Categories
Antitrust Monopolization Regulation Tax

Wealth and Happiness

In a new paper, Glick, Lozada, and Bush have done both antimonopolism and the antitrust academy a service by making the first real attempt to put the movement in direct conversation with contemporary antitrust method.

GLB have a simple message: welfare economics long ago stopped using willingness to pay to measure consumer welfare, and antitrust should too.

What is more, welfare economics today pursues an eclectic set of approaches to measuring welfare. Some of them suggest that the dispersal of economic power and the availability of small businesses can make people happy.

It follows, argue GLB, that it is entirely consistent with contemporary welfare economics to take these things into account in evaluating mergers or prosecuting monopolies.

The Social Welfare Function

GLB start with the problem that welfare economists faced at the beginning of the 20th century: how to compare the value that different people—say a producer and a consumer—obtain from a transaction in the absence of some universal measure of value.

If the producer gets a profit of $2 and the consumer pays $5 for a bag of apples, did the transaction confer the same amount of value on the two? Are $2 worth the same to the producer as a-bag-of-apples-for-$5 is worth to the consumer?

If there were some universal measure of happiness—denominated in, say, “utils”—then we could answer that question.

We would look up the consumer’s change in pleasure associated with swapping $5 for apples and compare it to the producer’s change in pleasure associated with making a $2 profit. If the former were 50 utils and the latter 30 utils, then we could say that the transaction did not confer the same benefit on both parties.

Pareto

Economists eventually decided that they would not be able to find a universal metric of happiness. But they hoped that they might be able to glean some information about happiness from the behavior of economic actors.

The first approach that they hit upon was the pareto criterion. It said: the only bad transactions are those into which the parties do not enter voluntarily, because those must make at least one party worse off (the party who would not voluntarily enter into the transaction).

Any transaction the parties do enter into voluntarily is, in contrast, good, because they wouldn’t be willing to enter into it unless the transaction made neither worse off.

It followed that voluntary transactions could be treated as welfare improving—or at least not welfare reducing. The parties were signalling, through their willingness to enter into them, that the transactions were at least not undesirable.

If the producer and consumer voluntarily transact in apples at $5, then welfare could be said not to have been reduced and indeed potentially to have increased. That was the pareto criterion.

It helped welfare economics a bit. But it also failed to answer an important question: what about people who are affected by a transaction but who are not entering into it themselves?

If, for example, two producers merge, and, as a result of the merger, they are able to charge a higher price, consumers are affected. But consumers have no choice over whether the merger takes place.

The pareto criterion tells us that the merger does not make the merging parties worse off. But it tells us nothing about whether the merger makes consumers worse off.

Some way of comparing the costs of the transaction to consumers with the benefits to the merging producers is needed, but the pareto criterion cannot provide it.

Willingness to Pay and Potential Pareto

The solution proposed by some economists in the early 20th century was to use willingness to pay as a measure of happiness.

The idea was that if a consumer would be willing to pay $10 for an apple, then that would be a measure of the pleasure the consumer would get from consuming the apple. By noting that a person should be willing to pay cash for cash on a dollar-for-dollar basis, one could proceed to do with dollars what economists had originally hoped to do with utils.

To return to our example of an apple purchased for $5, if the consumer were in fact willing to pay $10 for the apple, then the value to the consumer of the transaction would be the $10 the consumer would be willing to pay less the $5 price that the consumer actually paid for it.

And the value of the transaction to the producer would be the producer’s $2 profit. It would then follow that the consumer did better than the producer in the transaction because the consumer generated a “surplus” of $5 whereas the producer generated a profit (“producer’s surplus”) of only $2.

This willingness-to-pay approach made it possible to evaluate a merger of producers.

If producers were to merge and drive the price up to $7, then the producers (who, if their costs are as before, would now make a $4 profit) would end up better off than the consumers (who would now enjoy a surplus of $10 less $7, or $3). The merger would reduce the welfare of the consumer by $3.

If antitrust were to adhere to a consumer welfare standard—the rule that mergers that reduce consumer surplus are to be rejected—then this merger would fail the test and be rejected.

As GLB note, the willingness to pay concept made it possible to consider tradeoffs as well.

The merger might, for example, also reduce the costs of production of the merged firms from $3 to $0.50, thereby increasing the merging firms’ profits on the transaction from $4 to $6.50.

