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Regulation: The Helping Hand That Harms 167

How Anti-Trust RegulationBrings About Monopolies

Most Americans, and most economists as well, believe that anti-trust regulation prevents monopolies and fosters competition. They

believe consumers are protected by the government from big corpo-rations that reduce their production in order to raise prices, or runsmaller weaker companies out of business, so that they can enjoy highprots at the expense of the rest of society. This argument is fallacious.

The truth is that anti-trust laws exist in order to allow the cre-ation of monopolies that could not otherwise exist: the governmentprotects less ecient but politically favored companies from more

ecient competition. The companies themselves are usually the onesto originate and promote the regulation. Companies use governmentpower to prevent the mergers, acquisitions, expansions, or particularinvestments or production of rivalrms so as to make them less com-petitive. In some cases, two rms that would have as small as a com-

bined 3 percent market share in their industry have been preventedby the government from merging.103 The government also preventsnewer, smaller competitors from competing with larger corporations

because the immense amount of time, money and hurdles requiredunder regulation is often unaffordable to smaller companies thathave not yet acquired as much capital as their larger competitors. Theresulting failure of these small rms is, of course, the intention of theregulation.

Trust-Busting

But surely, you must be thinking, what about all the historicalcases youve heard about concerning the large trusts (early forms ofcorporations) of the late 1800s that were broken up because of theirmonopoly control and presumed damage to citizens, right? The sto-ries are mythscomplete myths. Indeed, the government broke upthese companies and destroyed or diminished their productive capa-

bilities, but the trusts were not harmful economic entities; theycontributed greatly to increased prosperity for all. It is true that some

103 An example is the 1962 case of Kinney Shoes being prevented from acquiring theBrown Shoe Company.


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168 The Case for Legalizing Capitalism | Kelly

of those who owned or ran the trusts eventually asked the govern-ment for protection from competitors (regulation), and this is shame-ful. It is also true that many other companies became powerful andwealthy through government-assigned privileges. But without ques-tion, the trusts did not become large and successful by somehowunfairly competing in an otherwise free market.

Thomas J. DiLorenzo showed in the June 1985 issue of the Inter-national Review of Law and Economics104 that the industries accusedof being monopolies at the initiation of the Sherman Antitrust Actwere expanding production four times more rapidly (some as muchas ten times faster) than the economy as a whole for the entire decadeleading up to the Sherman Act. These rms were also dropping theirprices faster than the general price level (remember that prices fell dur-ing most of the 1800s). One of the senators in favor of antitrust lawsat the time, Representative William Mason, admitted that the trustshave made products cheaper, have reduced prices.105 Nonetheless,he argued that in accomplishing this, the trusts put honest compet-itors out of business, which implies that the trusts were dishonestand that they had engaged in wrongful acts by simply competing in

business. He stated this because he, along with most congressmen atthe time, wanted to protect less ecient companies in their districts

from the more ecient competition of the trusts.106 Economic policyactions are almost always taken for political reasons.

Similarly, Dominick Armentano found that of the fty-ve mostfamous antitrust cases in U.S. history, in every single one, the rmsaccused of monopolistic behavior were lowering prices, expandingproduction, innovating, and typically benefiting consumers.107 Hefound that it was their less ecient competitors, not consumers, whowere harmed.

As further evidence of the lack of any harm trusts caused indi-viduals, economic historians Robert Gray and James Peterson pointed

104 Thomas J.DiLorenzo, The origins of antitrust: An interest-group perspective,Inter-national Review of Law and Economics ( June 1985), pp. 7390105 Thomas J. DiLorenzo, Anti-trust, Anti-truth, Mises Daily (June 1, 2000).106 Ibid.107 Dominick T. Armentano,Antitrust and Monopoly: Anatomy of a Policy Failure (1990).


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out that between 1840 and 1900, the proportion of national incomereceived by workers remained unchanged: Labor received 70 percentand owners of capital, property, and materials received 30 percent.This means that companies did not gain at the expense of the public.

