Man, Economy, and Liberty

1

Rothbardian Monopoly
Theory and Antitrust Policy

Dominick T. Armentano

This essay will discuss some of Murray N. Rothbard’s contributions to monopoly theory in light of the current reforms in the administration of the antitrust laws of the United States.

Theory and Policy

Public policy is usually grounded on some theory of how the world works or should work. If the theory supporting the public policy is flawed, the policy will produce unintended consequences. The consequences in turn will often lead to a debate over alternative theoretical models and eventually, perhaps, to different public policies.

In the 1960s and 1970s, many microeconomic policies, including antitrust, generated consequences that many economists judged to be inappropriate. Energy regulation produced oil and natural gas shortages, air carrier regulation kept air travel costs and prices high, and many important antitrust cases were initiated against efficient business organizations seemingly because they were efficient. Such a thoroughly perverse state of affairs created a strong constituency for a substantial deregulation in some industries, and for important changes in the administration of the antitrust laws.

Antitrust policy has certainly changed markedly over the last ten years.1 Despite some glaring exceptions such as the unwarranted divestiture of the American Telephone and Telegraph Company, the antitrust authorities are far less likely to intervene in traditional antitrust areas such as price discrimination, tying agreements, increased firm market share and merger. Yet despite these important changes, it is not at all clear that the shift in antitrust policy represents any fundamental change in theoretical perspective. Indeed, we will argue that those who advocate antitrust reform have tended to rely upon the very same theoretical model as did the previous antitrust “traditionalists,” and that, as a consequence, the current antitrust administrative changes are neither as radical nor as permanent as they appear. Further, we will argue that really fundamental antitrust reform or repeal would depend upon a radically different theoretical perspective, and that the monopoly theories of Murray Rothbard may provide that radical perspective.

The Competitive Model

To understand traditional antitrust policy, and the fundamental conservatism of the current reform movement, we must first review the formalistic theory of competition and monopoly power that has dominated micropolicy discussions for 100 years: the perfectly competitive equilibrium model. This model assumes that products sold in markets are homogeneous and that consumers and producers are “fully informed” concerning their conditions of sale. If sellers have no “control” over market price, each seller is induced to generate an output where marginal cost and market price are equal. Such behavior, economists hold, will produce an equilibrium condition that is socially “efficient” and tends to maximize social “welfare.” If real-world markets are perfectly competitive, presumably, there would be no legitimate reason to regulate microeconomic activity.

Except for some very special market situations, however, it has always been apparent that real markets are neither competitively structured nor in equilibrium. Sellers in most markets attempt to differentiate and advertise their product, and competition in such situations is interdependent and rivalrous rather than a static state of affairs. But since little behavior in the actual business world appears consistent with the equilibrium conditions of the “competitive” model, how is such behavior to be understood and evaluated in terms of public policy?

Market Failure and the Traditionalists

The older, more traditional perspective among industrial organization specialists was to treat each deviation from the competitive equilibrium condition as some regrettable “market failure” that might be remedied with appropriate antitrust regulation.2 And since the real-world behavior of firms can differ sharply from the competitive equilibrium assumptions, this approach opened up a vast array of regulatory opportunities. For example, business firms that were profitable—especially over long periods of time—were always suspected of monopolizing since all economic profits should be “competed away” in the competitive equilibrium. Firms that differentiated their products were always suspect since products should be homogeneous in competition. Firms that advertised and employed expensive selling and marketing techniques were always suspect since, in competition, market information was simply assumed to be perfect. Even technological change, innovation, and lower product prices could be exclusionary, a barrier to entry, and evidence of monopoly power. This sort of analysis, of course, was and is totally perverse, yet it dominated the traditionalist period of antitrust enforcement and intellectually rationalized some of its most absurd legal actions.

