Monday, July 09, 2007

To Find Monopoly, Count the Number of Firms

Preach, Don. Preach it.

As an old FTC hand myself, I find most antitrust "policy" remarkable.

The Sherman Act is just fine, if interpreted narrowly. But interpreting the Sherman Act narrowly requires interpreting the definition of "industry" broadly.

When I was at the FTC, my old friend Mike Smirlock proposed to me a definition of monopoly, or monopolize, as used in the Sherman Act.

1. ASSUME THE MERGER TAKES PLACE.
2. Define the industry. Include close substitutes in the defintion of "industry."
3. Now, rank the firms in the industry (post-merger) from largest to smallest.
4. Starting with the largest, count the number of firms in the industry.
5. If the number is "1", the industry is a monopoly, and the merger should not be allowed.
6. If the number is "more than 1," the industry is NOT a monopoly, and the merger SHOULD be allowed.

The good Boudreaux makes a persuasive argument for why THIS merger should go through. ATSRTWT, please.

But I think the Smirlock test is the one we should use. The considerations raised by Don B only arise because we are doing something else.

For enthusiasts, I give you the Sherman Act, the only anti-monopoly legislation you will ever need:

Section 1. Trusts, etc., in restraint of trade illegal; penalty
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

Section 2. Monopolizing trade a felony; penalty
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.


The other sections, which are either obselete, purely technical, or (IMHO) shaky, can be found here.

(I should note that my own view is quite centrist, compared to that of my good friend Gary Hull. Check this out!)

3 comments:

Jacob T. Levy said...

2.5: Include firms that do not yet provide the product or service in the U.S., but could legally do so without prohibitively uncompetitive prices or barriers to entry.

A "1" test is politically impossible, and not necessarily optimal-- duopolies can effectively restrain trade by signaling to one another, and can monitor and enforce one another's behavior in ways that make cartelization possible. (Depends on the industry.) "Monopoly" is not the only operative word; a "combination [...] in restraint of trade or commerce" is sufficient to trigger the statute.

But it does seem to me politically possible to get to:

6. If the number is more than 1 [no quotes, please!], but the post-merger firm is not #1 on your list, the merger is not in restraint of trade and should be allowed.

Even that would be progress from the status quo.

Simon Spero said...

You're just not defining the market segment correctly. With this merger this giant conglomerate will control the market for organic grocery chains whose names start with W.

Wellspring was the first to go. Now Wild oats falls. Soon Weaver Street Market must fall, and then what happens?

Chris Lawrence said...

I'm certainly more sanguine about a Whole Foods-Wild Oats merger than Sirius-XM; mind you, WF-WO (merged or not) are going to get their clocks cleaned whenever Wal-Mart gets serious about organic. But even today WF-WO are hardly a duopoly in any market except "supermarkets at which people wearing Birkenstocks don't feel like they're helping The Man when shopping at."

I'd be more comfortable with Sirius-XM if there were any evidence that the US and Canadian frequency regulators were willing and able to license another digital sat radio provider if it wanted to emerge (I'm not even sure there's plausible EM spectrum for this use). Same deal with the now-moot DirecTV/Dish merger from a few years back.