The most famous trust is probably that of John D. RockefellersStandard Oil. The company rened oil that was mostly used in kero-sene products (gasoline and automobiles were just being developed).The oil business was very small as compared to today. Standard Oil

began as a smaller company, and grew in size through normal busi-ness competitionproviding a better product at lower prices. As aresult of its innovation and the competition it fostered, the price of

refined petroleum fell from over 30 cents per gallon in 1869 to 5.9cents in 1897.108 Competition did in fact force many companies intobankruptcy, which is what happens to any company that fails to com-pete eectively. Still, such occurrences formed the basis of accusationsof wrongdoing against Standard Oil in court. However, unlike mostcases, companies that could not compete with Rockefeller were usu-ally able to sell their assets to him. One man so benetted from Rock-efellers buying him out that every time he went out of business, hestarted a new oil company that Standard Oil could once again out-compete and buy out. He became very wealthy by having Rockefeller

buy him out eleven times.109 Even though Rockefeller outcompetedmost companies, there were other companies that in fact gainedground on Standard Oil and prevented it from having a monopolyinthe free market, without government help.

What is a Monopoly?

A key way in which the government nds rms guilty of beingmonopolies is in defining monopoly in both vague and unrealisticterms. According to the governments and government economistsview, there should always exist a world they describe as having pureand perfect competition, in which there are numerous rms in anindustry, selling identical products, each having a small market share,

108 Thomas J. DiLorenzo, How Capitalism Saved America (2004).109 Robert LeFevre, The Age of the Robber Barons (lecture), http://mises.org/mp3/lefevre/131.mp3.


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operating in uid, continuous markets, where there is a constantlyuctuating market price, where no single rm has any pricing power,and where there are no barriers to entry of the market (of any kind,even those which are natural ones).

In government economists view, if this description of a market-place does not actually exist, there instead exists a monopoly, duopoly,or oligopoly, with unnatural pricing and competitive powers. As we allknow, industries with this prole rarely exist; which is why the govern-ment always has an excuse to nd rms guilty of being monopolis-tic. Additionally, it is very dicult in many cases to determine exactlywhat the industry is. Does Coca Cola compete only with other softdrinks, or does it also compete with iced tea, fruit drinks, coee, water,and beer? Depending on how the denitions are used, any rm could

be a monopoly. For example, Wendys could be a monopoly eventhough so many other burger places exist, since only Wendys has amenu oering large square beef patties with baked potatoes oeredas a side dish. In fact, companies normally compete in part by meansof intentionally dierentiating themselves. And in the bigger picture,all products compete with all products. For example, if you win thelottery, you might choose between a boat, an RV, and a diamond ring.

The reality of the case is that there can be very tight competitionin dierent industries with ve, two, or even one competitor. Addition-ally, there might exist only one business in an entire industry! But hav-ing only a single monopoly rm in an industry does not mean thatit has the power to restrict output or raise prices.An industry, even withonly one company, is competitive as long as competition is a threat. Thisis the case, for example, with the NFL, which does not act monopo-listic in the least: it constantly creates new product attributes such asinstant replay for questionable referee calls, and it expands supply byadding new teams. Additionally, it always has indirect competitors (the

CFL, sitcoms, other forms of entertainment, etc.), and sometimes hasdirect competitors, such as the XFL football league which attemptedto compete in 2001. But it always has the threat of competition.

In the same fashion, Alcoa was the only producer of alumi-num ingot for many years, but did not constitute a monopoly in thetraditional sense, because it did not prevent competitors from enter-ing the marketplace, and its rate of prot, at 10 percent, was not an


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extremely large one.110 It earned its position in the marketplace byhonestly and fairly out-competing other previously-existing firms.Nonetheless, the U.S. Court of Appeals found the company guilty ofemploying superior skill and foresight111 that the court felt fore-stalled competition by less ecient businesses. Alcoa was accused of

being exclusionary, since not all rms in its industry had equal skilland foresight.112 In other words, Alcoa was guilty of outcompeting inthe marketplace by oering a superior product at lower prices.