Antitrust Reform

Eventually this combination of poor theorizing and silly antitrust cases produced a crisis in antitrust enforcement. An increasing number of economists and lawyers (led by Robert Bork, Richard Posner, Harold Demsetz, Yale Brozen, and others) became severely critical of the traditionalist analysis, and called for specific reforms in the administration of antitrust policy.3 Many of these reforms stemmed directly from increasing empirical evidence that demonstrated (to the reformers, at least) that concentrated markets did not perform poorly and need not be tightly regulated by the antitrust authorities. The reformers were also critical of the barriers to entry doctrine and argued that firms tended to gain and hold market share by being continuously more efficient than their rivals. In addition, the reformers tended to accept price discrimination, advertising, product differentiation, and most tying arrangements as part and parcel of an efficient market process—not as the evidence of market failure or resource misallocation. Finally, many more business consolidations could be permitted without specific antitrust scrutiny since few mergers harbored any real probability of restraining trade.

Based on these policy changes it would appear that the current antitrust reform movement holds a sharply different theory of monopoly power and market failure than that held by the antitrust traditionalists. But this is not really the case. The reformers, to be sure, are far more willing than the traditionalist to admit the existence of market disequilibria, and they are far more willing to acknowledge the beneficial nature of most voluntary business agreements. Despite these differences, however, the reformers and the traditionalists share a basic theoretical commonality: the welfare analysis implicit in the perfectly competitive model. When push comes to shove—and it always does in any evaluation of price-fixing or so-called “predatory practices”—the reformers admit that certain business action can be socially inefficient and can lower social welfare, and that such action ought to remain illegal.

Market Failure and Antitrust Reform

This reliance by the reformers on the perfectly competitive perspective can be easily observed in their general unwillingness to oppose antitrust in principle, and in their enthusiasm for vigorous enforcement of antitrust law in the area of horizontal agreements and price-fixing.4 Business agreements that can reduce market output or raise (or stabilize) market price are seen by the reformers (and, of course, by the traditionalists) as socially harmful and inefficient; such practices ought to remain illegal per se. Firms that can restrict market output have market power, and such power can impose a “dead-weight” welfare loss or allocative inefficiency on society. Business agreements that harbor both social benefits as well as social costs are more complicated and ought to be judged by a “rule of reason.”5 Here the reformers would have the antitrust regulatory establishment sit in economic judgment of those agreements, and permit only those whose social benefits exceeded their social costs. Thus the reformers still see a significant role for antitrust regulation—especially with respect to mergers, joint ventures, and other cooperative agreements—and this regulatory responsibility can be derived directly from orthodox competition theory and welfare analysis. The antitrust reform movement, and the debate between the reformers and the traditionalists, can now be put in a clearer perspective. The traditionalists see market failure and monopoly power almost everywhere and want additional antitrust regulation to deal with such failures. The reformers, on the other hand, see market failure only with respect to business behavior that might reduce market output or raise (or stabilize) market price; only that manifestation of monopoly power would be regulated. Both claim that free markets can fail, and both agree that it is a legitimate responsibility of government to prevent such failures. Both agree that social welfare and efficiency can be lessened by “monopoly power.” Neither would grant that a free market ought to be totally unregulated, and both would agree that some economic liberty—say the liberty to collude—must be sacrificed in order to promote economic efficiency.

The Case Against Antitrust

There are several ways to object to the limited nature of this antitrust debate and to argue, instead, that all of the antitrust laws should be repealed. The first approach would be to assert (or demonstrate) that liberty, including the right to make any business agreement, is a higher value than any alleged increase in welfare or efficiency, and that a higher value ought never to be sacrificed to any lesser value. A second approach would be to argue that social efficiency, correctly understood, must incorporate the notion of complete buyer and seller liberty.6 A third approach would be to hold that any truly inefficient business agreement will be short-lived and dissolve naturally, and that open markets always tend toward an equilibrium outcome; any antitrust enforcement would either be premature or redundant. A fourth approach would be to argue that even though free markets might contain single sellers and cartels, no theory of monopoly price is tenable or could justify any antitrust enforcement. Although Murray Rothbard has argued on behalf of all these points, this last position is his unique contribution to the literature on monopoly theory and policy.

