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Anti-trust is Anti-Competitive

Mises Daily: Tuesday, July 13, 2004 by

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People engage in fierce competition everyday. Entrepreneurs strive to create the next Microsoft, employees fight their way up the corporate ladder to become the next Donald Trump, and competitive athletes train their bodies to reach the level of a Lance Armstrong or Tiger Woods.

We can all appreciate the drive and spirit behind the competitive impulse, and we recognize that it yields productive gains for everyone. The primary motivation for businesses is profit, and if they are successful, they have not only served themselves but also society.

Yet, businesses sometimes urge the government to intervene when their competitors with the same goal pose a threat to them. This is the driving force behind antitrust legislation. The supposed purpose of antitrust is to ensure the competition necessary for a thriving market economy. In reality, it is a bludgeon used by businesses against their better-performing competitors. This is the essence of all attempts to invoke an antitrust rationale to stop mergers.

A quick look at the FTC docket is enough to demonstrate the point. Pick any case out of the amazing blizzard of cases and you will find a hidden force at work: a firm that has turned to the state to work out a grievance.

An example is the proposed merger of MGM Mirage and Mandalay Resort Group in Las Vegas, which would create the largest casino company in the world. This merger would give the new company control of over half the hotel rooms on "The Strip" at the most popular hotels such as MGM Grand, New York-New York, Bellagio, Treasure Island, Mirage, Mandalay Bay, Monte Carlo, Luxor, Circus Circus, and Excalibur.

Before it goes ahead, the merger must be cleared by the Federal Trade Commission (it is not yet on the docket). The government will probably force MGM to sell properties and holdings to meet the standard for what in their opinion constitutes fair competition. And who might favor such sales? Who might advocate delaying the merger as long as possible to prevent the emergence of a highly efficient firm dedicated to serving all consumers? The answer should be clear: lesser competitors. They are the ones with the most direct interest in the imposition of merger barriers.

Several local economists voiced a concern that the new company would create a monopoly that would increase hotel prices and hurt consumers. These economists, blinded by bad science, simply do not understand real competition. There is nothing wrong with one company controlling "The Strip" because they cannot force people to come to Las Vegas or stay at their hotels. Even if the hotels in this new ownership group were to charge higher prices, no one is coercing tourists to lodge at them.

Could we say that consumers have been "ripping off" the hotels all these years by paying the previously lower prices? In any case, higher profits always and everywhere attract new entrances into the field, which drives down profits and requires that entrepreneurs continually innovate in order to stay ahead. This innovation can take the form of higher quality and better service, but it can also mean lower prices. In fact, it is far more likely that the merger would result in lower prices, which is precisely what worries the competition.

Competition is a rivalrous process in which businesses struggle to be the best producers of goods and services. This rivalry, which has no end state, can lead to many firms remaining or just one. Neither scenario is better or worse than the other because the result is due to competition and the market process. No external standard concerning the correct number of sellers or the number of choices available to consumers should be permitted to trump the market process. In any case, it makes no sense to merely take a snapshot in time because market conditions are always changing: one firm can become ten in short order, only to be succeeded by a single producer again.

These competitors to the mega-deal in the works are well known and already discussed in the media. They include Caesars Entertainment and Harrah's Entertainment. In anticipation of the merger, Boyd Gaming and Coast Casinos have geared up with a merger of their own to create one of the most diversified gaming companies nationwide. Insofar as they use market means to compete, it is all part of the energetic development of enterprise. In absence of antitrust, this is how all competitive markets work: everyone striving for excellence and efficiency—provided government doesn't intervene.

The fear of a high-price monopolist emerges too in complaints about Starbucks growing success. People say that Starbucks "rips people off" with "high" prices. If that were true, it is a wonder why customers voluntarily pay for Starbucks beverages again and again, consuming them with pleasure and gladly paying the price. After all, how many people have you seen being kidnapped by Starbuck's employees at gunpoint and dragged into the coffee shop and forced to buy a coffee beverage? The success of the company alone proves that the benefits of buying that beverage outweigh the costs, at least for those who gladly give money in exchange for coffee.

The retort is that Starbucks gets away with charging high prices because of its monopoly position. But that begs the question of how Starbucks achieved its status in the market. How did Starbucks go from one store in Seattle to thousands of stores worldwide? The answer is clear: this company offered a product that consumers enjoyed and they were better at the coffee game than their competitors. Furthermore, what does "high price" mean? Consumers could argue that any price above zero is too high.

Another charge made against Starbucks: it is guilty of negotiating its way toward exclusive distributorships. Let's say a mall owner wants to open a Starbucks in his mall. Suppose Starbucks agrees to come only if the owner prevents any other coffee chain from opening. Assume that the mall owner agrees.