Conversely, harmful monopolies can exist while numerouscompanies operate in a market. In New York and many other cities,larger, more ecient taxi cab operators are prevented from compet-

ing against smaller, costlier ones through the governments limitingof the number of licenses it sells (at over $100,000 each). Were sup-ply not limited, prots would fall, and cost savings would be initiated;only the most ecient competitors would remain, and they would doso by being larger (like car rental companies). In the end, fewerrmswould provide more, higher quality, and cheaper services. A harmfulmonopoly exists whenever government prevents even one competitorfrom entering a market.

Why Harmful Monopolies Cant Exist in Free Markets

The reason that even a single firm cannot act monopolistic israther simple. The higher the prices a company charges, the moreprot it makes. The higher the prot, the more competition is invitedinto the market, as long as otherrms are permitted to freely enter themarket. The more rms that enter the given market, the more likelythe existingrms will lose market share. Therefore, not only do exist-ingrms (or a would-be monopolistic rm) try to prevent possiblecompetitors by keeping the selling prices of their products not toofar above costs, but they continually try to nd ways to reduce theircosts. For if existingrms remained inecient, they would lose mar-ket share to new entrants who would come to take advantage of the

110 Randal C. Picker, Monopolization under Sec. 2 (powerpoint lecture), picker.uchicago.edu/antitrust/AT13Post.ppt.111 Thomas J. DiLorenzo, Anti-trust, Anti-truth, Mises Daily (June 1, 2000).112 Ibid.


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fact that they could make larger prots by producing with lower coststhan the current rms, while maintaining the same selling price, oreven loweringthe selling price. As long as even a sole competitor hasthe threatof a new competitor, it will sell for as low a price as possible,which it could achieve more easily with economies of scale that comefrom increased production.

It is for this reason that we have products that are very importantto us, but that still sell for relatively low costs. For example, one wouldthink that automobile batteries or the on/o switch to an air condi-tioning unit would cost thousands, since the overall machines couldnot function without these small parts. But instead of being expen-

sive, these parts are easily a

ordable because they are priced basedon their costs of production plus a reasonable prot;113 their costs ofproduction, in turn, are based mostly on the market prices for eachindividual subcomponent, which themselves are based on cost of pro-duction resulting from supply and demand of the individual factorsof production, along with the products marginal utility. If rmstried to sell these parts for more than potential competitors could sellthem for, they would be facing sti competition.

On that note, it should be pointed out that product prices on the

retail side, which are largely based on the value that consumers attri-bute to their enjoyment of the product (marginal utility), can some-times enjoy higher prot margins in cases where direct, comparablecompetition is impossible. For example, a restaurant whose particularambiance, recipes, avors, and taste of food, cannot be easily repli-cated by competitors could earn very high rates of prot. Accordingto the government, the restaurant would constitute a monopoly even

by providing such a great product that consumers go out of their wayto pay the asking prices (which could still not be too high withoutcausing a decline in the restaurants revenues and prots).

Since the key to the prevention of monopolistic practices is thefreedom to compete, another argument government economistsoften put forth should be considered. This is that if the barriers to

113 Contrary to what the entire world of academic economics supposes, (manufacturedgoods) businesses in the real world do not assess marginal revenues and set prices equalto marginal cost. They set them on a cost-plus basis.


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entry are too high, the market is not competitive. This thinking is

wrongheaded. Just because one is free to enter a market does not

mean that one has the means to do so. High capital requirements, typ-ically seen as a barrier to entry, in reality just mean that in order to be

protable, the producers must operate with low costs. Many indus-

tries require this large scale and eciency, which requires an immense

amount of investment. The need for large investments and large scale

is the reason that so many industries end up with only two or three

rms. Would-be smaller competitors are not able to achieve such a

high quantity of production and low selling prices.

