on that list look as old-fashioned as Kwoka’s definition of “professional journal publishing” as involving print only, ignoring electronic publications. Hotels now face stiff competition from Airbnb; rentals cars from Uber; cable companies face “cord-cutting” alternatives such as broadcast HDTV, satellite providers DirecTV and Dish, and internet providers such as Roku, Netflix, Amazon, Hulu, and more. The claim that eyeglass maker Luxottica controls 80% of U.S. optician chain sales ignores the sales made by thousands of independent optometry practices, huge retailers Walmart and Costco, and online retailers Zenni Optical and Warby Parker. It is difficult to imagine how Pearlstein or Kwoka could seriously suggest consumers face monopoly pricing from such industry leaders as Southwest Airlines, Marriott hotels, Enterprise Rent-A-Car, or Costco Optical.

Jason Furman’s Mistake

A widely quoted 2016 Issue Brief from President Obama’s Council of Economic Advisers (CEA) includes a graph from then-chairman Jason Furman showing large recent gains in “returns on invested capital” among public non financial firms as calculated by the consulting firm McKinsey & Co. The Furman CEA claimed that this demonstrates a surge in “rents,” which was wrongly defined as returns “in excess of historical standards.” At McKinsey, however, Mikel Dodd and Werner Rehm explained that returns appear to be growing larger by their measure because invested capital as traditionally measured (plant and equipment) became smaller as the economy shifted from capital-intensive manufacturing to services and software.

Are There Only 13 Industries?

Pearlstein wrote, “There is little debate that this cramped [Chicago School] view of antitrust law has resulted in an economy where two-thirds of all industries are more concentrated than they were 20 years ago, according to a study by President Barack Obama’s Council of Economic Advisers, and many are dominated by three or four firms.”
That is not what the 2016 CEA Brief said. What it said was the largest 50 firms (not “three or four”) in 10 out of 13 “industries” (really sectors) had a larger share of sales in 2012 than in 1997. Pearlstein’s “two-thirds of all” means 10 out of 13, but the United States has more than 13 industries. In pointlessly broad sectors such as retailing, real estate, and finance, the top 50 firms had a slightly larger share of sales in 2012 than in 1997. The 50 largest in “retailing” accounted for 36.9% of sales in 2012, said the CEA, but that combines McDonald’s, Kroeger, Home Depot, and AT&T Wireless as if they were colluding competitors.

The whole piece is well worth reading."