Surely, the mall owner has the right to determine with whom he will associate. If he decides to take the offer and the coffee shop does indeed open in the mall, then both parties have benefited. This would not be unfair, stifle competition, or violate "consumer rights" because Starbucks' competitors (i.e., Seattle's Best and Peet's Coffee) and their customers never had anything taken away from them; to take something away from someone, it must have belonged to them in the first place. In other words, people do not have a right to drink Seattle's Best or Peet's Coffee beverages in the first place. If the mall owner made a mistake in going along with the deal, it will become obvious in time, and the contract will be re-negotiated. But in the meantime, no one is harmed.

Finally, some Starbucks opponents claim that the corporation destroys the original coffee shop culture and puts "mom and pop" coffee shops out of business. In a free-market, one has the opportunity to be number one, but not the guarantee of being number one. It is clear that these small shops are not successful against Starbucks because coffee consumers have decided to go to Starbucks instead. Even if Starbucks' corporate motto was "Kill off every independent coffee store in the world", so be it. There is nothing wrong or evil with this desire as long as they operate by the rules of a free-market.

Consider another scenario: suppose Microsoft notifies Dell that if Dell wants to sell its computers with Microsoft software, Dell cannot install any competitors' software on that computer. Surely, Microsoft has every right to dictate its terms, and Dell has every right to freely accept or reject those terms. If Dell accepted Microsoft's conditions, then yes, other software companies would be at a disadvantage. However, no company possesses the right to have its software installed by Dell. If this arrangement comes about, other software companies have the incentive to create software that will replace Microsoft's.

Some claim that Microsoft prevents innovation because the computer industry is somehow locked and hamstrung by the Windows platform. But how did Microsoft come to dominate the industry? By manufacturing a commercially viable product that people found beneficial to their business or personal life. It was consumers who voluntarily purchased its software and made Bill Gates a billionaire.

Besides, if Microsoft were a "monopoly," which would imply its managers have nothing to fear from competitors, the company would not update their products, come out with new programs, or create patch downloads for errors. Innovation is not the practice of an omnipotent entity.

In the famous lawsuit against Microsoft, competitors and "consumer advocates" complained that the Windows desktop displayed Internet Explorer and MSN icons, unfairly forcing consumers to use those programs rather than other browsers like Netscape or other Internet service providers like Prodigy or Earthlink.

But if we care anything for property rights, it matters that Windows is Microsoft's property; the company should be able to put whatever it wants on its screen. Even if Windows would interfere with or destroy competitors' software when installed on that same machine, that would not be anti-competitive as long as Microsoft made consumers aware of this fact.

(Here I leave aside matters of copyright and patent, except to make two points. First, Microsoft has every right to maintain proprietary rights to its code, and doing so does not require copyright or patent. Second, even the most vehement promoter of open-source coding has to admit that Microsoft's patents have had negligible impact on its market position. To argue for these positions is not the purpose of this essay.)

The portrayal of Microsoft as an evil empire that fears nothing and faces no competition is misleading. Competition is not about the number of firms in the market, but rather it is a process of trying to beat rivals by providing a superior product or service. Terms such as "cutthroat competition" are ridiculous as is the hysteria over "proof" of anti-competitiveness such as an email message written by a Microsoft executive stating something to the effect of "cutting off Netscape's air supply."

The United States Court of Appeal's recent ruling upheld the Justice Department's settlement with Microsoft. While Microsoft views this as a "victory," it is a testament to the waste of time and money this company and the U.S. taxpayers suffered at the hands of antitrust legislation and special interests.

What seems to be lost in this whole case is that Mr. Gates' chief opponents, like Lawrence Ellison of Oracle and Scott McNealy of Sun Microsystems, are striving to reach the top of the computer world themselves. Does anybody really think that if Oracle or Sun kept gaining market share year after year that Mr. Ellison or Mr. McNealy would say, "You know, we're getting too good and we're too dominant. We better stop and let Microsoft catch up."

If they ever said that, they should be fired instantly. It would be like the NFL coach of the defending Super Bowl champions telling his team at the beginning of the season, "Hey, we don't want to win the Super Bowl again because that would be unfair. Let's just have a pretty good season this year." Undoubtedly, the team owner would get rid of that coach so fast that his head would spin.

Of course, Microsoft wants to "kill off" their competitors. Sure, Starbucks wants to "destroy" Seattle's Best. However, these terms obscure the reality: a business can only try to produce a superior product; it is the consumer who chooses whether to buy that product. In a true free-market or capitalist system, businesses cannot force anybody to do anything. As Mises pointed out, "The captain is the consumer."

A true monopoly is the government, the only entity that can use force or the threat of force to accomplish its goals. Other monopolies are businesses which have been granted a special privilege to operate by the government. The best anti-monopoly policy is one in which the government does not intervene in the affairs of business (other than enforcing property rights) and lets markets develop on their own. Adhering to flawed economic theories of efficiency and competition leads to the countless rules and regulations that hamper a true market economy—an economy based on freedom of association, property rights, and the desire to be number one.

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Ninos P. Malek is a Ph.D. student in the Economics department at George Mason University in Fairfax, Virginia. ninosmalek@hotmail.com. Comment on the blog.