Uhm ... Dr Woods demonstrates how predatory
pricing would a be a suicidal pursuit ...
Sherman is/was/has always been a means by which
Government could exact their 'wrath' to the favor of those paying tribute.
(It is unconstitutional to boot)
Regard$,
--MJ
"In his masterpiece, Antitrust and Monopoly:
Anatomy of a Policy Failure, Dominick Armentano
carefully examined fifty-five of the most famous
antitrust cases in U.S. history and concluded
that in every single case, the accused firms were
dropping prices, expanding production,
innovating, and generally benefiting consumers.
It was their less-efficient competitors who were
"harmed," as they should have been.
"For example, the American Tobacco Company was
found guilty of "monopolization" in 1911, even
though the price of cigarettes (per thousand) had
declined from $2.77 in 1895 to $2.20 in 1907,
despite a 40 percent increase in raw material costs.
"In what is perhaps the best example of
nonsensical double-talk in antitrust history, in
1944 Judge Learned Hand found Alcoa guilty of
"monopolizing" the virgin ingot aluminum market
by employing "superior skill and foresight" which
the judge feared had "forestalled" competition by
those businesses with less skill and foresight.
He condemned Alcoa for being extremely adept at
correctly anticipating market demand for its
product and then supplying that demand, to the
"exclusion" of its less efficient competitors.
"Alcoa "embraced every new opportunity" with a
"great" organization, said the judge, and manned
the organization with "elite business personnel."
It was obvious to the confused and befuddled
Judge Hand that gaining market share through
entrepreneurial excellence should be illegal.
"In 1962 the government forbade the Brown Shoe
Company, which had 1 percent of the shoe market,
from acquiring Kinney Shoes, which also had a 1
percent market share. A company with 2 percent of
the shoe market, according to the government, constituted a monopoly.
"In 1969 IBM, the Microsoft of the day, had a 65
percent market share in the computer market and
was sued by the government for allegedly
monopolizing the industry. IBM was mired in a
court battle for thirteen years before the
government finally gave up on the case. In the
meantime, the company was eclipsed by Intel and
other competitors while Microsoft had just
produced, in 1981, its first copy of MS-DOS.
"The government's assault on IBM undoubtedly
weakened the company and weakened the level of
competition in the industry as well. This has
happened time and again as a result of Quixotic antitrust prosecutions.
"In 1962 the government forced the Schwinn
Bicycle Company to divorce itself from its
network of dealers; foreign competition
eventually drove Schwinn into bankruptcy.
"General Motors was never prosecuted, but because
of the company's fear of antitrust it was
official company policy from 1937 until 1956 to
never let its market share top 45 percent, for
any reason. This fear of antitrust prosecution
contributed to the industry's dramatic losses in
market share to the Japanese and German
automakers during the 1970s and '80s." -- Thomas DiLorenzo
At 10:37 AM 2/15/2013, you wrote:
Interesting article.....I find it hard to
believe that Professor Armentano could find no
examples of predatory pricing, but if this is
correct, then the whole theory of the
Anti-Sherman Act and the Act itself should be revisited.
On Fri, Feb 15, 2013 at 3:44 PM, MJ
<<mailto:[email protected]>[email protected]> wrote:
The Misplaced Fear of “Monopoly”
by
<http://fff.org/author/thomas-e-woods-jr/>Thomas
E. Woods Jr. February 14, 2013
Those of us who get drawn, often against our
better judgment, into Internet debates soon
discover that the case against the market
economy in the popular mind boils down to a few
major claims. Here I intend to dissect one of
them: under the unhampered market we’d be at the mercy of vicious monopolists.
This fear can be attributed in part, no doubt,
to the cartoon history of the 19th century
virtually all of us were exposed to in school.
There we learned that rapacious “robber barons”
gained overwhelming market share in their
industries by means of all sorts of underhanded
tricks, and then, once secure in their position,
turned around and fleeced the helpless consumer,
who had no choice but to pay the high prices
that the firms’ “monopoly” position made possible.
This version of events is so deeply embedded in
Americans’ brains that it is next to impossible
to dislodge it, no matter the avalanche of
evidence and argument applied against it.
Historian Burton Folsom made an important
distinction, in his book The Myth of the Robber
Barons, between political entrepreneurs and
market entrepreneurs. The political entrepreneur
succeeds by using the implicit violence of
government to cripple his competitors and harm
consumers. The market entrepreneur, on the other
hand, makes his fortune by providing consumers
with products they need at prices they can
afford, and maintains and expands his market
share by remaining innovative and responsive to consumer demand.
It is only the political entrepreneur who
deserves our censure, but both types are
indiscriminately attacked in the popular
caricature that has deformed American public opinion on the subject.
Andrew Carnegie, for instance, almost
single-handedly reduced the price of steel rails
from $160 per ton in 1875 to $17 per ton nearly
a quarter century later. John D. Rockefeller
pushed the price of refined petroleum down from
more than 30¢ per gallon to 5.9¢ in 1897.