Rothbardian Monopoly Theory

Since Rothbard’s economic theories are generally within the Austrian economic tradition, it might be useful to compare his position on monopoly with those of Ludwig von Mises and Israel M. Kirzner. Mises held that monopoly could exist in a free market whenever the entire supply of a commodity was controlled by one seller or a group of sellers acting in concert. Such a situation was not necessarily harmful unless the demand curve for the commodity was inelastic. Then, according to Mises, the monopolist would have a perverse incentive to restrict production and create a monopoly price, and that price would be “an infringement of the supremacy of the consumers and the democracy of the market.”7 Kirzner has suggested that the monopoly ownership of some resource could have “harmful effects” since it would create an incentive on the part of the resource owner to not employ the resource to “the fullest extent compatible with the pattern of consumer tastes” in the market.8

Rothbard’s position on monopoly price and consumer welfare is distinctly different. He argues initially that it may be confusing (and even absurd) to define monopoly as the control over the entire supply of some commodity or resource. This definition may be inappropriate since the slightest consumer perceived difference between different units of some commodity or resource (with respect to location for example), would then mean that each seller of anything is a “monopolist.”9 But even if this were an appropriate definitional approach, the entire notion of “monopoly price” in a free market is simply untenable according to Rothbard. Any acceptable theory of “monopoly price” is itself conditional on an independent determination of a “competitive” price against which the monopoly price might be compared. For Rothbard, however, any independent determination of a competitive price in a free market is impossible. Free markets contain only free-market prices.10

Competitive prices in the orthodox literature have usually been associated with marginal cost pricing, particularly under conditions of long-run equilibrium. For Rothbard, however, such prices are meaningless and irrelevant since they are associated with a static equilibrium condition that could never actually exist, and would not necessarily be optimal even if it did exist. In any actual market situation all sellers have some influence over price and market information is never perfect. In all real markets sellers face a sloped demand curve, not the perfectly elastic demand curve associated with the competitive equilibrium. Thus, all market pricing is free-market pricing whether it is accomplished by atomistic sellers or by firms with significant market share. Competitive prices are as fictitious as the medieval notion of the “just” price.

Mises, it will be recalled, defined a monopoly price as that price accomplished when output is restricted under conditions of inelastic demand, thus increasing the net income of the supplier. Rothbard argues, however, that there is no objective way to determine that such a price is a monopoly price or that such a “restriction” is antisocial. All we can know is that all firms attempt to produce a stock of goods that maximizes their net income given their estimation of demand. They attempt to set the price (other things being equal) such that the range of demand above their asking price is elastic. If they discover that they can increase their monetary income by producing less in the next selling period, then they do so.

Rothbard maintains that to speak of the initial price as the “competitive” price, and the second-period price as the “monopoly” price makes no objective sense. How, he asks, is it to be objectively determined that the first price is actually a “competitive” price? Could it, in fact, have been a “subcompetitive price”? Presumably even competitive firms can make mistakes and produce “too much.”11 If they do they must “restrict production” and increase market price; but this does not mean that the second price is a monopoly price. Indeed, the entire discussion is absurd since there are no independent criteria that would allow such determinations. All that can be known for sure, Rothbard argues, is that the prices both before and after any supply change are free-market prices.

In addition, the negative welfare implications concerning alleged monopoly prices would not follow even if such prices could exist. Since the inelasticity of demand for Rothbard is “purely the result of the voluntary demands” of the consumers, and since the exchange (at the higher prices) is completely “voluntary” anyway, there is no ambiguous way to conclude that societal “welfare” has been injured.

Rothbard has been severely critical of orthodox utility and welfare analysis.12 The conventional wisdom in antitrust, among both reformers and traditionalists, has been to assert that business agreements such as price-fixing ought to be prohibited since they tend to reduce consumer welfare and lower social efficiency. For Rothbard, however, the costs and benefits associated with exchange are personal and subjective, and do not lend themselves to any cardinal measurement or aggregation. He holds that there is no unambiguous manner by which the costs for consumers and the benefits for producers (or vice versa) might be totalled up across various markets, and then compared to make a determination as to whether a business agreement is socially efficient or not. Indeed, the entire notion of social efficiency is a myth for Rothbard.13 Individual consumer and producer utility and “surplus” may exist, but these notions cannot be mathematically manipulated to allow any regulatory “rule of reason” judgments.

