4/17/23
Brian Albrecht and his excellent ICLE colleagues explore recent merger prognostications here. They critically examine doomsday predictions about Amazon-Whole Foods, consolidation in the beer industry, Bayer-Monsanto, Google-Fitbit, Facebook-Instagram, and Ticketmaster-Live Nation, concluding in each case that fears of subsequent monopoly power were mistaken.
Here are a few snippets:
“The first merger we look at is Amazon’s purchase of Whole Foods. Critics at the time claimed the deal would reinforce Amazon’s dominance of online retail and enable it to crush competitors in physical retail. As now-FTC Chair Lina Khan put it: “Buying Whole Foods will enable Amazon to leverage and amplify the extraordinary power it enjoys in online markets and delivery, making an even greater share of commerce part of its fief.”
These claims turned out to be a bust. As we explain, at the time of writing, several large retailers have grown faster than Amazon; Whole Foods’ market share has barely budged; and several new players have entered the online retail space. Moreover, the Amazon-Whole Foods deal appears to have delivered lower grocery prices and increased convenience to consumers.
Google’s acquisition of Fitbit is another case where progressive scholars’ dire predictions failed to materialize. The deal’s opponents claimed the merger would reinforce Google’s position in the ad industry and prevent new entry; harm user privacy by enabling Google to integrate Fitbit health data into its other ad services (or sell this data to health insurers); and crush burgeoning rivals in the wearable-device industry.
At the time of writing, available evidence suggests the exact opposite has occurred: Google’s share of the online-advertising industry has declined, as has Fitbit’s position in the wearable-devices segment. Likewise, Google does not use data from Fitbit in its advertising platform; not even in the United States, where it remains free to do so. Meanwhile, the merger enabled Google’s entry into the smartwatch market as an upstart competitor against the market leader, Apple. In short, enforcers’ “terrible decision” to clear the merger appears vindicated.”
In corresponding with a non-economist friend of mine about these matters, I offered the following commentary:
It's not to equate "big" with "bad.” Many economists, for over a century, have argued that you can’t derive any immediate welfare implications from a firm’s size. Traditionally, economists have argued that we should distinguish between firms that have become large as a result of rent-seeking from those which have become dominant through superior satisfaction of consumer wants. Those that achieve success by way of the latter means make the world a wealthier place for everyone, even if one side effect is a high, static concentration ratio. Firms that "abuse" their newfound market niche by raising prices, restricting output, or cutting quality are inviting new entry, provided that government hasn’t erected artificial entry barriers. The threat of potential entry disciplines firms even when a market is comprised of only a handful of sellers.
This distinction between alternative means of achieving market dominance is why myself and many other economists are highly skeptical of policy aimed at curbing firm size. Antitrust skeptics see the market as a competitive, dynamic process that repeatedly selects for those firms that are best at satisfying consumer preference. I’d argue that highly dominant firms (dominant at what?), when they aren’t shielded by government-enacted entry barriers, tend to be fairly ephemeral.
The historical record seems to agree. All the classic examples—Standard Oil, A&P grocery stores, Alcoa, JC Penney, MySpace, etc… were all once considered unstoppable juggernauts, but had relatively limited heydays and were eventually outcompeted by superior rivals. This is true even for network industry firms like MySpace, where being a first-mover is of tremendous advantage. (See this infamous piece, humorous in retrospect.)
If my view of the market as a place of perpetual churn is correct, antitrust is analogous to a punishment for the winners—who have (temporarily) won precisely by making the world a wealthier place. On this view, antitrust is like setting up a system that assesses a fine on whoever wins the hundred-meter dash at the Olympics and then expecting this system to reveal who the world’s fastest man is. Suppose a cure for cancer is possible. The first firm to discover the cure would have a 100% market share and could be prosecuted under antitrust laws.
In other words, the existence of a particular distribution of incomes/profits/firm sizes/whatever, is not enough to infer any welfare implications by itself. What matters is the institutional environment within which these firms are seeking profits. In a context where private property rights are well-protected and where there’s little opportunity to seek privileges from government, the existence of large firms may simply reflect the fact that some sellers are better at satisfying consumer preferences than others. It may reflect economies of scale. If we care about making the world a better place, this is something to celebrate. These firms are creating wealth, and much of that wealth goes to consumers. But to the extent that government is handing out special privileges, then a high concentration ratio might simply reflect the fact that some firms are better at attaining crony, political favors. They are benefitting at the expense of their rivals and consumers.
An implication is that it's always important to ask why concentration ratios have increased. There is significant debate on this topic, and there is much evidence suggesting that government-enacted entry barriers are a significant driver. I'll offer just one example. Take the "Americans with Disabilities Act." The ADA required that businesses incur a host of fixed costs to make their facilities handicap accessible. For enormous firms like Wal-Mart, a regulation like this amounts to pennies. But for mom-and-pop operations, having to double the size of their bathrooms to comply with the new regulations could represent a doubling of their costs.
The result is that large firms are shielded from new entrants and this contributes to higher concentration ratios. This is not mere speculation; large firms sunk significant resources into lobbying for these regulations, which is puzzling when you consider their costs would increase as a result of the law being passed. It’s less puzzling when you realize that these regulations raise large firms’ rivals’ costs disproportionately to their own. To the extent that concentration ratios are increasing due to regulations like these (and there are tens of thousands like it), I’d agree that rising concentration is undesirable.
It's a naïve view of antitrust to assume that regulators are disinterested actors, seeking to promote consumer welfare. (In fact, some scholars are ready to jettison the historic consumer welfare standard altogether in service of other goals antitrust might achieve). What, then, does antitrust look like in the real world? The overwhelming majority of antitrust cases are not brought by consumers, but by firms that have been outcompeted by their rivals in the marketplace (for every 1 antitrust suit brought by a consumer, around 19 are filed by rivals).
For more on concentration and antitrust, see Louis Rouanet’s review of Thomas Philippon's The Great Reversal. Or my recent piece at the Beacon blog.