Predatory PricingOne of the most inuential theories with regard to monopolies

is that of so-called predatory pricing. Under this theory, a company,

particularly a large, wealthy one, could temporarily slash its prices in

order to undercut the smallerrms and drive them out of business, at

which time the large rm woud be able to reduce its production and

raise its prices. The idea is that the large rm, more than the small, can

aord to sell at a loss for a while, and then make up the loss later with

its higher prices. After the large rm becomes the sole supplier in the

industry, it is held, otherrms will not attempt to compete for fearof incurring losses in the same way again. The list below comprises

the primary reasons why this predatory pricing doctrine is completely

unrealistic.114 Though the list is somewhat technical and infused with

economic jargon, it is important at least to present these arguments

to the reader, because the predatory pricing doctrine has such a pro-

found inuence on the world of political economics; it is a primary

cause of harm to millions of consumers:

1. Though the large rm has more money, any loss incurred would

be in the same proportion as that of the small firm; the largerm is thus hurt just as much (even if the marketplace in ques-

tion is that of a particular operating location, and the large rm

has many other locations to support the one location in question,

114 Condensed, summarized, and paraphrased from Reismans writings on predatorypricing: George Reisman, Capitalism: A Treatise on Economics (1995), pp. 399402.


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it cannot aord to maintain an unprotable operating locationwhich reduces its overall prots).

2. If the relative proportion of capital of the small rm is largerthan that of the large rm, it can aord to sustain losses for a lon-ger period.

3. In order to recoup previous losses, the large firm has to raiseprices to such a degree that their very large prots would attractnew competitors that could even possibly compete at lower costs,due to the lack of losses to make up. But in fact it is restrainedfrom raising prices due to this fact. Also, once the large rm suc-ceeds, its new prots are limited because if it raises prices too

high, demand will fall (since customers can choose to buy less orbuy alternative products).

4. Depending on the remaining productive capacity of the largefirm as well as the so-called elasticity of demand (the extentto which buyers will continue to buy more, less, or the samequantities at higher and lower prices), a lower price could causeincreased demand which would drive the price higher becausethere would not be enough capacity to meet the new demand.If the large firm increases capacity in order to meet the new

demand, it has to keep funding that new capacity after all marketmanipulation is complete. The resulting costs could outweighthe gains from possible higher prices later.

5. The large rm must sell below the variable operating costs, notthe largely xed total costs. As long as the small rm can produceabove operating costs, it pays to continue operations. If much ofthe costs of the small rm are xed, it might be able to protablyoperate for quite a while.

6. Suppliers to the competing firms, who would be harmed bydecreased demand resulting from the large rms future higherprices, would have an incentive to subsidize the small rm so asto prevent the large rm from raising prices.

7. Were the large rm really to try and continually lower prices toharm smallerrms, the small rm could prot by shorting thestock of the large rm every time it re-entered the market where


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the large rm was operating, making the money needed to sup-

port its other losses.

8. Were the now sole large rm to continually lower prices, everytime small rms tried to compete, the small rms could encour-

age buyers to wait until they entered the industry and the large

rm reduced prices. At this point the withheld demand would be

so high that the small rm could sell at higher prices and prot.

9. Were buyers to see that only a single rm would be left, they

would require contractual agreements in order to deal with such

a price-manipulating company; otherwise, they would stand to

be harmed nancially.

10. If the small rm goes out of business, its assets are worth less.

They can be bought at bargain prices in bankruptcy, thus oer-

ing a low cost basis with which the new small rm owner can be

competitive.

The occurrence of any particular one of the above events would

likely make attempted predatory pricing unprotable. The reality is

that the large rm would suer extreme losses and would, in fact, be

more protable by sharing the industry with competitors.

