Re: Monopoly and Efficiency/Technology

[gemuese@soca.com]

On Feb. 2 Charles Mueller posted the message quoted below concerning and
FTC staff report (found on the Web at 
http://www.ftc.gov/opp/global/report/global1.htm)
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        The question has been posed as to whether/when monopolies and
cartels, instead of raising prices, reduce 'quality.'

        I'm surprised that no one has mentioned the FTC (and evidently
Justice) position on monopoly power and efficiency/innovation.  In its
1996
report, 'Anticipating the 21st Century:  Competition Policy in the New
High-Tech, Global Marketplace,' the Commission staff came out in support
of
the view that mergers creating market power may very well (1) raise
consumer
prices BUT are also apt to (2) enhance 'efficiency'--yield lower unit
costs,
and (3) stimulate innovation, with (2) and (3) more than OFFSETTING (1),
the
price-effect of such monopoly-building mergers.  For a critique of this
FTC
report, see my journal, Antitrust Law & Economics Review, Vol. 27, No.
3,
pp. 23-68, and Vol. 27, No. 4, pp. 39-60.

        In other words, the FTC (and Justice) have been routinely
approving
mergers to monopoly/duopoly for the past 2 decades on the theory that
higher
levels of concentration--monopoly power--are SUPERIOR to
competitively-structured markets both in terms of industrial efficiency
AND
as a stimulus to technological progress.

        If, as we're hearing here, monopolies and cartels are
SUPPRESSORS of
technology, where did our 2 enforcement agencies go wrong?

        Charles Mueller, Editor
        ANTITRUST LAW & ECONOMICS REVIEW
        http://webpages.metrolink.net/~cmueller
         
  [END OF Feb. 2 message]
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	Mr. Mueller's purported restatement of the paper  ["In other words, the
FTC (and Justice) have been routinely approving mergers to
monopoly/duopoly for the past 2 decades on the theory that higher levels
of concentration--monopoly power--are SUPERIOR to
competitively-structured markets both in terms of industrial efficiency
AND as a stimulus to technological progress"]  is inaccurate and
requires a reply.  

	The report in no way indicates that the FTC has been routinely
approving mergers on the basis of efficiencies.  In fact, it cites only
one case in which the Commission actually considered efficiencies--a
case in which the Commission concluded there was insufficient proof that
there would even be efficiencies in the merger under consideration.  

	The report is actually from FTC staff, not the Commission itself. 
Chapter 2 of the report addresses the topic of efficiences in merger
analysis.  After describing how efficiencies have figured into the
calculus historically, the Chapter lays out an approach, set forth
below, that the authors recommend be used in merger analysis.  Even the
recommended approach does not seem quite so dramatic as Mr Mueller's
chracterization.  While it acknowledges that efficiencies from some
mergers may mean that the merger will not be anticompetitve, it does not
conclude that most mergers will yield such efficiencies--only that the
issue should be considered.  A conclusion that the Commission for two
decades has been approving any mergers "on the theory that higher levels
of concentration are SUPERIOR to competitively-structured markets both
in terms of industrial efficiency AND as a stimulus to technological
progress" would seems hard to draw from this Chapter.


The basic approach taken by the authors, for those interested (but not
interested enough to go to the FTC's Web site) is to ask the question of
whether the merger will be "likely to change the merged firm's abilities
and incentives so as to deter the likelihood of lessened competition
post-merger or increase competition in a relevant market."  They then
provide some examples of what they are thinking of: "For example, if
merger-related efficiencies would enable a firm to lower its costs,
those lowered costs may disrupt market conditions so as to make
collusion less likely or to disturb the terms by which firms previously
were able to coordinate their conduct.  Similarly, if a merger combined
complementary technologies and thus enabled  the creation of a new or
improved product, the increased product variety, in itself of value,
might stimulate competition or impede competitors' ability to
coordinate.  Likewise, if merger-related efficiencies eliminated a
technology disadvantage, the merged firm might become a more significant
constraint on market leaders.  And merger-related efficiencies might
enable the merged firm to reposition itself and constrain existing
unilateral price elevation in a market for differentiated products." 


This posting warrants a couple of points in response.

The primary point is 

In his first sentence Mr. Mueller attributes the positions in the paper
to the FTC itself, although, as he later points out, the paper was
written by staff.