TheEconomistAugust 8th 2020 531D
onald turner, America’s top trust-
buster in the mid-1960s, saw antitrust
law as benefiting from an “inhospitable”
tradition: on many matters its default re-
sponse was to say no. Government lawyers
routinely blocked mergers merely on the
grounds that the resulting company would
be too big. The companies’ counterargu-
ment that being bigger would make them
better was rarely entertained by the courts.
In the 1970s the “Chicago school” of
antitrust law successfully harnessed eco-
nomics to argue for a much more hospita-
ble approach. Over the following decades
America’s regulators became so welcom-
ing that critics painted them as doormats.
In many industries the largest firms have
consistently gained market share without
any official concern; the most successful
technology companies have grown into
veritable titans. Many economists study-
ing the subject now worry that a lack of
competition is an economic drag, especial-ly online. Some scholars go further, argu-
ing that the Chicago school’s sense of what
is good for consumers is not serving their
broader interests.
The Chicago school, built on the work of
Aaron Director, an economist from the
mid-20th century, reached its zenith in the
writing of the legal scholars Robert Bork
and Richard Posner. Its proponents argued
that many activities which were assumed
to be anti-competitive were entirely rea-sonable strategies for improving corporate
efficiency. They also claimed that in some
cases even things which couldn’t be justi-
fied that way could safely be left to the mar-
ket to sort out without recourse to law.
Take “predatory pricing”. Regulators
thought that selling goods below cost so as
to bankrupt competitors was malfeasance
that had to be stopped. The Chicago school
argued that it was a poor business strategy
which would fail. Even if the predator
crushed its competition, it would not re-
main a monopoly long enough to recoup
its earlier losses. Instead, its high profits
would attract new competitors.
Perhaps because, in the 1970s, American
business had started to look more in need
of help than hindrance, such arguments
found favour with the American courts.
And though the Chicago school’s influence
was more limited elsewhere, many juris-
dictions, including the European Union,
adopted one of Bork’s central ideas: that the
sole purpose of competition law should be
to protect consumers. It is a view which
forbids regulators from considerations of
the broad public interest, limiting them to
the busting of cartels and the prevention of
mergers that create monopolies. Under
this “consumer-welfare standard”, compe-
tition cases turn on forensic analysis of
“upward pricing pressure”—ie, of the de-
gree to which a merger or strategy will leave
consumers out of pocket.
But has this approach led regulators to
miss the wood for the trees? In 2016 The
Economistpointed to America’s high cor-
porate profits and the rising market shares
enjoyed by big firms as evidence that com-
petition across the economy had waned.
Later that year economists at the White
House released a report making similar ob-
servations. A version of the trend can also
be found in Europe. Research by the oecd, a
club of mostly rich countries, finds that be-
tween 2000 and 2014 the share of sales ac-
counted for by the top eight firms in a given
industry rose by four percentage points in
Europe and eight percentage points in
North America (see chart on next page).
Many antitrust experts are uncon-
cerned: industrial concentration, they ar-
gue, does not tell you how competitive the
market for a particular good is. But some
economists have blamed falling levels of
competition for far-reaching economic
ills, such as stagnant labour markets and
growing inequality. In a paper published in
2019 the late Emmanuel Farhi of Harvard
and François Gourio of the Federal Reserve
Bank of Chicago argued that the rising mar-
ket power of big companies was linked to
low interest rates and weak investment,
factors shaping the whole economy.
As in the days of the Chicago school,
other economists see these critiques as ig-
noring the role of efficiency. A recentlyFrom hospitality to hipsterism
In the first of a series on subjects where economists are rethinking the basics, we
look at arguments against letting businesses grow as large as they would likeA healthy dose of competitionEconomics brief Competition
1 Competition and concentration
2 Setting minimum wages
3 Explaining inflation’s absence
4 The dollar’s role in trade
5 The importance of culture
6 Embracing government debtIn this series