Cornelius Vanderbilt, operating earlier in the
century, reduced fares on steamboat transit by
90, 95, and even 100 percent. (On trips for
which a fare was not charged, Vanderbilt earned
his money by selling concessions on board.)
These are benefactors of mankind to be praised, not villains to be condemned.
To be sure, there are caveats, as there always
are in history. For a time, Carnegie did support
steel tariffs. Since he substantially reduced
the price of steel rails, though, this political
position of his did not harm the consumer. Other
critics will point to the Carnegie and
Rockefeller foundations and the dubious causes
those institutions have supported. Their
objection is irrelevant to the specific question
of whether the men themselves, in their capacity
as entrepreneurs, improved the American standard of living.
That question is not even debatable.
Mainstream economics identifies monopolists by
their behavior: they earn premium profits by
restricting output and raising prices. Was that
behavior evident in the industries where
monopoly was most frequently alleged to have
existed? Economist Thomas DiLorenzo, in an
important article in the International Review of
Law and Economics, actually bothered to look.
During the 1880s, when real GDP rose 24 percent,
output in the industries alleged to have been
monopolized for which data were available rose
175 percent in real terms. Prices in those
industries, meanwhile, were generally falling,
and much faster than the 7 percent decline for
the economy as a whole. We’ve already discussed
steel rails, which fell from $68 to $32 per ton
during the 1880s; we might also note the price
of zinc, which fell from $5.51 to $4.40 per
pound (a 20 percent decline) and refined sugar,
which fell from 9¢ to 7¢ per pound (22 percent).
In fact, this pattern held true for all 17
supposedly monopolized industries, with the
trivial exceptions of castor oil and matches.
In other words, the story we thought we knew
from our history class was a fake.
Predatory pricing
Beyond the appeal to specific examples from
history, critics of the market propose
plausible-sounding scenarios in which firms
might be able to harm consumer welfare. Larger
firms can afford to lower their prices, even
below cost, as long as it takes to drive their
smaller competitors out of business, the major
argument runs. Once that task is accomplished,
the larger firms can raise their prices and take
advantage of consumers who no longer have any
choice but to buy from them. That strategy on
the part of larger firms is known as “predatory pricing.”
Dominick Armentano, professor emeritus of
economics at the University of Hartford,
surveyed scores of important antitrust cases and
failed to uncover a single successful example of
predatory pricing. Chicago economist George
Stigler noted that the theory has fallen into
disfavor in professional circles: “Today it
would be embarrassing to encounter this argument in professional discourse.”
There is a reason for that disfavor. The strategy is suicidal.
For one thing, a large firm attempting predatory
pricing must endure losses commensurate with its
size. In other words, a firm holding, say, 90
percent of the market competing with a firm
holding the remaining 10 percent of the market
suffers losses on its 90 percent market share.
Economist George Reisman correctly wonders what
is supposed to be so brilliant and irresistible
about a strategy that involves having a firm --
albeit one with nine times the wealth and nine
times the business -- lose money at a rate nine
times as great as the losses suffered by its competitors.
The dominant firm, should it somehow succeed in
driving all competitors from the market, must
now drive prices back up, to enjoy its windfall,
without at the same time encouraging new
entrants (who will be attracted by the prospect
of charging those high prices themselves) into
the field. Then the predatory-pricing strategy
must begin all over again, further postponing
the moment when the hoped-for premium profits
kick in. New entrants into the field will be in
a particularly strong position, since they can
often acquire the assets of previous firms at
fire-sale prices during bankruptcy proceedings.
During the period of the below-cost pricing,
meanwhile, consumers tend to stock up on the
unusually inexpensive goods. This factor means
it will take still longer for the dominant firm
to recoup the losses it incurred from the predatory pricing.
A chain-store variant of the predatory-pricing
model runs like this: chain stores can draw on
the profits they earn in other markets to
sustain them while they suffer losses in a new
market where they are trying to eliminate
competitors by means of predatory pricing.
But imagine a nationwide chain of grocery
stores, which we’ll call MegaMart. Let’s
stipulate that MegaMart has a thousand locations
across the country and $1 billion of capital
invested. That comes out to $1 million per
store. Those who warn of “monopoly” contend that
MegaMart can bring to bear its entire fortune in
order to drive all competitors from one
particular market into which it wants to expand.
Now for the sake of argument, we’ll leave aside
the empirical and theoretical problems with
predatory pricing we’ve already established.
Let’s assume MegaMart really could use its
nationwide resources to drive all competitors
from the field in a new market, and could even
keep all potential competitors permanently out
of the market out of sheer terror at being crushed by MegaMart.
Even if we grant all this, it still makes no
sense from the point of view of business
strategy and economic judgment for MegaMart to
adopt the predatory-pricing strategy. Yes, for a
time it would enjoy abnormally high profits, and
indeed the prospect of those profits explains
why MegaMart would even consider this approach.
