Friday, January 09, 2004

Antitrust: Government Jobs Program

Richard Rahn of the Discovery Institute has a fabulous op-ed in today’s Washington Times discussing the true cause of most antitrust cases:
Both the Justice Department and the Federal Communications Commission employ many lawyers whose job is to prevent monopolies. But what happens when there are no monopolies to prevent? Being able bureaucrats, these antitrust lawyers know that, to keep their jobs, they need to find monopolies, whether real or not. The way they do this is by defining a market more and more narrowly until they find a monopoly.
I don’t have an exact figure on the number of antitrust lawyers at DOJ and FCC. (I know the FTC employs about 300 in its antitrust unit.) The DOJ Antitrust Division’s estimated 2004 budget is $141,898,000. Most of that funding—as well of that of the FTC—comes not from tax dollars, but from the filing fees companies must pay when they enter into mergers over a certain value.

What’s interesting is that while most premerger filings don’t result in antitrust action, the DOJ and FTC have increasingly targeted mergers that are not subject to prior review. The FTC has openly declared war on completed mergers in the technology industry, in one recent case undoing a merger three years after the fact.

But back to Rahn’s point. It shouldn’t be difficult for people to grasp the concept of bureaucratic entrenchment: Government antitrust lawyers act not to protect the public, but to protect their own jobs. Unlike the businesses subject to antitrust, government agencies are immune from competitive efficiencies. This means that in slow times, staffing at the DOJ, FTC, and FCC are not reduced to accommodate falling demand. Put another way, when traditional “product lines” dry up—i.e. Microsoft—the agencies develop new growth industries. They discover previously unknown antitrust violations in other industries, and prosecute accordingly.

Rahn notes, “There are too many in government who refuse to distinguish between product differentiation that expands consumer choice, which is desirable, and real monopolies.” Perhaps the best recent example of this is the FTC’s action to stop the Nestle-Dreyer’s merger, which the antitrust lawyers argued would reduce competition for “superpremium ice cream”. The FTC’s entire case rested on manipulating market definition to absurd levels. My colleague Donald Luskin lampooned the FTC’s thought process on the Nestle case back in 2003:
Imagine, if you will, an incredibly complex diagram covering a wall in the office of a Ph. D. at the FTC. The diagram is titled “The Market for Food,” and the hierarchical scheme branches from there to include every possible food group. Now erase everything that isn't under “The Market for Deserts,” and then erase everything that isn't below “The Market for Frozen Deserts,” and then erase everything that isn't beneath “The Market for Ice Cream.” Not much of the diagram remains (we're already down to something the size of a postage stamp). But now erase “The Market for Cheap-o Ice Cream,” “The Market for Regular Ice Cream,” and “The Market for Premium Ice Cream.” What you have left is about the size of Abraham Lincoln's nostril on a penny. This is “The Market for Superpremium Ice Cream.”
The greatest threat posed to producers is that when they develop a new product, the government will define that product as a separate market, even when the item competes in a larger existing market. This is how the antitrust regulators expand their power and justify their budgets. Keep that in mind next time you hear that some merger is challenged for “reducing consumer choice.”

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