Editorial

Breathing Life Into Antitrust Policy

The United States is Witnessing a merger wave unparalleled since the turn of the century. Big business will spend more than a trillion and a half dollars on the monopoly game in 1998, shattering all previous records.

While the Clinton antitrust authorities have wakened from the somulence of the Reagan-Bush years, with the important exception of the Microsoft case, they seem content to sit on the sidelines as the Big Boys combine.

The problem traces back more than two decades, when a conservative, corporate-backed campaign began to overturn many common-sense insights on the costs of mergers. The "law-and-economics" movement came to dominate law schools, scholarly writing and, eventually, the thinking of the federal judiciary. Its principles became the guiding doctrine for the Reagan-Bush Justice Department and Federal Trade Commission, the two U.S. agencies charged with enforcing the nation's antitrust laws.

The central tenets of law-and-economics, as applied to antitrust, include the notion that antitrust policy should concern itself purely with narrow economic effects of mergers and corporate behavior. Based on a theoretical understanding of market efficiency, law-and-economics also holds that many outlawed or undesirable anticompetitive practices are irrational, and therefore should never occur, or are possible only in extreme and unlikely situations.

The Clinton administration has moved away from the more hardline versions of law-and-economics, but the movement's general approach remains entrenched at the Justice Department and Federal Trade Commission.

In examining proposed mergers, the Clinton antitrust authorities' modus operandi has been to scrutinize the effect on particular market niches, and call for divestitures of certain of the merging parties' overlapping business interests. They have revised antitrust guidelines so that they explicitly consider the purported "efficiencies" gained by mergers, and weigh these efficiencies against the likely harms from decreased competition - even though nothing in antitrust law suggests that "efficiencies" should be considered in antitrust enforcement. And they give great credence to the notion of "potential competition" - the idea that market participants are constrained from gouging consumers by the prospect of future competition, even when it does not presently exist.

The result has been that the Clinton authorities frequently request minor alterations in major mergers - a sell off of retail outlets in those locales where the merging competitors represent a large share of the entire market, or a divestiture of particular factories or product lines.

But very, very rarely does the administration act to block the megamergers, with the Lockheed Marietta-Northrup Grumman, CVS-Rite Aid, Northwest-Continental and Staples-Office Depot mergers among the few exceptions.

The result is an extremely dangerous concentration of economic and political power that is likely only to grow worse, absent some change in national antitrust policy. The diminished competition left in the wake of the merger wave will mean higher prices, less choice and poorer service for consumers, especially lower-income consumers; more downsizing of good-paying jobs; slower rates of innovation and product development; a more sluggish economy; and an even firmer corporate grip on the political system.

Countering the corporate consolidation trend requires a renewal of aggressive antitrust policy - both a bolder political commitment to blocking mergers and a rethinking of an array of antitrust principles.

Among the most important notions for a revived antitrust policy:

• Resuscitate the "incipiency" doctrine. Mergers tend to run in waves, with each megamerger spurring several others, as is now the case in the telecommunications, banking and financial services, oil and gas and many other sectors. Partly this reflects a corporate executive perception, with very little grounding in objective evidence, that they too will need to gain size "to compete in the fast-changing global economy." Partly it reflects the faddish nature of the stock market and corporate management. Antitrust authorities should not wait until the endgame arrives to act. In evaluating megamergers, they should take into account the effect an early combination between major industry players is likely to have in sparking subsequent mergers and increasing industry concentration.
• Reintroduce considerations of political power in merger reviews. Underlying passage of the core U.S. antitrust laws was a concern about the political power that accompanies concentrated economic power. That concern merits as much weight now as it did at the turn of the century.
• Ignore or cast a critical eye on efficiency claims. Virtually every merger is accompanied by hosannas about the resulting efficiencies, synergies and economies of scale. Mostly this is just code for monopoly pricing and layoffs, plus groundless hype. Mergers tend to reduce efficiency through personality conflicts, culture clash and corporate bloat - just a few months into the merger, for example, Citicorp-Travelers is experiencing profound difficulties. And any real efficiency gains can usually be achieved through less anti-competitive alternatives, such as project-specific joint ventures.

These and other changes in antitrust policy are vital - but they stand little chance of being realized absent a public push for a crackdown on merger mania. The most vexing challenge for antitrust advocates is to ring the alarm bells in a fashion that riles the public to demand the antitrust policy needed for a well-functioning economy and democracy.