Remedies for Structural Dominance

The objective of a remedial decree in cases of structural monopoly should be to induce the dominant firm that is found guilty of a section 2 violation to divide itself into competitive parts within some reasonably short period of time after the first finding by a court that a violation has occurred.154 Unless the dominant firm voluntarily divides itself into two or more viably competitive parts within a stipulated interval, say five years, the government would be entitled to court-ordered divestiture.

Although this proposal is not problem free, it does have several attractive attributes. First, the management itself, which presumably has the requisite expertise, has the incentive to redistribute the firm’s assets into coherent, internally efficient and hopefully competitive parts. Only failure by the firm to exercise this option would require the government to intervene —although the proposed division by the firm would be subject to judicial review to determine whether competitive requirements had been met.

Second, a gradual procedure is provided by this method of divestiture. No immediate interruption of activity need occur; the transition can be performed as expansion and plant renewal decisions come up for considera- tion. The high transition costs that an immediate dissolution order might impose are thereby mitigated.

Finally, both physical and human assets will be reassigned. Often the expertise of a firm’s personnel may constitute its most significant resource. While the duplication of physical assets by existing and potential rivals may be relatively easy, the acquisition of management and technical groups possessing the requisite experience can be much more difficult. The discussion of knowhow in Section 3.2 of Chapter 2, in connection with the United Shoe Machinery case, is relevant in this connection. Recall that it was the U.S. Justice Department’s contention that affirmative relief required that United Shoe’s potential competitors be given “consulting” assistance so that they might acquire “that intuitive knowledge based upon training and experience that is incapable of translation into written form. The employees of United’s potential competitors need to be given as much and as detailed help as United’s own employees, if not more,”32 Such consulting assistance would be unnecessary if dominant firms were to divide themselves into viable parts, since the requisite expertise and experience (knowhow) would presumably be distributed among the parts in the process.

Requiring dominant firms to undergo divestiture may, however, have undesirable side effects. First, the dominant firm may engage in aggressive monopolistic pricing, thereby encouraging new entry and the eventual erosion of its dominant market position (Turner, 1969, p. 1221). The emerging dominant firm faces a choice between alternative profit streams. It can choose the profit stream associated with continuing dominance and accept the prospect of eventual dissolution; or it can, during the latter part of the industry’s intermediate development stage, increase its prices in order to realize greater short-run profits and effect a decline in market share below threshold levels. Although this second course of action would result in transitional welfare losses, these may not be great. I [like Turner (1969, p. 1221) ] would be inclined to accept them — in the expectation that, even in these circumstances, a net social gain would commonly obtain from the early dissolution of the emerging dominant position.

Pre-existing dominant firms, however, would not pose these same dif- ficulties. A firm that already qualifies as dominant at the time the proposed policy is adopted should automatically face a dissolution proceeding. Changes in market share during the period of the proceeding would presumably oe small and in any event could be disallowed as a basis for release. Indeed, were an increase in price to cost margin to be attempted, an injunction might reasonably be granted to prevent its implementation.

Second, the dominant firm may, in anticipation of a section 2 complaint, undertake programs designed to make the cost of divestiture exceedingly great. Kaysen and Turner, for example, stipulate that “the court shall not approve a plan involving division of the assets of a single plant” (1959, p. 269).34 Dominant firms that are anxious to forestall a dissolution order may be induced on this account to engage in excessive equipment specialization and plant size concentration. A satisfactory deterrent to such behavior is not easy to devise. Perhaps the only realistic policy is to reject the single plant exception unless nontrivial economies of scale can be clearly shown — in which case the relief issue would not be faced since dominance here is permitted.

If this approach is adopted, however, problems in evaluating claims of single plant economies must be anticipated. To the extent that these economies are said to be attributable to technological factors, objective engineering evidence could be required. Since, beyond a certain size, plant replication typically affords economies, for example, by permitting better access to factor markets and by reducing the transportation expense of servicing customers,158 the demands for a clear showing of technological economies can be relatively strict. In the absence of such a showing, divestiture, despite high transition costs, could be required. Advance announcement of this policy ought to discourage “strategic” investment in single plants.

Third, allowing a firm to produce its own plan of divestiture may lead to a division that creates noncompeting parts, for example, splitting into an industrial division and a consumer products division. Although such a separation would be consistent with stockholder interests, the government would presumably object if alternatives involving active, contemporaneous competition between parts of the firm could be arranged. Where contem- poraneous rivalry cannot be obtained, but the nonoverlapping divisions are both viable and enjoy reasonable parity with respect to size, relief may still be partly efficacious: divisions operating in nonoverlapping markets but sharing common knowledge will, when given independent standing, increase the potential for future competition.

Finally, the dominant firm may allow itself to be run inefficiently. Managers and employees may induige themselves in  in on-the-job leisure or in other “corporate personal com. :’ activities. In these circumstances, rivals presumably can ea   . ike the dominant firm. The industry would thus restructure itself, but with considerable transition costs. Uncertainty with respect to the time that the government will file a section 2 complaint, however, should tend to discourage this behavior. Moreover, competition in the capital market, operating primarily through the takeover mechanism,159 might be regarded more sympathetically as it applies to the dominant firm industries, since this serves as a check on inefficient practices.

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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