Predatory pricing does not really occur, even though some econ-

omists like to pretend it does. Examples abound of supposed com-

panies that engage in predatory pricing, but are instead simply better

competitors. One example is the former A&P grocery store chain,

which used to be a very prominent national chain that was accused

of predatory pricing. But in the end, they were outcompeted, likely

because they were prevented by government from oering their own

private labels like grocery stores do today; the government saw thatact as monopolistic at the time.

It should occur to readers at this point that companies can eas-

ily be held guilty by the government of raising prices too much on the

one hand, and of loweringthem too much on the other. They often

are accused of at least one of these.


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The Only Real Monopolies Government Monopolies

The only way firms can be the sole company in an industry

and not face the threat of possible competition is by having the gov-ernment prohibit (i.e., threaten to use physical force) others from

entering a particular market. Indeed, the government engages in such

action; it is therefore instructive for us to look at the results of such

eorts. The most common occurrences of true monopolies are in the

areas of railways, telecommunications, water services, electricity ser-

vices, mail delivery, and public schools. These are industries where fre-

quent train wrecks (Amtrak), power blackouts, and water shortages

(public utilities) occur, along with constantly increasing prices (post

oce and schools & universities), long lines, and poor services (post

oce), as well as underachieving students and dramatically increasing

taxes and tuitions (schools and universities).

It is argued by government economists that most of these are

natural monopolies where the existence of a single provider is more

ecient than multiple providers. This argument, just like the preda-

tory pricing argument, is not only fallacious, but is based purely on

preconceived false notions, not on observation from reality. In fact, the

theory was made up afterthe fact (i.e., it is a rationale for actions previ-

ously undertaken).

Before the government decided that government-imposed

monopolies should exist, there was in fact competition in these mar-

kets; in most of them, there was more robust competition: Six elec-

tric light companies operated in New York City prior to 1890; 45 had

a legal right to operate in Chicago in 1907; prior to 1905, Duluth Min-

nessota had 5 electric light companies, and Scranton Pennsylvania had

4. After monopoly regulation was implemented in these cities, prices(and prots) usually stayed the same or went up (this was during a

period where prices were falling).115 University of Illinois economist

Walter Primeaux found that those cities which allowed two or more

115 Based on research performed by economist George Stigler. http://mises.org/jour-nals/rae/pdf/rae9_2_3.pdf.


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competing utilities rms (some for over 80 years) had prices that were

on average 33 percent lower than those that didnt.116

Until the early 1900s, many large cities had at least two tele-phone companies. Once AT&Ts patents on telephone service expired

in 1893, more than 80 competitors cropped up within a year, and by

1900, over 3,000 telephone companies existed.117 Prices fell dramati-

cally and call volume increased exponentially. But upon the initiation

of World War I, the government nationalized the phone company

in the name of national security. Until it was again denationalized

80 years later, Americans faced punishingly expensive telephone ser-

vice that made calling long distance a rare event. Once deregulation

arrived again in the 1980s, prices fell dramatically; now, cheap longdistance calls are made by all of us daily without our giving it a sec-

ond thought. Many state telephone companies in foreign countries

were forced into privatization in the 1990s as cell phones became com-

petition: the rigid, overpriced hard lines could not compete with the

cheaper, higher quality service of mobile phones.

The governments antitrust department is a massive bureaucracy

constantly searching for companies to harm. A prime example is its

prohibiting RCA Corporation from charging royalties to American

licensees in the 1950s, a practice deemed to be monopolistic. RCA

instead licensed to many Japanese companies, which gave rise to the

Japanese electronics industry, which ended up outcompeting the

American industry.118 RCA was eventually bought by a Japanese com-

pany in 1990.

Pan American World Airways was destroyed by antitrust regula-

tion because it was forbidden to acquire domestic routes, action that

was deemed to be unfair competition to other airlines. Since it had no

feeder trac for its international ights, Pan Am also went bank-rupt in 1990.

116 Howard Baetjer Jr., (Deregulate the Utilities), http://www.thefreemanonline.org/columns/deregulate-the-utilities/.117 http://www.cato.org/pubs/journal/cjv14n2-6.html.118 Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective.International Review of Law and Economics 5 (June 1985).