If one were to view the goal of the antitrust laws as the maximization of total welfare—meaning the maximization of the combined surplus of producers and consumers, however that surplus may be distributed between them—this cost reduction would justify the merger. It would expand the sum of producer and consumer surplus from $7 ($2 for the producers and $5 for the consumer) to $9.50 ($6.50 for the producers and $3 for the consumer).

Moreover, the merger might even be said to satisfy the consumer welfare standard if one were to adhere to the peculiar sophistry that any increase in total welfare should count as an increase in consumer welfare because the increase in total welfare could be redistributed to consumers.

Because the merged producers could be forced to pay the $2.50 increase in total welfare to the consumer, leaving the consumer with $5.50, which is more than the $5 he would have without the merger, the deal could, according to this peculiar sophistry, be classified as consumer welfare enhancing.

At least in potential. And if such a transfer were made, then the consumer and the producers alike would welcome the deal (the producers would be left with $4, which is more than the $3 in profit earned without the deal). Hence GLB refer to this as the “potential pareto criterion”. It is also called the Kaldor-Hicks efficiency criterion.

Wealth Effects

Economists should have, and, indeed, did, realize from the start that willingness to pay was a doomed approach because a person’s willingness to pay changes with his budget.

Between People

Two people who would be willing to pay the same amount for an apple if they had the same wealth would likely be willing to pay vastly different amounts if one were poor and the other rich. The rich person might be willing to pay much more for the apple than would a cash-strapped poor person.

One can avoid this problem by supposing that the poor man is willing to pay less for an apple because he in fact would derive less pleasure from it. He might have to deny his child meat in order to be able to afford the apple, and that might ruin his meal.

But viewing actual pleasure as perfectly consonant with willingness to pay amounts to shoehorning subjective feelings into budget constraints.

It is just as likely that the poor man who did make such a substitution would feel a great deal of guilty pleasure. His rational faculties might enable him to forego that pleasure and give his child meat. But that does not mean that his pleasure centers would not be the worse for it. They would be.

If wealth effects matter, however, then one cannot compare producer and consumer surpluses—or indeed the surpluses generated by any two people.

One cannot say, for example, that a merger that decreases cost by $2.50 is on net a good thing if it results in a price increase of only $2 because $2.50 is more than $2, so the total amount of pleasure generated by the economy has gone up. For if the producers are rich but the consumer poor, then the $2 cost to the consumer might inflict more pain on him than the $2.50 increase in profits for the producers.

Redistribution of those $2.50 in benefits to the consumer is now required for efficiency and not just to achieve distributive justice. If efficiency is about increasing the total amount of happiness generated by the economy, and those $2.50 make the consumer happier than the producers, then efficiency requires that the $2.50 go to the consumer.

If the only implication of wealth effects were that redistribution from rich to poor is required for efficiency, then wealth effects would not be particularly problematic for progressives.

But very often a policy change not only creates a benefit and raises a price, as in our merger example, but also inflicts an economic cost in the sense of precluding some production—or aspect thereof—that consumers value.

The merger might, for example, not only reduce apple production costs by $2.50 but also lead to slightly less tasty apples. Perhaps the merger saves on costs by enabling the sale of an orchard that produced particularly tasty apples but was also relatively costly to maintain.

If the consumer’s maximum willingness to pay falls by $2 because the apple is less tasty, then the willingness to pay measure suggests that the merger should go ahead. The benefits in terms of a reduction in costs of $2.50 exceed the costs in terms of a reduction in the value of the apple to consumers of $2. There is a net gain of $0.50.

To be sure, if the price again rises to $7 as a result of the merger, consumers find themselves even worse off than before. Their surplus falls to $1 (a maximum willingness to pay of $8 less a price of $7).

But the merging producers can, at least in theory, make up for this by transferring $2 to the consumer to offset the price increase and by transferring at least $2 of the cost reduction they enjoy as well, ensuring that the consumer ends up with at least the $5.00 in surplus the consumer would have enjoyed without the deal.

And the producers, who initially enjoyed an increase in profits of $5.50 ($2.50 in cost reductions plus $2.00 from the increase in price) end up better off so long as they do not pay more than $5.50 to the consumer.

