(Bloomberg Opinion) -- The big story at the annual American Economic Association meeting in Atlanta earlier this month was about the economics profession dealing with its gender problem. But after that, the second-most-interesting debate in economics right now is over antitrust and monopoly power.
Two things have pushed the antitrust issue to the fore — economists have started to cite excessive market power as a drag on growth and wages, while energized activists are rising up to challenge lax regulation that allowed a wave of mergers in the past few decades.
Along with rising awareness of the market power problem, there’s a growing realization that the traditional approach to antitrust won’t be enough to correct things. Not only do regulators fail to consider many of the broad implications when deciding which mergers to allow, but the government lacks tools for dealing with monopoly power after companies become large and dominant.
One of the most interesting papers presented in Atlanta was by the University of Pennsylvania’s Ioana Marinescu, an economist who has done a lot of recent research on market concentration and market power. Writing with law professor Herbert Hovenkamp on the effect of mergers on labor markets, the authors proposed a new approach to antitrust. Whereas defenders of the traditional approach focus on consumer welfare as the benchmark of market power, Marinescu and Hovenkamp recommend that courts and regulators also consider the degree to which mergers give companies more power to suppress wages.
But Massachusetts Institute of Technology economist Nancy Rose gave a presentation emphasizing the difficulty of using merger enforcement to counter market power. It’s true, Rose noted, that antitrust enforcement has eased in recent decades, and that it could be tightened up. But formidable institutional barriers will limit the effectiveness or the policy even under the best of circumstances. To stop companies from merging, regulators have to take them to court, and plead their case to judges whose understanding of the economics involved is hazy at best. (Also, as Rose might have been too polite to point out, companies themselves can often hire expensive consultants to argue their case.) Thus, merger enforcement is costly and difficult.
There are other limitations of merger enforcement beyond the ones mentioned by Rose. Often, mergers end up raising prices, in spite of corporate promises not to. But because the Federal Trade Commission doesn’t conduct a systematic review of mergers after the fact, this generally goes unnoticed and unpunished.
Furthermore, it’s not even clear how companies should be split up if a merger does reduce competition. The famous cases of antitrust action breaking up big companies often involved division along geographical lines. When AT&T was forced to relinquish control of local telephone services in 1982, those services simply became regional companies that retained their local market share. When Standard Oil was broken up in 1911, the resulting companies were divided along regional lines — many of them eventually spread out and began to compete with each other, but at least for a while the breakup probably didn’t do much to diversify the local markets for workers and for gasoline. For workers as well as consumers, it’s often local concentration that matters rather than nationwide concentration.
It would be great if big companies could simply be divided into the competing rivals that existed before a merger took place. But once two competitors join, they tend to merge their sales departments, their engineering departments, their management structure and almost every other facet of their business. Antitrust regulators can’t easily order the merged company to split itself back into its constituent parts, because those parts no longer really exist.
Thus antitrust, although a valuable weapon in the nation’s struggle to counteract corporations’ monopoly power, can’t be the only arrow in the quiver. Complementary approaches are needed in the form of institutions that push back against the power of the big companies.
Two such approaches are unions and minimum-wage laws. Unions, by organizing workers into a single bargaining unit, effectively create monopoly power in labor markets to counteract the concentrated power of employers. A similar policy is co-determination, in which the government mandates that workers be given board seats in their companies. Minimum wages directly counteract the tendency of powerful employers to set wages inefficiently low — which is why modest minimum wages can even raise employment levels in some cases.
Beyond these approaches, which have been tried in various times and places over the past century or more, there are radical new ideas. One of these is the idea of progressive labor standards, the subject of a recent proposal by businessman and activist Nick Hanauer. The idea is to impose tougher requirements — such as higher minimum wages and more mandatory benefits — on companies with more market power. Measuring market power is hard, but Hanauer proposes various measures, including market concentration, dominance over independent companies in local markets and wage disparities within the corporation.
So progressive labor standards should be regarded as a last resort. If traditional approaches — a combination of antitrust, stronger unions, minimum wages and possibly co-determination as well — doesn’t do the trick, direct sanctions on dominant companies might be the only alternative.
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Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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