Anti-Anti-Trust? Some clarifications please

Economics Economics Questions
1

From the little I know about Austrian economics, I know that they believe anti-trust policy to be deleterious to the marketplace. I largely agree with that but in turn have some questions.

Do you believe that there is absolutely no industry and no condition (assuming total and complete liberalization) in which a dominant player who:

  1. Charges extortionary rates during “normal” periods
  2. Uses predatory pricing during periods of challenge to drive out new entrants

can keep their position in the long-term or even manage to construct singificant barriers to entry so as to completely dissuade potential new entrants? Technical and infrastracture-heavy industries come to mind.

For example, in the air transport industry. Suppose we grew up with a totally liberalized market. Suppose British Airways managed to achieve complete monopoly in the UK market, and BAA complete monopoly in the British Airports market. Suppose these two decided to merge in order compete with other Euro-continental formations…This would given them the opportunity to charge extortionate fees on their domestic market, and since they control all airports, have such purchasing power with their manufacturers etc., no one would be able to step in to compete with them.

With regard to UK-Europe flights, obviously the British consortium’s pricing would be held in check by competitive pressure from the Euro-continental one…Suppose these two then decided to merge to compete with a Super-American consortium…Again, prices soar in Intra-Europe market but are held in check by competition from the Americans…

We can play this out until we have one global airline and airport consortium, in charge of a mamoth market and making enormous profits. So what’s the argument here? Is this hugely fat cow wetting the appetite of would-be competitors to levels that it encourages much more technological progress on their part?

Would we really see new aircraft technologies or even more disruptive transport technologies (the classic disruptive example used in the industry is the teleporter) happen much faster by allowing that monopoly gobble up everything in its path and making one huge target of itself?

Or are we more likely to see this mega-corporation leverage its enormous financial resources for R&D so that it can be the one to obsolete itself? (But still allowing for a fat margin).

My instinct tells me that this market decided to pay a premium (reflected in the “extortionate fees”) for much faster technological advancement (mega-corp obsoleting itself fearing others may do it before them), but is this the Austrian consensus?

Comments welcome![*-)]

2

It isn’t even the mainstream consensus anymore. I’m a bit short for time right now, and I am sure others will elaborate, but to put it briefly, companies do not only face competitive pressures within their industry, but also from outwith. High profits are a signal to entrants to enter that indsutry and begin competing with the firm (and there are many, many firms out there that can do so.) The firm is also susceptible at all points in time to takeover bids if it is performing inefficiently. The firm, furthermore, faces competition from goods that are substitutes to the good they are offering. If the price is too high, consumers will eventually simply stop consuming and leave the firm worse off. Even natural monopolies dwindle away in the face of competition, such as that in telecommunications, as technologies to circumvent the problem of expensive infrastructure came to be. Dominick Armentano’s Antitrust is the instructive work in this area.

3

Oh but I am considering other industries (teleporter being one of them). So, in essence, the premise is that other modes of transport would try and attack the mega-corp’s profits by working around its barriers (e.g. airport slots, aircraft production slots etc.).

Realistically, fielding operational alternatives would take years, and even then, I still don’t see why the mega-corp that resulted from all those cross-border mergers and vertical integrations wouldn’tfield their massive resources to obsolete themselves.

More than that however, the road that this line of reasoning leads me to that if monopolistic pricing signals new entrants, and they in turn drive prices lower, then there could not be a company that consistently earned extra-ordinary profits, since these would always attract competition. So are Microsoft’s ~30% margins due to distortions in the marketplace that was caused by government regulation? To the contrary, government regulation (anti-trust) is hindering its further growth. Plus I don’t see any other regulatory barriers for potential competitors? It might not be the hot company it once was, but I don’t see anyone stealing their core business, or their high margins yet. The notion that Google will drive around it by transfering the operating system on the web remains to be seen (if it ever happens).

4

You’re basically asking: assume a monopoly is possible, is monopoly possible? Remember that whatever the total size and available resources of a company, the ability to achieve and maintain a monopoly is still judged marginally as all things are, by the capitalized value of the premium they expact to charge once they have a monopoly. In other words it only makes sense to try and establish a monopoly if the resources you need to leverage to push everyone out and keep everyone out are worth less than the premium you will pull in once the monopoly is established. This is unlikely to ever happen, especially when there are other ways to make money, even if just investing in other opportunities. Then, assuming someone manages to actually do it, they’re still limited in the price they can charge because if they charge too much the profits become too attractive and allow competitors to overcome any barriers the monopoly company may have put in place. The more they want to raise prices, the more they have to invest in keeping the barriers to entry not only up, but continually build them higher. That tends to eat into the expected premium. As for predatory pricing, it’s ridiculous. If you think otherwise, suggest it to your current boss and see what he thinks of it as a strategy. If he doesn’t have you committed, he almost certainly will have you fired.

Anti trust law isn’t just harmful to the market, it is specifically targetted to hinder the market. It is protectionism. It tries to manage the market by defining ‘competition’ not as a process but as a state of being such that certain conditions must be met which are favorable to uncompetitive companies.

5

On Microsoft, please tell me you are aware that the company enjoys significant protection from IP laws? And that it is not a monopoly, at least not in the sense that regulators insist it is? Armentano had an article recently on the nonsense that regulators peddle. At any rate, if competitors are attracted by a firm’s high profits and yet cannot dislodge it due to its efficiency/appeal to consumers, then the firm will go on enjoying high profits, as it should. Where is the problem?

6

If flying becomes more expensive, people will turn to other forms of transportation. Cars and trains (more the former in the USA, while more the latter in Europe) offer alternative means to travel. Its true that long-distance travel is necessarily monopolized by the airline industry, but stop and consider how difficult it would really be to establish a significant barrier-to-entry in air travel in the absence of state controlled and funded airports and airplanes. Anyone could design an airplane and go into business. Small airfields are not terribly complicated things to create, and they dot the landscape of much of America (far outnumbering commercial airports I believe). Even with America’s regulated air travel, getting a flight from a smaller carrier for even an amateur pilot is simple. If large airline companies in a liberalized economy started widening their profit margin, there would be plenty of people waiting to take their market share.

As for Microsoft, consider its prime competitors: OSX and Linux. Linux is still wholly unsuitable for mass consumption. Apple (whatever they are paying Jobs isn’t enough, IMO) has gotten a lot better with OSX, but it still has major compatibility issues to overcome. The original PC-Mac compatibility problem was not barrier put up by a monopolistic Microsoft, it was the result of Apple shooting themselves in the foot. The IBM PC was the “open” platform, with many different vendors supplying hardware and software. Microsoft has really been the only good offerer of end-user operating systems for the PC (OS2 was horrible). Although I often use Linux and open-source solutions, I think Microsoft makes good products (I think the XBox 360 is especially good), and I’m glad they are profiting from it.

The “predatory pricing” argument is bunk because of time preference and interest. A monopolist would have to be willing to forfeit income on lower prices in order to gain more in the future than could otherwise have been gained by another investment. I can’t see how this could ever really occur in a way that would do anything but benefit consumers. “Predatory pricing” would have to be sustained until barriers-to-entry could be erected, which really can’t happen without the use of government.