Antitrust ostensibly aims to keep markets competitive. Such regulation is justified, it is claimed, because markets too frequently become monopolized in the absence of government intervention to ensure competition. Using both civil and criminal sanctions, antitrust statutes seek to prevent the three classes of behavior, all thought to be anticompetitive and, thus, harmful to consumers: collusion among rivals, mergers that threaten to create excessive monopoly power, and any number of exclusionary practices—such as predatory pricing—that allegedly hamper rivals’ ability to compete.

The longstanding and still‐​popular explanation for the enactment of antitrust legislation in the United States holds that, starting in the 19th century, Congress sought to protect consumers from the increasing monopolization of the American economy. Judge Richard Posner’s summary statement of the origins of the world’s first national antitrust statute makes the point: “The basic federal antitrust law, the Sherman Act, was passed in 1890 against a background of rampant cartelization and monopolization of the American economy.”

Economic history contradicts this popular understanding. The Gilded Age was not one of increasing monopolization. It was, much like the 1990s, an era of exceptionally vigorous competition and rapid growth.

In a ground‐​breaking study, Thomas DiLorenzo compiled price and output data on industries singled out, during congressional debates over the Sherman Act, as monopolized. He found that between 1880 and 1890, outputs in these industries increased an average of seven times faster than the increase in outputs for the booming American economy as a whole. Real prices in these industries also generally fell significantly during this same decade. Increased outputs and lower prices are not consequences of monopoly. For the record, it also should be noted that real, nonfarm wages were 34% higher in 1890 than in 1880.

In part prompted by DiLorenzo’s findings, recent research into the history of antitrust legislation reveals that these statutes were supported by producers who lost market shares to newer, more entrepreneurial, and more efficient firms—such as Swift & Co. and Standard Oil. These newer firms were indeed generally bigger than their rivals—a fact explained by their success in using railroads, telegraphy, and innovative managerial and marketing techniques to serve wider geographic markets. Serving wider markets allowed these firms to capture economies of scale (lower per‐​unit costs made possible by spreading fixed costs over larger outputs) and economies of scope (lower costs of developing and producing new products).

Although surprising to most modern economists unfamiliar with economic history, the fact that the American economy in the late 19th century was highly competitive was widely understood by economists a century ago. Representative of the views of late‐​19th‐​century American economists were those of Richard T. Ely, founder of the American Economic Association (and no fan of laissezfaire). Writing in 1900, Ely recognized that, “when largescale production without any special favors conquers a position for itself in any portion of the industrial field, it is because it carries with it advantages for society.” Ely went on to accuse antitrust legislation of being “faulty and indeed deplorable” because it undermined the property rights necessary to direct enterprise into productive channels.

Although more research must be done to uncover the full panoply of political forces at work behind antitrust legislation, accumulating evidence supports DiLorenzo’s thesis that producers whose customer bases were sharply reduced by new and dynamic rivals sought antitrust legislation to thwart this competition. That is, antitrust is

anticompetitive. The collection of essays assembled by Fred S. McChesney and William F. Shughart II supports this claim. By pointing to the increasing average size of firms in many industries (“bigger is badder”) and by inciting fear over the future consequences of today’s low prices (“predatorily” low prices allegedly enable a price cutter to rid itself of rivals), firms seeking protection from competition fashioned sufficient public support for antitrust regulation.

The other major antitrust statutes—the Clayton Act of 1914, the Federal Trade Commission Act of 1914, and the Robinson–Patman Act of 1936—also were enacted without any real evidence of monopolization. The passage of antitrust legislation is simply not the outcome of legislators working selflessly to restore competition to an economy shackled by monopolists.

Of course, questionable origins alone do not prove that antitrust regulation is undesirable. Perhaps most contemporary economists and nearly all policymakers are right to assert that markets do not, on their own, remain competitive. Perhaps competitive markets can be adequately assured over the long run only by active antitrust oversight by government. Perhaps. But there is surprisingly little economic theory to suggest that competition is unsustainable. Save for work done by scholars in the Austrian tradition, economists have no theory of competition. As Harold Demsetz explains, modern economists’ theories of competition are really just theories of price and output determination under certain assumed conditions conventionally labeled competitive or monopolized. Nothing in these models explains how or why markets become competitive or monopolized.

One of the few economists to outline a genuine theory of market competition is Joseph Schumpeter. His explanation of the entrepreneur‐​driven dynamic market process is as valid today as it was when it was first written:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. [The capitalist process] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

Entrepreneurial creativity, combined with the freedom of consumers to spend their wealth as they choose, exposes all firms to the unremitting threat that their customers will tomorrow switch their patronage elsewhere. This creativity and freedom keep markets competitive. Evidence supports Schumpeter’s thesis that free markets robustly protect consumers from monopoly power. For example, size does not shield firms from competition. Only 11 of America’s 20 largest firms (measured by market capitalization) in 1987 were among America’s 20 largest firms in 1997, and only 8 of America’s largest firms in 1967 were in this group in 1997. Taking a broader perspective yields the same conclusion that markets are inherently dynamic—and becoming even more so. According to W. Michael Cox and Richard Alm (1999):

Of today’s 100 largest public companies, only five ranked among the top 100 in 1917. Half of the firms in the top 100 are newcomers over just the past two decades. Although flux is a constant for the economy, the process seems to be taking place faster. In the 60 years after 1917, it took an average of 30 years to replace half of the companies in the top 100. Between 1977 and 1998, it took an average of 12 years to replace half of the companies, a near tripling in the rate of replacement.

