Phase I: The Historical Perspective,
What is Antitrust?
Broadly, the economic view is that competitive behavior should be defined as economic efficiency. Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. Roughly speaking, it is a situation where any changes made to assist one person would harm another. Alternatively, it can also be thought of as the situation where no additional output of one good can be obtained without decreasing the output of another good, and production proceeds at the lowest possible average total cost.
Robert Bork has argued that the legislative intent and precedential history of American antitrust supports the economist’s view. Lina Khan argues that congress passed antitrust laws to safeguard against excessive concentration of private power and that it is recognized this vision would protect a host of interests which the sole focus on consumer welfare disregards. Both are lawyers opining about economic matters from a legal perspective. Each imputes motives that may or may not have driven antitrust legislation. Probably both are right depending on where you stand and what is important to you.
Types and Harms
Legislators and judges claimed that trusts harmed society. There actually were few trusts in the technical sense. The harm claims against trusts were that they charged high prices and they drove smaller, less efficient competitors out of business. Those harm claims are contradictory. There was no single coherent vision behind American antitrust policy. There still isn’t. What has resulted came from a haphazard mixing of forces in our political economy.
There are two theories of monopoly according to Harold Demsetz. The intervention theory says monopoly is always the creature of the state. It asserts only the state legally enforces property rights which represent meaningful barriers to entry. The spontaneous monopoly theory says the competitive system naturally generates monopolies which disinterested government must seek out and destroy. Note, both theories assume government involvement.
Building to the ICC… antitrust precursor
At the state level after the Revolutionary War America was highly regulated in ways protecting the holders of existing interests. Transportation was still animal powered. High transportation and transaction costs were part of doing business. From a federal perspective transportation was far less regulated. Soon canals, the telegraph and railroads began changing the economy, shrinking time in transit, reducing transportation cost and knitting producers and consumers more closely together.
Because of the high fixed cost structure, railroads could not cover their total cost by pricing at the margin. There were two available solutions. They could collude to price above the marginal cost or they could engage in price discrimination. Collusion failed. There was intense competition on the trunk lines when there were alternative routes for longer distances. Many locations not proximate to trunk lines had only single carrier service. In these short haul situations, because there was no alternative the producers of raw materials and farmers on these shorter lines were trapped into paying higher prices to get their goods to markets.
Conclusion:
By the late 1880’s both sides came to want federal government intervention. The railroads wanted help policing the cartels. The shippers wanted to block the cartels and end rate discrimination. The result became the Interstate Commerce Commission. This was a product of political sausage making which saw the Senate favoring railroad interests and the House favoring the shippers. At the time the ICC was considered a legislative train wreck pleasing no one.
Tomorrow we will take on Sherman Antitrust Act of 1890 as we build toward understanding what viable applications for Big Tech might be and why.