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Examples such as these belong to the long list of harm done tocompanies, employees, investors, and mostly consumers by the federalgovernment. Normal competition is often deemed anti-competitive

by government bureaucrats; companies that are more successful thanothers are deemed to have an unfair advantage. Government ocialsand contributing Harvard and Yale socialist economists always believethat they know better than the marketplace what actions should betaken to please the most number of people in society, and they believethey know the exact prices that should be charged for thousands ofproducts. Some economists have even gone so far as to argue that acompany that creates an innovative new product from which consum-ers can benet is a monopoly until competitors come along. Thus,

the government, they say, should regulate companies research anddevelopment spending in such a way that all companies can producenew products in synch.119 In other words, it is argued that competitionshould be abolished, and companies should instead spend time andmoney lobbying the government for the right to produce the particu-lar things that they want to produce with their own private property.

Typically, politicians call new monopoly regulationas well asmost other types of regulationderegulation (most laws govern-ment passes are titled in ways that describe the opposite of what they

are). Deregulation often involves the governments setting prices atbelow-market prices, with the outcome that new companies will notenter the market to compete since they cant make prots by chargingmarket prices. When this happens, politicians and socialists say thatderegulation has failed and that government control is needed. Regu-lation is regulation, not deregulation.

A typical way that government economists determine that acompany is monopolistic is by assessing whether it is making highprots. Armies of economists are trained to be able to perform such

scientic analysis. These economists take a snapshot of companydata at one point in time, make assumptions to ll in the gaps, anddetermine whether profits are too high. But research has shownthat when the same company data is studied over time, those withhigher rates of prot tend to have prots fall to the average rate, while

119 For example see Prole: Dennis C. Mueller, http://ideas.repec.org/e/pmu110.html.


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companies with lower rates of prot tend to see prots rise towardsthe average rate, just as was discussed with the uniformity of protprinciple in Chapter 1.120

Government should be kept out of the marketplace and compa-nies should be allowed to compete without regulation. Unfair com-petition and exploitation of consumers is not possible. Successfulcompanies can only run other competitors out of business, which, con-trary to the governments beliefs, is not an act which causes harm tosociety.

Regulation of the Financial Industry

In the midst of the most recent nancial crisis, dishonest social-ists cry that nancial deregulation caused the mess. The public, dueto either ignorance or dishonesty or both, echo the same cries. Butit should be clear from Chapter 3 that ournancial markets have not

been free. When government controls both the quantity and price ofmoneythe very basis of the nancial marketsthere is almost com-plete government control. Indeed, the Financial Services Moderniza-tion Act of 1999 repealed much of the Glass-Stegall Act121 in 1999, butit did not constitute deregulation, considering our non-gold-backed

currency.

122

Instead, it amounted to corporate welfare for

nancialinstitutions, giving them incentives to take on risks for which bankaccount holders and tax payers would be liable. Other (valid) nan-cial deregulation in recent years resulted in things such as drasticallyreducing transaction fees (stock trades that used to cost $300 per 100shares can now be executed for $1.00), among others. In our deregu-lated environment, although the government allows market partici-pants to deal with one another, the guidelines for every action that

120 For example: Yale Brozen, The Antitrust Task Force Deconcentration Recommen-

dation,Journal of Law and Economics 13 (October 1970): pp. 27992; Yale Brozen, ThePersistence of High Rates of Return in High-Stable Concentration Industries,Journalof Law and Economics 14 (October 1971): pp. 50112.121 Which was originally enacted to enable Rockefeller-dominated Roosevelt adminis-tration to cripple the Morgan nancial empire: Alexander Tabarok, The Separation ofCommercial and Investment Banking: The Morgans vs. The Rockefellers, http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf.122As explained by Robert B. Eukland and Mark Thornton, More Awful Truths AboutRepublicans, http://mises.org/daily/3098.

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