Nor are firms protected from competition by large market share. For example, Sears, Roebuck was the nation’s largest retailer in 1987. Less than 10 years later, that distinction belonged to Wal‐​Mart Stores. Likewise, Digital Equipment was the tenth‐​largest firm in America in 1987, enjoying the dominant market share in minicomputers. But the advent of workstations (principally by Sun Microsystems) and the increasing computing power of personal computers all but destroyed this market—and, along with it, Digital’s preeminent market position.

Of course, the precise ways that entrepreneurial creativity unfolds in light of consumer choices cannot be prophesied by antitrust officials. Even the best‐​intentioned administrators and judges cannot foresee products, industries, and organizational and contractual forms yet to be created and tested in the market. Unequipped with this knowledge—and unavoidably judging innovations by standards set by existing and familiar practices—antitrust interference in markets today will too likely derail emerging competition and distort the competitive process.

The best that regulators can do is to try to improve the efficiency of existing industrial structures. A classic study of actual antitrust cases by William Long, Richard Schramm, and Robert Tollison found, however, that regulators at the Department of Justice are not guided by a concern for economic efficiency or competition when pursuing antitrust actions. A follow‐​up study by John Siegfried reached the same conclusion. Similarly, empirical research on predatory‐​pricing cases consistently reveals that the vast majority of such cases are economically unjustified. Indeed, even antitrust actions against firms accused of colluding to raise prices appear to be either pointless or often harmful to consumer welfare.

If economic and consumer welfare considerations do not motivate actual antitrust investigations, it is plausible to suspect that political considerations are ultimately the driving force behind antitrust’s application. This conclusion is borne out in a study by Faith, Leavens, and Tollison, in which politics, not economics, was found to drive the decisions of antitrust authorities. Their data show that the principal determinant of Federal Trade Commission (FTC) aggressiveness is determined by the geographic location of specific firms. Firms located in districts represented by members of Congress who serve on the FTC oversight committees or on committees that control the FTC’s budget are more likely to receive favorable FTC treatment than are firms whose political representatives are not on such committees.

Similarly, Malcolm Coate, Richard Higgins, and Fred McChesney found that much FTC litigation is driven by staff attorneys’ self‐​interest in filling their resumes with litigation experience regardless of the economic merits of the litigation. (Such experience better ensures that these attorneys will successfully pursue lucrative careers in private practice.) These researchers also found that an FTC decision on whether to challenge any particular merger is strongly influenced by that merger’s likelihood of driving resources and votes from the districts of powerful politicians.

Summarizing these and other findings on antitrust’s remarkable failure (in the United States and abroad) to be guided by proconsumer considerations, economist Louis De Alessi wrote that, “regardless of their ideological orientation, few economists today would defend the historical record of antitrust.”

It is apparent that antitrust owes its survival to the same forces that created it—namely, interest groups using antitrust to further their own narrow agendas at the expense of the public welfare. The proven capacity of the market to protect consumers from monopolistic exploitation, combined with the proven proclivity of antitrust regulation to be used against consumers, argues strongly in favor of a repeal of all antitrust stances.

Further Readings

Asch, Peter, and Joseph J. Seneca. “Is Collusion Profitable?” Review of Economics and Statistics 58 (February 1976): 1–12.

Bittlingmayer, George. “Decreasing Average Cost and Competition: A New Look at the Addyston Pipe Case.” Journal of Law and Economics 25 (October 1982): 201–230.

Coate, Malcolm B., Richard S. Higgins, and Fred S. McChesney. “Bureaucracy and Politics in FTC Merger Challenges.” Journal of Law and Economics 33 (October 1990): 463–482.

Cox, W. Michael, and Richard Alm. Myths of Rich & Poor. New York: Basic Books, 1999.

De Alessi, Louis. “The Public Choice Model of Antitrust Enforcement.” The Causes and Consequences of Antitrust. Fred

S. McChesney and William F. Shughart II, eds. Chicago: University of Chicago Press, 1995. 189–200.

Demsetz, Harold. Efficiency, Competition, and Policy. Cambridge, MA: Blackwell, 1989.

DiLorenzo, Thomas J. “The Origins of Antitrust: An Interest‐​Group Perspective.” International Review of Law and Economics 5 (January 1985): 73–90.

Ely, Richard T. Monopolies and Trusts. New York: Grosset & Dunlap, 1900.

Faith, Roger L., Donald R. Leavens, and Robert D. Tollison. “Antitrust Pork Barrel.” Journal of Law and Economics 25 (October 1982): 329–342.

Long, William F., Richard Schramm, and Robert D. Tollison. “The Economic Determinants of Antitrust Activity.” Journal of Law and Economics 16 (October 1973): 351–364.

McChesney, Fred S., and William F. Shughart II. The Causes and Consequences of Antitrust. Chicago: University of Chicago Press, 1995.

Posner, Richard A. Antitrust Law. Chicago: University of Chicago Press, 1976.

Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. New York: Harper, 1942.

Siegfried, John J. “The Determinants of Antitrust Activity.” Journal of Law and Economics 18 (October 1975): 559–574.

Donald J. Boudreaux
Originally published
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