How do we prevent big companies conspiracy?

Question

These days we can see a bunch of troubling trends.

• Consumer goods are less quality.
• Big companies merge.
• Patent laws and strict requirements on appearance remove small entrepreneurs from the manufacturing business.

These problems had been subjects of dystopian sci-fi scenarios for many times. Even though it is profitable for a starting bussinessman to buy and sell as the supply and demand dictates, for a few big companies, ruling over the market it is profitable to keep the prices up.

What can lawmakers do about concluding conspiratorial agreements or merging big companies to keep the supply and demand principle?

Answer 1

The kinds of practices you describe are frequently controlled through competition/antitrust policy. For example:

• In the US conspiratorial agreements (such as price-fixing cartels, bidding cartels, or other agreements that restrict competition) or conspiring to abuse a position of dominance in a manner that harms competition is illegal under the terms of the Sherman Act 1890. Likewise, these kinds of practices are prohibited within the EU by Article 101 of the Treaty on the Functioning of the European Union.

• In the US, the Clayton Act 1914 provides for the prevention of mergers that are deemed anti-competitive. A merger between "big" companies is likely to be anticompetitive because it will result in a significant increase in market concentration. More formally, the DOJ writes, "Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission." Article 102 of the Treaty on the Functioning of the European Union serves the purpose of preventing anti-competitive mergers in the EU.

The laws mentioned above are regularly used to prevent conspiracies or mergers that harm competition, and firms are often subjected to significant penalties for violations of these laws. For example, here is a list of cases in which the European Commission has intervened to prevent cartels. Here is a similar list for merger cases.

The relevant EU laws are mirrored in national law within EU member states so that member state competition authorities can also intervene to prevent conspiratorial behaviour.

• The issue of patents is a slightly more tricky issue. A patent is a state-granted right to behave anti-competitively. When a patent is awarded, the state is basically saying "we are going to let you behave like a monopoly over this technology for the next 20 years". This is harmful for all the usual reasons that monopoly is bad. But, there is an important trade-off. Firms invest a lot of resources into research and development. For example, developing a new drug is estimated to cost as much as $5,000,000,000. Companies would not be willing to make this investment if they thought that, as soon as the drug were invented, others would enter the market, copy the idea, and sell a cheaper competing generic alternative. If we want firms to innovate then there has to be some reward to innovation. Thus, the compromise we have is that firms are allowed to be a monopoly for a limited period of time in return for making their inventions public by writing them into a patent filing.

Answer 2

In principle, there are two effects of merging companies that have opposite effects on welfare/efficiency:

A) A merger could result in more efficient production. This could be because the merged firm will adopt the practices of the most productive of the two original firms. Alternatively, it could be because of economies of scale. We think that many processes are more efficient if they are done on a bigger scale. The investment in designing a product and designing and installing a very efficient production process only pays off if you have a large enough scale. finally, it could even happen because it's efficient for a single entity to own the upstream and downstream processes in order to avoid negotiation costs and invest heavily in relationship-specific technology.

B) On the other hand, a merger could result in less competition. This could happen because the two companies were competing against each other and they are no longer doing so after the merger. It could also happen because the new larger firm is going to be a dominant player in input and output markets. It will be able to dictate terms to its suppliers, and also to its consumers, and even to its specialized employees.

The presence of these effects means that the work of anti-trust regulators is complex. They have to evaluate the likelihood on one of the effects being bigger than the other before the merger takes place in order to allow it or block it. Often what they do is to impose conditions on the merged entity in a way that guarantees that it will not be a dominant player.