This is only one example of the conundrums that exist in our antitrust policy. These conundrums can be summarized in saying that the law as presently interpreted seems to say that firms should compete but should not win. Firms should be efficient enough to survive but, if more efficient, should not share the fruits of that greater efficiency with their customers. The relatively more efficient firms must not operate competitively. They must not press the rate of output to the point where marginal cost approaches price if that rate of output is sufficient to supply most of the market, particularly if their efficiencies spring from the large-scale provision of advertising. We have confused high concentration with monopoly and competitive activity by large firms with predatory behavior. We have taken descriptions of sufficient conditions for competition, such as a large number of firms, and confused them with necessary conditions.
If the US Department of Justice Antitrust Division and the Federal Trade Commission are to permit the competition that will press efficiency in the economy to its optimum level, they and the courts must learn what are the necessary conditions for competition. The leap beyond what is strictly necessary is repressing competition when applied in inappropriate cases. Unfortunately, although we economists are very sure of what constitute sufficient conditions for competition to prevail in some circumstances, we are not at all sure of what are the necessary conditions in all circumstances.
Open entry is, it seems to me, a necessary condition if a competitive result is to prevail in a market. I am confident, furthermore, that open entry is sufficient to enforce competitive behavior in most, if not all, circumstances.
If I am correct, the task of the Antitrust Division can be confined to the demolition of arbitrary barriers to entry and the prevention of the erection of such barriers. It need not confuse itself with such tasks as attempting to break up major firms in highly concentrated industries. It need not determine what is a market or an industry. The courts would not have to listen to endless arguments as to whether a line of commerce or a market includes only domestically produced virgin aluminum; all virgin aluminum pig used in the US, whether produced at home or abroad; all virgin aluminum pig sold in the US, whether produced at home or abroad; all virgin aluminum plus secondary aluminum; all metals used for the purposes for which aluminum is used; all materials used for the purposes for which aluminum is used; etc. The courts would not have to decide such arguments as whether the shoe market consists of a neighborhood, a city, a metropolitan area, a state, a region, or a nation. If the Antitrust Division concentrated on the task of eliminating contrived impediments to entry, it would efficiently accomplish the twin goals of ensuring competitive behavior and maximizing efficiency in the economy.
Barriers that are not barriers
The sophists in our profession have confused the meaning of barrier to entry. Because of this confusion, I am sure that the Antitrust Division would do ridiculous things in the name of removing impediments to entry. Even enlightened chiefs of antitrust have fallen for the notion that advertising is a barrier to entry. One of the widely used texts in industrial organization tells us that differentiation of product is a barrier to entry. A basic text in price theory informs us that, “Barriers to entry arise because of economies of scale.”
Limitations on advertising would erect a new block to entry rather than removing one. It would, in fact, create grandfather rights. It would become more expensive to inform prospective customers that a firm new to a given market is prepared to supply them. It would raise the cost of letting the world know that a better mouse trap has been built. It would force firms to invest more heavily in a dealer network or in a distribution system if they were limited in their advertising outlays, thus raising the long-term-cost curves of prospective entrants. It would become more expensive to build volume quickly to a level that would achieve the major part of the available economies of scale. Efficiency would fall because firms would be forced to resort to the inefficient substitutes for advertising they otherwise avoid.
Attacks on product differentiation by the Antitrust Division or the Federal Trade Commission also could result in blocking entry. A new entrant can usually insinuate itself more easily into the market if its product is not identical with those offered by established firms. Why should buyers switch to a new supplier unless its product serves their tastes more efficiently than those already available?
It may be argued that a market may be more competitive—more open to entry—with product differentiation than without it because of its effect on buyer behavior. Buyers dissatisfied with a product from a current supplier will more readily engage in a search for an alternative supplier if there are no legal barriers to the offering of alternative varieties. If only a standardized product is allowed, search is less likely to be fruitful and less likely to be undertaken.
