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What Antitrust Should Look Like In A World Of Low Entry Barriers

October 2016

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Antitrust law has a 150-year history in the U.S., designed to ensure sufficient competition in the marketplace to keep prices at or near the social welfare maximizing level that would prevail under perfect competition. Over that timespan the federal antitrust regulators have tried to adapt with the times to keep abreast of changing industry structures, lines between industries, and other barriers to entry. Yet, they now face a challenge that may make antitrust law an irrelevant holdover of a forgotten age. Regulators must address the question of what antitrust regulations should look like when barriers to entry mostly disappear. This question is of immediate importance given the proposed mega-mergers of AT&T with TimeWarner and Bayer with Monsanto that have been recently announced.

Over time, antitrust law has morphed from counting firms in a market, to examining simple concentration ratios, to Herfindal Indices, to actually estimating the pricing power companies would have after a proposed merger, until we recently seem to have returned to simply counting the number of firms. What is too often overlooked is how technology first blurred the boundaries between products and now is using software and the internet to shrink barriers to entry. In such a world, even a monopoly facing no current competitors may have little power to raise prices because to do so will invite new competitors to enter the monopolist’s industry or simply to invent a substitute product that replaces the monopolist’s whole industry.

There are only so many barriers to entry: high entry costs, protected intellectual property, large economies of scale, government regulation, and network economies pretty much cover the possibilities. Clearly, the government is not worried about cases where government regulation creates the market power (such as regulated utilities or government-granted monopolies). A few industries still exist with high entry costs, but so much venture capital is now available that even that barrier is looking lower. As for protected intellectual property, economies of scale, and network economies, the trend toward software and information technology as the centerpiece of so many goods and services we buy is destroying all three as effective barriers to entry.

Protected intellectual property, such as patents and copyrights, works only when the product so protected cannot be closely substituted using another company’s proprietary technology. The increasing ease of access to information and advances in computer simulations are making it easier for firms in the pharmaceutical, chemical, plastics, electronics, and many other industries to find ways to compete against products without infringing on their intellectual property. In the area of software, it is rarely difficult to find a different way to accomplish the same aim, further weakening intellectual property as a barrier to entry.

Economies of scale are becoming less of a barrier, as well, in several ways. First, more and more products are becoming digital, meaning firms experience constant returns to scale virtually from the start and easy scaling from small to large thanks to cloud and server services such as Amazon. Second, e-commerce has obviated the necessity of brick and mortar locations, making it easier to reach economies of scale in both retailing and wholesaling. Third, globalization means that markets are bigger to begin with and it takes a much smaller market share to reach competitive economics of scale than in the past.

Finally, network economies are much less daunting in a world where technology products are simply platforms for software. Fax machines had network economies, worth more the more other people owned them, as did VHS video players. Microsoft Windows benefitted from network economies when their huge market share meant software was written mostly for it. Early on, the iPhone was thought to benefit from network economies, but it is becoming increasingly clear that software like phone apps can be modified easily to different platforms and that we can all run the same software while using different hardware and even operating systems.

Technology has reached the point where we don’t need a television to watch TV, a radio to listen to the radio, or (thanks to Skype) a phone to make a phone call. Even successes such as Uber, which seems to depend on network economies (lots of drivers means lots of rider which means more drivers, etc.) cannot count those network economies as a barrier to entry. Another ridesharing service that writes a better app or offers better pricing can take over quickly since the only cost of switching to drivers and riders is downloading a new app.

What all this change means is that barriers to entry are much lower than they may appear to regulators in old-school antitrust agencies. Mergers that would appear to yield considerable pricing power may not, market share is less meaningful, and markets that may not appear contestable at first blush may well be. All of which is fancy economic-talk for the happy fact for consumers that technological change is making it much harder for even the largest companies to take advantage of their customers through high prices.

This shift in the balance of power between market-dominating firms and potential upstarts calls for an era of looser antitrust regulation. Regulators in many cases should be less worried about potential negative effects of increasing industry concentration as it is less likely than in the past to translate to the power to raise prices. As yet non-existent entrants now need to be considered by the regulators as much as they surely are by existing firms when they set their prices.

 

This article was written by Jeffrey Dorfman from Forbes and was legally licensed through the NewsCred publisher network.

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