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HomeEconomyProtecting Competition or Preventing It?

Protecting Competition or Preventing It?

Laws and regulations create rules which guide our mutual efforts to advance our interests in dealing with one another. That is why they must be clear. Vague (i.e., uncertain) rules means there is no objective way to determine whether the participants in such “games” are playing fairly or well.

Moving back an analytical step, however, the basis of laws and regulations is language, which in turn reflects (or distorts) logic. That is why they should involve careful, consistent use of language. But they often do not. 

For example, consider how the use of the word “competition” in antitrust not only illustrates the fallacy of equivocation–“calling different things by the same name”–but is actually used to mean mutually inconsistent things, creating cognitive dissonance that gives the government the power to reject virtually anything they don’t like as “anti-competitive.”

The word competition is scattered throughout the antitrust laws, where it is frequently supposedly defended, while unfair or predatory competition is prohibited. The FTC recently followed that rhetorical pattern in challenging the Microsoft-Activision merger as a supposed threat to competition. And the newly released draft guidelines for the FTC and Department of Justice to follow in evaluating mergers and acquisitions include a bushel of directives about protecting competition and preventing monopoly power. 

Those guidelines include that “mergers should not eliminate substantial competition between firms,” they should “not entrench or extend a dominant position,” they “should not further a trend toward concentration,” they should “not otherwise substantially lessen competition,” and that “they should not eliminate a potential entrant in a concentrated market,” among others. 

As Elizabeth Nolan Brown notes, however, that set of principles (relying on inconsistent meanings of competition) “could be used to justify blocking any merger,” echoing the conclusion of Geoffrey Manne, President of the International Center for Law and Economics, that “The overbroad guidelines are clearly designed to deter merger activity as a whole, regardless of the risk posed to competition.”

Ms. Brown illustrates her point about using such directives to put large firms in a lose-lose double-bind with the argument the FTC used in its failed bid to stop Meta from acquiring virtual reality fitness app maker Within Unlimited:

When these companies develop new products of their own that compete with smaller rivals, they are accused of acting nefariously to entrench their dominant position and yes, thwart competition. Yet when they don’t make their own version, they’re accused of thwarting competition. Basically, a Big Tech firm that wants to expand by any means will find itself running afoul of Khan’s FTC.

The main underlying reason for the difficulties in understanding whether there is competition (at least unmodified by any adjective) in a certain case is that competition is unavoidable. Economics starts from the assertion of scarcity—that we would like more goods and services than we can produce. But whenever that is the case, competition is unavoidable. People will compete to meet whatever criteria are used to decide who will get how much of the limited amount available. So every form of resource allocation is ultimately competitive. 

The main question is then not whether there is competition, but what kind of competition would those of us in society prefer? Cage fighting and market competition are both competitive, but in the first case people compete in seeking ways to help themselves by hurting others, and in the second, they compete in seeking ways to benefit others with better options as the means to help themselves, creating very different “competitive” results.

But even beyond that definitional difficulty, there are multiple different and often mutually inconsistent meanings that are commonly attached to the word, competition.

Competition can mean rivalry in trying to offer potential trading partners better options than they had before. This is the meaning of competition that sounds good to our ears as consumers and is thus the imagery emphasized in popular discussions of antitrust. And that rivalry can take place in many dimensions—not just price, but other terms of trade, service, warranty coverage, delivery, financing, new products and innovation, etc.—reflecting rivals’ beliefs about what will be most effective in attracting (i.e., benefiting) trading partners.

Competition can also mean consistency with the economics model of pure or perfect competition that anyone who has ever taken a microeconomics class has been exposed to. In that model, firms are viewed as “price takers”–too small relative to the market to have any appreciable power to change the price, who are thus assumed to be able to sell whatever they wish at the market price. Among other things, this means no firm would ever cut prices in their rivalry to attract customers. Further, such firms are not just price takers, but “terms of trade” takers, who would not try to improve any other dimension of their offers either, because they are assumed to be “given.”  

These two meanings of competition are mutually inconsistent. So the FTC could reject rivalrous behavior as inconsistent with competition because it is inconsistent with the perfect competition model, and also conclude that terms of trade takers’ behavior is inconsistent with competition because there is no price or quality rivalry between such firms.  

Competition can also mean having a large number of sellers in the market, which is one aspect of the perfect competition model, beneficial because more options can be beneficial. That can be taken to infer that anything that reduces the number of competitors, such as a merger, or the potential number of competitors, such as internal growth, reduces competition. But how good those options are is more important than how many firms there are. So restrictions on being able to make better offers, as with merger and growth limits that prevent reaching the scale or scope to achieve lower prices and/or better offers, can also be seen as inconsistent with competition. But current antitrust authorities seem to only recognize the first of these interpretations, while ignoring the second, so that they can always say “no” to whatever large firms propose to do in order to grow.

Harm to competition can also be interpreted to mean harm to competitors (which you can always recognize by asking if you could add the seemingly innocuous word “the” before “competition,” –i.e., meaning not harm to the process of competition, but harm to the competitors—without changing the meaning). The best known recent example has been the FTC’s inordinate focus on the effects of the Microsoft-Activision merger on Sony, the largest, most dominant firm in the relevant market, rather than the effects on the consumers in the market—gamers. But this focus is inconsistent with a basic fact about rivalry—every improvement in one seller’s offerings that attracts a buyer from another seller by giving them a better deal than before must harm that rival seller by reducing their sales. So if you can’t reduce competition in the sense of harming rivals, you cannot engage in rivalry seeking to benefit consumers. 

This last inconsistency is so blatant it has even led to efforts to claim such rivalry to benefit consumers is really “predatory,” supposedly driving rivals out of business, which then enables them to impose monopoly abuses, harming consumers. However, you can look very diligently and still not find an empirically verified example of such predation, going all the way back to the allegation of Standard Oil’s predatory pricing. A good illustration is Wal-Mart, which has been accused of predatory behavior for decades. But when and where have they achieved monopoly status and jacked up their prices? Never. Costco’s gas stations have similarly been accused of predatory pricing in many places, but they have never monopolistically jacked up their prices either. 

The many meanings that have been attached to the word competition or competitive have caused a great deal of confusion and opened the door to a great deal of antitrust malfeasance in the name of protecting competition. Fortunately, in recent decades, this confusion has been narrowed by an increasingly consistent focus on rivalry benefiting consumers—most commonly called the “consumer welfare standard.” But under the Biden administration, antitrust authorities have sharply turned away from that focus. A major aspect of this is currently on display in the federal antitrust bureaucracy—seeking power to turn confusion about competition into a lever to say no to any business activity that might make any firm bigger, regardless of whether it benefited consumers. Yet Americans would do far better if we instead remained focused on maintaining the possibility of rivalry in improving offers to buyers, since it is as buyers we share the most in common.