Even with the Antitrust Division focusing on the task of removing artificial impediments, there will be thickets of sophistry to clear away if the division is to do a proper job of promoting competition. That sophistry can lead to ridiculous attacks by the Antitrust Division was certainly demonstrated in one case in which the division maintained that it needed certain accounting and budgetary data from the defendant in order to prove that he was the low-cost producer. The division’s theory was that being a low-cost producer conveyed monopoly power by making it possible for the defendant to sell at lower prices than its competitors and thereby drive them from the field. Being a low-cost producer and not using such efficiency to preempt the market seems to me to be more akin to undesirable monopolistic behavior. Efficiency is hardly an arbitrary or artificial barrier to entry.
Real barriers to entry
If free entry is the (or only a) necessary condition for the maintenance of competition, I would suggest that the Antitrust Division should be devoting itself to attacking controls on entry. It should enter those cases where, for example, the Interstate Commerce Commission denies certificates to those who would enter, let us say, the trucking industry. When someone seeks a charter from the Office of the Comptroller of the Currency or from state banking authorities to enter the banking business and is arbitrarily denied, the division should come to the assistance of the applicant. When the Massachusetts Pharmacy Board refuses permission to a pharmacist to open a drug store, presumably because an adequate number already operate in the area, the division should leap to attack this artificial barrier. When the Minnesota Pharmacy Board denies any nonpharmacist the right to start a drug store and hire a pharmacist, the division should train its legal artillery on the barricade. When New York, Chicago, San Francisco, and all major cities other than Washington, DC, refuse to issue taxicab licenses to those who willingly satisfy all requirements for the provision of trained, licensed chauffeurs and safe equipment, with appropriate amounts and types of insurance, the division could certainly ride to the rescue of the patrons of this fenced-in market. When the Postal Service harasses those who would compete with it and shuts them out of the postal market on the authority of a law that makes it illegal for anyone but the post office to use a householder’s mailbox or to carry written messages, the division should recommend the repeal of such arbitrary barriers. When the division attacks the New York Stock Exchange, it should concentrate on the practices and rules of the exchange that impede entry to the stock brokerage business, such as limitations on the business member firms are allowed to do with nonmember firms.
The division should also be devoting attention to the attempts to erect new barriers to entry. When bills are offered prohibiting banks from entering the computer service market, the division should be as eager to maintain this source of potential entrants to an industry as it is when it attacks joint ventures and acquisitions.
What is entry?
On the subject, those attacks raise some interesting questions as to the meaning of entry and of “arbitrary barriers to entry.” It would appear that the Antitrust Division itself has become an arbitrary barrier to entry.
The division defines entry as the appearance of a new name in the list of those competing for a given set of customers. If the new name is simply a replacement of an old name because an acquisition has occurred, the division regards this as no improvement in the competitive situation. In many cases, it has argued that this is a degradation of competition because a name has been removed from the list of potential entrants.
To an economist, expansion of capacity—either by de novo entrants or by established companies—is entry in the meaningful sense of moving resources (capital and manpower) into the use in question. Monopoly in an economically functional sense means a situation where an industry fails to add resources when justified and called for by the demand and cost situation. If customers are willing to pay more for the additional product than the cost of using resources to produce more, and if these resources are not moved into the industry in question, monopoly prevails and inefficiency is a consequence.
The Antitrust Division barrier
If a potential entrant into an industry chooses to enter by acquisition of an established firm, it will have to offer a price that is worth more to the sellers than retaining ownership of the firm. Presumably, it will offer such a price if it believes that it can manage the acquired assets more efficiently than they are being managed. Alternatively, it finds it cheaper to enter the industry in this way than by building new assets, and it believes the industry worth entering at this cost. If the former is the situation, and the division blocks the acquisition, it is blocking a probable improvement in efficiency. If the latter is the case, the blockage of the acquisition may block the entry of the firm since more-expensive methods of entry may mean that it will not be worth entering at the higher cost.