Antitrust Implications

The policy implications of the argument that are of principal concern are those having to do with antitrust. Dewey has described the role of economists in antitrust as follows (1959, p. i) :

The important issues in the control of monopoly are ‘’economic’’ in the sense that judges and administrators are compelled to make decisions in the light of what they think the business world is “really” like, and it is the task of economists through research and reflections to provide them with an increasingly accurate picture.

While this book does not aspire to describe business reality, it is an effort to provide a more accurate picture. To the extent that it both succeeds in this objective and has a policy impact, antitrust enforcement will proceed more selectively in the future.

A brief summary of the antitrust implications of the argument with respect to vertical integration, conglomerate organization, dominant firms, and oligopoly is set out here. This by no means exhausts the applications of the organizational failures framework to antitrust, but these are the main issues with which I have been concerned in this book.

1. Vertical Integration 

My examination of vertical integration in transactional terms leads to a mixed verdict. The more strident claims of those who proclaim vertical integration (and, more generally, vertical market restrictions of all kinds) to be altogether innocent of anticompetitive potential are shown to be exaggerated. For one thing, it may be a means of mobilizing latent monopoly power (for example, by facilitating price discrimination — which mayor may not yield efficiency gains). In addition, although vertical integration, by itself, has no immediate effect on market concentration at any stage, it can have entry impeding consequences in highly concentrated industries if, by foreclosing a market, entry were to be inhibited to any but a fully integrated supplier, and if labor and capital markets do not operate friction- lessly. Where, however, the industry in question is not highly concentrated, this same anticompetitive potential is much less severe. Absent collusion, the presumption that vertical integration is innocent or beneficial is generally appropriate. Vertical merger guidelines,16 which currently advise that acquisitions will be challenged where a ten percent firm at one stage of an industry acquires a six percent firm at another stage, are plainly overrestrictive.

Of course, vertical integration, once accomplished, does not commit the firm to continuing the integrated relationship indefinitely — although there are often strong bureaucratic incentives to do so. When, however, competitive supply becomes feasible, internal supply, as a public policy matter, becomes relatively disfavored — because it is not apt to be the least cost mode. In consideration of the bureaucratic proclivities to maintain an integrated relationship, more attention ought probably to be given to the matter of supplying firms with incentives for voluntary divestiture.

2. Conglomerate Organization 

The broadside attack that some lawyers and economists have leveled against conglomerates appears to be overdrawn. Again, frictions in the capital market turn out to be of fundamental importance. Absent takeover frictions or the incomplete congruence between the preference function of incumbent managements and the firm’s stockholders, the conglomerate appears to lack a compelling economic purpose of a socially redeeming kind. In an economy, however, where returning funds to and reallocating funds by the capital market incurs nontrivial transaction costs and/or managers of specialized firms opportunistically display positive earnings retention preferences, the internal reallocation of resources to higher yield uses is what most commends the conglomerate as compared with similarly constituted specialized firms. The conglomerate in these circumstances assumes miniature capital market responsibilities of an energizing kind. That some antitrust specialists are unimpressed with such consequences is explained by their assessment that only economies having technological origins are deserving of consideration — coupled perhaps with a conviction that the supplanting of “competitive market forces,” however feeble these forces may be, by internal organization is anticompetitive.185

Once it is conceded, however, that the capital market incurs nontrivial transaction costs in resource allocation and management surveillance respects, there is plainly a case for encouraging, or at least not impeding, organizational innovations which have the potential to attenuate internal organizational distortions. Subject to the organization form qualifications which I have repeatedly emphasized, the conglomerate has attractive prop- erties in that it both makes the market for corporate control more credible, thereby inducing self-policing among otherwise opportunistic managements, and promotes the reallocation of resources to high yield uses. Except, therefore, among giant-sized firms, where the risk of offsetting social and political distortions is seriously posed, a more sympathetic posture by the antitrust enforcement agencies toward conglomerates would seem warranted.

3. Dominant Firms 

The transactional approach to the dominant firm condition may be contrasted with more conventional explanations, which typically attribute dominant firm outcomes to economies of scale in production or to unlawful conduct. I contend that many of these allegations of anticompetitive conduct are contrived — at least in the sense that, even if the conduct in question occurred, it could not plausibly produce a dominant firm condition. Also, although I believe that economies of scale should be admitted as a defense for dominance, I expect that technological economies will commonly be exhausted at a size that falls well short of dominance in a mature industry.

My position is that dominance is often to be attributed to default failure on the part of rivals and to stochastic market failure. Persistent failure by actual and potential rivals to grasp economic opportunities at critical formative stages of an industry’s development can strap society with a dominant firm for many years thereafter. Chance events during this early development period can also contribute to dominance — which outcomes, moreover, are unlikely to be undone by unassisted market processes if, at the mature stage of an industry’s development, stochastic disturbances are attenuated. Rather than accede passively to such monopolistic outcomes or proceed against dominant firms along (contrived) conduct lines, structural relief, if default or.stochastic market failure can be shown, is urged.

4. Oligopoly 

The principal implication of the argument with respect to oligopolistic industries is that oligopoly ought not uncritically to be equated with a dominant firm condition. It is much more difficult to negotiate a compre- hensive collusive agreement, and there are many more problems of effecting a joint-profit maximizing outcome, than are commonly suggested. Theories of “shared monopoly” ought accordingly to be regarded with skepticism. A rational antitrust policy would presumably first address the dominant firm industries and, where feasible, effect dissolution there before going on to attack oligopolies. Contrary to what is sometimes said, there are prospective benefits from converting a dominant firm industry into an oligopolistic one.

The foregoing assessments may be contrasted with more usual attitudes toward structural monopoly. Absent unlawful conduct, dominant firm outcomes are rarely challenged. By contrast oligopolistic industries have recently been made the special target of attack by both the Neal Task Force186 and the Hart Bill.187 The differences, I conjecture, between the recommendations made here and those reached elsewhere are attributable to the fact that the transactional factors which are emphasized here have, for the most part, been neglected previously.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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