Monopolies, Human Needs, and Hobson’s Choice: A New Approach to Antitrust Regulation

“There is a widespread conviction in the minds of the American people that the great corporations known as trusts are in certain of their features and tendencies hurtful to the general welfare. This springs from no spirit of envy or uncharitableness, nor lack of pride in the great industrial achievements that have placed this country at the head of the nations struggling for commercial supremacy… It is based upon sincere conviction that combination and concentration should be, not prohibited, but supervised and within reasonable limits controlled; and in my judgment this conviction is right.” – President Theodore Roosevelt, State of the Union 1901

In 1898, President William McKinley appointed the Industrial Commission to investigate industrial concentration and railroad pricing and make policy recommendations to the President and Congress. After McKinley’s assassination in 1901, Theodore Roosevelt seized upon the Commission’s recommendations to impose stricter regulations on trusts via the Sherman Antitrust Act of 1890, which banned anticompetitive practices by businesses. John D. Rockefeller pioneered the use of trusts, arrangements where one person holds the title of property for the benefit of another person, to further consolidate his control of Standard Oil, then the largest corporation in the world. Due to Rockefeller’s successful campaign to dominate the US oil industry, trusts have become more or less synonymous with monopolies.

The excerpt in the introduction is from Roosevelt’s first State of the Union address in 1901, in which he expresses the national displeasure with the rise of trusts. Standard economics tells us that reductions in competition between firms lead to less choice for consumers and, generally, less utility. But when does this decrease in welfare merit government intervention? Even while advocating an increase in the regulation of monopolies, Roosevelt was deferential in his rhetoric toward private business (“nor lack of pride in the great industrial achievements”). This progressive viewpoint, which at once lauds business for increasing human welfare and criticizes it for its anticompetitive tendencies, demands a balanced approach to antitrust regulation.

Since the Federal Trade Commission (FTC) was formed in 1914 under President Woodrow Wilson, it has been the foremost government agency responsible for preventing and eliminating anticompetitive business practices, such as price fixing (collusion among businesses to raise prices), limit pricing (threatening to lower prices significantly if new firms enter a market), and predatory pricing (selling goods at a loss to force competitors out of a market). Aside from preventing anticompetitive practices, the FTC is tasked with determining the point at which there is too little competition in a given market. This task is a difficult one because defining a market is highly subjective. For example, what market is Sirius XM Radio Inc. in? If you say it is in the satellite radio market, then Sirius is clearly a monopoly, because no other company in the US offers satellite radio service. But if you expand the definition of the market to include AM/FM radio, then there is competition aplenty (it’s hard to compete with free). No need to stop there, though. The market could be further expanded to include all music delivery services, like iTunes and CD’s. But isn’t satellite radio just another type of entertainment? If you say that Sirius is a competitor in the Entertainment & Media market, then we are talking about a $1.1 trillion dollar industry. As you can see, changing the market from satellite radio to Entertainment & Media is equivalent to teleporting a fish from a small pond to the Pacific Ocean.

The subjective nature of defining markets is one of the contributing factors to why antitrust cases take millions of dollars and many years to prosecute. In lieu of never ending arguments between high-priced lawyers about what exactly a given market is, I propose a new, more limited rationale for pursuing antitrust cases. The FTC should dedicate its focus to the utilities industry. Companies in that sector of the economy are satisfying the most basic of human needs, by providing services such as water, sanitation, and electricity. In all other markets, it is impossible for a monopoly to exist, in the sense that there is only one available choice. There is always Hobson’s choice, the refusal to buy a good or service. You can think of this as the “take it or leave it” option. But when it comes to fundamental human needs, you cannot “leave it.” You must consume it at any price (though the quantity demanded may decrease to subsistence levels).

Now, these types of services tend toward monopoly because of the enormous capital outlays required to build the infrastructure to deliver them. Water and sewage companies must lay pipelines to every house they service and power companies must build electrical grids that cover entire cities. Once this infrastructure is in place, it would be highly inefficient, and likely unprofitable, for another company to build its own infrastructure. It is important to note that normally food is included in a list of human needs, but I think it’s self evident that the food industry has adequate competition and lacks this tendency toward monopoly because it is transported over international waters and public roads.

Since many utilities are already publicly owned or highly regulated, this argument is an implicit endorsement of fewer antitrust lawsuits. Though monopolies generally harm consumers in the short-run by limiting consumer choice, the long run competitive environment of a market is too uncertain to warrant trust busting, excluding the markets that address human needs, of course. A brief review of the most notable antitrust lawsuit of the last twenty years, United States v. Microsoft, bears this out. The FTC launched an inquiry in 1991 and the case was finally settled upon appeal in 2001. In the settlement Microsoft agreed to allow non-Microsoft software, like the internet browser Netscape Navigator, to run on Windows, but it was not forced to break up into separate entities. After 10 years and millions of dollars, there was no trust busting to be had. Looking back on this case, after the rise of Apple, smartphones, and tablet computers, there is serious doubt that Microsoft would have been able to maintain its chokehold on the personal computing market absent the DOJ lawsuit. No one could have predicted these market trends in 1991, but that fact is a reason not to break up companies, rather than one for it.

If as a society we want more competition and fewer monopolies, we need to increase our scrutiny of the legal monopolies (also  known as de jure monopolies) currently operating in the United States. Most legal monopolies spring from patents, or exclusive rights granted to inventors to produce and sell their inventions for a limited period of time. Richard Posner ably lays out the argument against granting too many patents for long periods of time in his Atlantic Monthly piece. Lastly, the newly-minted Tabarrok Curve describes the relationship between patent strength and the level of innovation in an economy. The curve is based more on intuition than concrete theory, but it serves as a good jumping off point for discussing the optimal level of patent protection for society. Like Tabarrok, I think we are clearly to the right of the curve’s peak and we should hope the next time congress changes the patent laws, it will favor public welfare over corporate welfare. With tepid growth and a stubbornly high unemployment rate, that day cannot come soon enough.

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