Indeed, the only unambiguous conclusion that can be derived from the existence of a voluntary agreement—price fixing or otherwise—is that the parties to the agreement were attempting, ex ante, to maximize their respective utilities. Any additional welfare conclusions beyond that, i.e., that other parties are worse off or better off, are mere speculations and cannot be scientifically rationalized. From this it would follow, presumably, that no antitrust regulation can be scientifically rationalized against any voluntary business exchange since no intervention could be shown to increase social welfare.

Rothbard’s criticism of conventional and Austrian monopoly theory allows him to conclude that “monopoly” can be best defined as a grant of special privilege from government that legally reserves “a certain area of production to one particular individual or group.”14 This definition of monopoly is both historically relevant and unambiguous in Rothbard’s judgment. It is historically relevant since it is the original meaning of the term in English common law, and much of this sort of monopoly still survives today. It is unambiguous since such an approach allows a clear distinction to be made between free-market prices and monopoly prices. Free markets—that are either rivalrous or cooperative in varying degrees—can only give rise to free-market prices. On the other hand, monopoly prices can arise whenever government legally restrains trade. Presumably an unambiguous anti-monopoly policy would conclude that all such privileges, including orthodox antitrust policy itself which restrains free trade, be abolished.

Some commentators who are sympathetic to Rothbard’s theories have suggested that antitrust policy could be used exclusively to attack legal monopoly. There are some very practical difficulties with this proposition, however. In the first place, most, if not all, legal monopolies at the state level are immune from antitrust jurisdiction under the so-called Parker doctrine.15 In addition Congress has recently gone further and immunized municipal officials from any antitrust liability should such cases ever prove successful.16 Finally, the retention of any part of the antitrust system—the antitrust bureaucracy and judicial review—would invite its use and abuse in other areas; such is the very nature of governmental regulatory policy. It is politically naive, therefore, to believe that antitrust could be salvaged to deal exclusively with government-created monopolies. The practical and principled position from a Rothbardian perspective would appear to be the total and immediate repeal of all antitrust regulations.

Notes

1. James C. Miller, “Report from Official Washington,” Antitrust Law Journal 53 (1984): 5-13.

2. For the more traditional antitrust perspective see, William G. Shepherd, The Economics of Industrial Organization, 2nd ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1985). This traditional perspective is reflected in articles and editorials in almost any issue of the Antitrust Law and Economics Review.

3. Robert Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978); Richard A. Posner, Antitrust Law: An Economics Perspective (Chicago: University of Chicago Press, 1976); Yale Brozen, Concentration, Mergers, and Public Policy (New York: Macmillan, 1983); D. T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure (New York: John Wiley and Sons, 1982).

4. Bork, The Antitrust Paradox, Chapter 13.

5. Wesley J. Liebeler, “Intrabrand Cartels under GTE Sylvania,” UCLA Law Review 30 (1982).

6. D. T. Armentano, “Efficiency, Liberty, and Antitrust Policy,” Cato Journal 4, no. 3 (Winter 1985): 925-32.

7. Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1963), p. 358.

8. Israel M. Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), p. 111.

9. Murray N. Rothbard, Man, Economy, and State (New York: Van Nostrand, 1962), p. 591.

10. Ibid., pp. 604-15.

11. Ibid., p. 607.

12. Murray N. Rothbard, Toward a Reconstruction of Utility and Welfare Economics (New York: Center for Libertarian Studies, 1977).

13. Murray N. Rothbard, “The Myth of Efficiency,” in Mario Rizzo, ed., Time, Uncertainty, and Disequilibrium (Boston: D. C. Heath, 1979), pp. 90-95.

14. Rothbard, Man, Economy, and State, p. 591.

15. Parker v. Brown. 317 U.S. 341, 1943.

16. The recently enacted “Local Government Antitrust Act of 1984” eliminates personal liability for municipal officials. See Antitrust and Trade Regulation Reporter, Bureau of National Affairs, 47, no. 1178 (August 16, 1984).