Megamergers

Megamergers

E-mail debates of newsworthy topics.
May 7 1998 3:30 AM

Megamergers

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Dear Eleanor:

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       Merger law has been so strict, at times draconian, that for three-quarters of a century there have been no major mergers that even approach the monopolistic. Those I would prohibit have largely been mergers of monopoly proportions by small companies in small markets. We would have to go back to 1911 when the Standard Oil and Tobacco trusts were dismembered to find very large mergers that should be illegal. Your hypothetical question about the Boeing-McDonnell Douglas merger is answered by the policy I have enunciated and which you correctly understand me to urge.
       I doubt very much that it can be proved that "most megamergers are a net economic loss to society." If they are not of monopoly size, so that competition is stifled, the question of whether they produce efficiencies or inefficiencies is best left to the market to decide. If a merger proves inefficient, the new firm will lose market share to its competitors. If, as you remark, "fewness of players narrows the paths of experimentation and development and lessens the choice of consumers," those are forms of inefficiency that rivals will be quick to exploit. Businessmen make mistakes, but it is obvious that fewer mistakes will be made by those intimately familiar with the business concerned than by lawyers and courts undertaking to second-guess businesses trying to make profits by creating more efficient enterprises.
       What, precisely, Congress feared in 1950 when it amended Section 7 of the Clayton Act is difficult to say. The rhetoric was extremely vapid, even encompassing such matters as infant mortality rates in cities with concentrated industries. That is why it is a mischaracterization to say that my view of this area of antitrust is "180 degrees away from what Congress thought it would get." In amended Section 7 of the Clayton Act, as in so much other controversial legislation, Congress never articulated the basic policy choices that the subject requires. Thus, Congress never suggested, much less specified, what market shares should make a merger unlawful. There was a degree of agreement that mergers, as well as practices covered elsewhere in the Clayton Act, should not be allowed if they were incipient monopolies. The concept of incipiency is not only bad economics, it has proven impossible to make sense out of in deciding cases. Every horizontal merger may be said to be an incipient monopoly because it increases market share, and yet Congress expressed no desire to ban all horizontal mergers. The courts have been left adrift in this area. That being the case, a degree of certainty worthy of the name "law" can be achieved only when the merger would create a monopoly.
       The notion that private power, at least as exemplified by major corporations, would become stronger than the state itself is pure populist mythology. Not only does it fail to tell a court how to decide any particular case, but it is untrue. The automobile industry is unable to stand up to the state and to defeat unwise legislation. The only occasions on which the car companies succeed are those in which their interests are congruent with labor unions and car dealers. Political power does not grow out of large capital but out of numbers and influence with voters. It is noteworthy, for example, that the politicians wage a vicious war on the tobacco manufacturers while continuing to coddle tobacco farmers.
       With or without megamergers, the government is unlikely to let large companies fail, because there are too many shareholders and workers, both in the company and in its suppliers and customers, for government to accept the political consequences. That is a fact of political life, but it has nothing to do with antitrust, whose mission is to protect competition. If that fact is somehow relevant to your view of antitrust, it would favor government rescues of major corporations, because such rescues would prevent a decrease in the number of competitors, while bankruptcy might produce a more concentrated market.
       I do take exception to your charge that my analysis reflects not my understanding of economics but my personal political philosophy. That is, to put it no higher, at least an accusation of woolly-mindedness.
       As to the vice president of the United States flogging Boeing aircraft in China, that too is irrelevant to antitrust policy, and the policy question should be addressed to Mr. Gore.

Regards,
Bob