But would the premium profits be high enough for
the whole venture to be a net benefit for the company?
George Reisman insists, correctly, that they
would not. “Such a premium profit is surely
quite limited -- perhaps an additional $100,000
per year, perhaps even an additional $500,000
per year, but certainly nothing remotely approaching
the profit that would be required to justify the
commitment of [the firm’s] total financial resources.”
Let’s suppose that the premium profit that could
be reaped by MegaMart after removing all its
competitors amounted to $300,000, the average of
those two figures. Assume also that the average
rate of return in the economy is 10 percent.
That means MegaMart can afford to lose $3
million -- the capitalized value of $300,000 per
year -- in order to seize the market for itself.
Spending an amount greater than that would be a
poor investment, since the firm would earn a
lower-than-average rate of return (lower, that
is, than 10 percent). For that reason,
MegaMart’s $1 billion in capital is simply irrelevant.
What follows from this, according to Reisman, is that
everyone contemplating an investment in the
grocery business who has an additional $5
million or even just $1 million to put up is on
as good a footing as [MegaMart] in attempting to
achieve such [premium] profits. For it simply
does not pay to invest additional capital beyond
these sums. In other words, the
predatory-pricing game, if it actually could be
played in these circumstances, would be open to
a fairly substantial number of players -- not
just the extremely large, very rich firms, but
everyone who had an additional capital available
equal to the limited capitalized value of the
“monopoly gains” that might be derived from an individual location.
Market defenses
Coming back to the more general “predatory
pricing” claim, one final argument buries it
forever. Economist Don Boudreaux invites us to
imagine what would happen if Walmart adopted the
predatory- pricing strategy and embarked on a
price war over pharmaceutical products, with the
aim of driving other drug retailers from the
market. Who would be harmed by this? Consumers,
to be sure, as well as rival drug suppliers.
But there’s a less obvious set of victims, and
it’s they who hold the key to solving the
alleged problem. Companies that distribute the
drugs to Walmart also stand to lose. Why?
Because if Walmart drives competitors from the
field and then raises drug prices, which is the
whole point of predatory pricing, then fewer
drugs will be sold. It’s as simple as the law of
demand: at a higher price of a good there is a
lower quantity demanded. That means a company
like Merck, which distributes a lot of drugs to
Walmart, will sell less of its product.
Is Merck going to take that lying down? Of
course not. Since a successful predatory-pricing
strategy for Walmart would mean lower sales and
profits for Merck, it has a strong incentive to
block Walmart’s move. And it can do so by means
of minimum- or maximum-resale- price-maintenance
contracts. A minimum-resale-price-maintenance
agreement establishes a minimum selling price at
which a retailer must sell a company’s product.
Such a minimum would make it impossible for
Walmart to engage in predatory pricing in the
first place; they would have to sell the product
at the stipulated minimum price, at the very
least, and could not go any lower.
Maximum-resale-price-maintenance agreements
would allow a company, once predatory pricing
has succeeded -- and again, for the sake of
argument we set aside all the reasons we’ve
given for why predatory pricing can’t work -- to
limit the extent of the damage. It would forbid
a retailer to sell its product above a
stipulated price. Walmart’s putative “monopoly
profits” could not be realized to any great extent under such an arrangement.
In other words, profits all across the structure
of production are threatened when one stage,
whether retailing or anything else, attempts to
reap so-called monopoly profits. You can bet
that firms threatened with a reduction in their
own profits will be particularly alert to the
various ways in which they can prevent the creation of “monopolies.”
What about the DeBeers diamond cartel? Surely
that is an example of free-market “monopoly,”
defying the economists’ assurances that cartels
on a free market tend to be unstable and
short-lived. In fact, there has been no free
market in diamonds. The South African government
nationalized all diamond mines, even ones it
hadn’t yet discovered. Thus, a property owner
who discovers diamonds on his property finds
ownership title instantly transferred to the
government. Mine operators, in turn, who lease
the mines, must get a license from the
government. By an interesting happenstance, the
licensees have all wound up being either DeBeers
itself or operators willing to distribute their
diamonds through the DeBeers Central Selling
Organization. Miners trying to distribute
diamonds in defiance of government restrictions have faced stiff penalties.
In short, opponents of laissez faire have
spooked public opinion with a combination of bad
history and worse theory. The average person,
although in possession of few if any hard facts
in support of his unease at the prospect of
laissez faire, is nevertheless sure that such a
dreadful state of affairs must be avoided, and
that our selfless public servants must protect
us against the anti-social behavior of the
incorrigible predators in the private sector.
This article was originally published in the
November 2012 edition of Future of Freedom.
<http://fff.org/explore-freedom/article/the-misplaced-fear-of-monopoly/>http://fff.org/explore-freedom/article/the-misplaced-fear-of-monopoly/
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