As More People Worry About Monopolies, an Economist Explains What Antitrust Can and Can’t Do

According to a growing chorus of critics, America has a “monopoly problem.” Nobel Prize-winning economist Joseph Stiglitz has said as much, as has Democratic U.S. Senator Elizabeth Warren. President Trump has called Amazon a “no-tax monopoly”. In response, pundits, politicians, and think tanks are renewing their interest in antitrust policy.

But is America really dominated by monopolies? And is antitrust the answer? Carl Shapiro is a professor at the Haas School of Business at the University of California at Berkeley, an expert in antitrust, and served at the Department of Justice during the Obama and Clinton administrations. He also served on the Council of Economic Advisors under President Obama.

In a new paper, he reviews the evidence of growing concentration in the U.S. economy, discusses whether that constitutes a decline in competition, and outlines the role he sees for antitrust going forward. I spoke to Shapiro by phone and email. What follows is excerpts from our conversation, edited for length and clarity.

On the timing of his paper, “Antitrust in a Time of Populism”:

Shapiro: Certainly, Trump’s election is part of it. But it’s more than that.  During the 2016 election, both parties were saying that the system is rigged and the little guy is not getting a fair deal.  That feeling was partly directed at government, but it was also directed at business.  Quite a few Americans seem to believe that powerful large businesses control the system and that regular people and small businesses are not getting a fair shake.

More specifically, quite a few journalists, policy analysts, and politicians have been talking about what they see as the decline of competition in America over the past 30 or 40 years.  I detail this in my paper.  That assertion directs attention to the question of whether antitrust policy has somehow failed us.

On increasing industry concentration, and whether that suggests a decline in competition:

We’re not really interested in concentration for his own sake. We use market concentration as a proxy or a signal about whether a market is competitive.  I spend a lot of time in the paper looking at the data and asking whether U.S. markets have in fact become significantly more concentrated over the past 20 or 30 years. There are some significant measurement issues.  Much of what’s been said about changes in concentration does not have a sound basis when one looks more closely at the data. I see some increase in concentration, but not to levels that indicate the presence of many monopolies or even tight-knit oligopolies.

But the bigger question is what do we make of the increases in concentration that we observe.  There are two very different interpretations. One interpretation is that when a market gets more concentrated, that means it’s less competitive, so we have a problem. That is not a new view; it was a fairly popular view in the ‘۵۰s and ‘۶۰s. And many people seem to be taking that view without even realizing that there is a perfectly coherent alternative view.  The alternative view attributes increases in concentration to growing economies of scale, which means that the larger companies tend to be more efficient than the smaller ones.  In that situation, over time the larger companies will tend to edge out their smaller rivals. That is what happens naturally when firms compete and there are substantial scale economies. When you have scale economies and some firms are more efficient than others those firms are going to get bigger and take over and you could very well see increasing concentration. Plus, it’s well understood by industrial organization economists that many markets are naturally rather concentrated. So that’s the alternative explanation: at least some of the increasing concentration we are seeing reflects the competitive process at work.

On the proper role of antitrust, and the principles it should follow:

There are well established principles of antirust. It’s bipartisan. It’s long-standing. The antitrust enforcement agencies, private lawyers, antitrust economics, and the courts all follow these principles.  Everybody who works in this area has converged on these principles over the past 50 years, and we have even exported these principles around the world. What is striking is that these principles seem to be on the table again. People are questioning these without really, in my view, offering a very coherent basis for doing so or a workable alternative.

So, what are the principles? First, that the goal of antitrust is to make sure that consumers benefit from the forces of competition. What that means is several things.  First, we have to make sure that mergers don’t eliminate competition. Second, we cannot let firms form cartels to collude rather than compete.  Third, we cannot let big, powerful firms stiff-arm or exclude competitors that would threaten them.  The common theme is that antitrust prevents firms from doing things, either alone or in groups, that disrupts the competitive process and harms consumers. That is the core principle, that’s what we’re trying to do with antitrust.

Now let’s set that against two things we’renot trying to do. First, antitrust does not break up or regulate a firm simply because it has grown to be large or powerful. Other laws do that. If we conclude that an industry is a natural monopoly, so competition in that industry just cannot work, we need to resort to price or rate-of-return regulation; we do this for utilities. But antitrust does not punish firms for being successful even if they become dominant. Sometimes one firm is very successful and obtains a dominant position in the market. So long as that firm does not exclude its competitors or engage in “monopolization,” antitrust is going to accept that outcome as part of the competitive process.  This does back to the Sherman Act from 1890, which outlaws “monopolization” but not “monopoly.”  Second, antitrust does not protect small companies from competition by larger ones.   Antitrust is about unleashing the forces of competition, not throttling them.  For over 100 years there have been political tendencies to protect small companies.  If we conclude that is an important social goal, it should be achieved through other means such as the tax system or via regulations, not through antitrust.

I am very much struck by how much the discussion today mirrors the discussion of 50 years ago and also the discussion of 100 years ago. It’s almost as though there are 50-year cycles by which these populist sentiments arise and look to antitrust to solve certain problems that are not fundamentally problems having to do with competition.

On the problems antitrust is not suited for:

The most important one is the excessive political power of large companies — to pick their regulators and to influence Congress in terms of the rules of the road, from environmental policies to labor policies to tax policies. I happen to think that’s a huge problem, and indeed is part of a broader problem of generalized corruption by which money has such enormous influence in politics.  I am hardly alone in having this concern, but antitrust cannot solve that problem.  The solution must come from campaign finance reform, greater transparency, a broader legal definition of corruption, or other policies along those lines.

The second big problem people are asking antitrust to solve is inequality of income and wealth. Effective antitrust naturally helps somewhat with inequality because it protects consumers. But antitrust cannot be a central way of addressing inequality.  That’s got to be tax policy and other major policies such as health care and education.

On the case for more utility-like regulation or some other dramatic regulatory scheme to limit the autonomy of major tech companies:

We’re at a moment when there’s a lot of talk about that, and I don’t think that talk will go away very quickly. I am not inherently opposed to certain forms of regulation, if they’re well-designed. I just ask whoever is proposing these things to say: What exactly is the problem you’re trying to solve? What entity would do the regulation? How would that entity not be captured? And would it be workable? While environmental regulations, and health and safety regulations have been a big success and saved many lives, we have learned over 50 years from a variety of industries that regulation of prices and entry and exit often doesn’t work very well.  The poster child for this was airline regulation. Airlines were deregulated 40 years ago.

Turning to today’s tech firms, one example is requiring disclosure of political ads and who paid for them. Why not? That seems fine. There may be some technical issues, but it seems like a really good idea. Various rules having to do with users’ control over their personal information and their online activities — I’m pretty open to that, too.

But when people express general concerns about the power of the large tech firms and look to regulation to check that power, I’m more skeptical.  Take Facebook, for example.  Clearly, Facebook is large and powerful based on their huge social network.  But what problem would regulation solve, and what specific regulation are we talking about? If somebody wants to come up with a proposal for a broad-based regulation that would apply to Facebook, I’m listening. But I don’t think it’s easy to control the economic power of the large tech firms by regulation.  The best way to do that is to make sure they are subject to the forces of competition