So all parties can, in theory, end up better off.

That’s because the benefits created by the merger exceed the costs by $0.50. Once one uses transfers to correct for the resulting price increase and to compensate the consumer for his loss, which is smaller than the producers’ gains, there is necessarily some net gain left over that producers and consumer can divide up, leaving them all better off.

The potential pareto criterion is satisfied and, if the transfers are actually made, so is the consumer welfare standard.

If wealth effects matter, however, then one cannot reliably compare the $2.50 benefit in terms of production cost savings to the $2 loss associated with the reduced tastiness of the apple. If the consumer is poor, then the consumer may place a dollar value on the reduction in tastiness of the apple that is far below the actual loss of pleasure the consumer would suffer in consuming a less tasty apple.

If there were utils and we could compare the value of the production cost savings to the producers to the reduction in the consumer’s happiness associated with the less tasty apple, we might find that the producers’ gain is 100 utils and the consumer’s loss is 1000 utils, resulting in a net reduction in happiness due to the merger.

Wealth effects prevent the consumer from registering his dissatisfaction in terms of willingness to pay, however, and so the merger appears to offer a net gain when in fact it does not.

It follows that the producers will never be able fully to compensate the consumer for the loss without incurring a loss themselves, and so according to the potential pareto criterion the merger should be blocked.

If we nevertheless treat willingness to pay as a measure of welfare, however, the deal will appear to be welfare increasing and the deal will go through, reducing overall happiness.

Wealth effects cause willingness to pay to lead to bad policymaking.

Within People

Wealth effects also undermine the commensurability of values with respect to the same person.

To see why, let’s go back to the example in which the merger raises prices but doesn’t reduce the tastiness of apples.

If unwinding the merger would reduce the price of an apple from $7 to $5, it is clear that the consumer becomes $2 richer. He saves $2, which he can now spend on other things.

In order for willingness to pay to be a useful proxy for welfare, one would, then, like to be able to say that the consumer is made just as well off by the price reduction as he would have been had he been given $2 in cash in lieu of the price increase.

But if willingness to pay depends on wealth, we cannot say that a $2 cash payment would leave the consumer in the same position as the consumer would be had price fallen by $2.

If a consumer cares more for apples the richer that he is, then the consumer will prefer a $2 cut in the price of apples to a $2 cash payment. Given his stronger preference for apples, the consumer might want to plow the $2 savings on apples into buying more apples, and that money would buy more apples at the lower apple price than would a $2 cash payment used to purchase more apples at the higher price.

It follows that the consumer would require a cash payment in excess of $2 in order to be made as happy as he would be if the price of apples were reduced by $2.

Similarly, we might ask whether taxing away $2 from the consumer when prices are low would leave the consumer just as happy as the consumer would be were he to experience a $2 price increase.

Again the answer would be “no.”

When the price of apples increases, it is clear that the consumer becomes poorer; his wealth buys him less. If the consumer’s taste for apples decreases with poverty, however, then the consumer will prefer a $2 increase in the price of apples to having $2 of cash taxed away from him.

Because he prefers other things to apples as he becomes poorer, the consumer will place a higher value on cash, which he can use to buy things other than apples, than he places on the price of apples.

But if a tax of $2 makes him less happy than he would be under an increase in the price of apples of $2, then a tax of less than $2 is equivalent, from his perspective, to an increase in the price of apples of $2.

So, overall, we have the peculiar result that a $2 price reduction is equivalent to a cash payment of more than $2 but a $2 price increase is equivalent to a cash reduction of less than $2.

Commensurability would, of course, require that all these things be equal.

And so we see that wealth effects not only prevent us from saying that a $2 gain to the producers creates the same amount of pleasure as a $2 gain to a consumer, but also that a $2 gain to the consumer via a price reduction creates the same amount of pleasure as a $2 cash payment. And the same can be said of losses.

GLB don’t acknowledge that between- and within-person incommensurability both stem from the same problem of wealth effects. But they do a good job of discussing both.

They also spend considerable time refuting the arguments of mainstream economists that within-person incommensurability is small and can be ignored.

But even if it were small, and indeed, even if wealth effects were not a problem for commensurability between persons either, willingness to pay would remain a highly problematic measure of value.

There is no basis for supposing that, just because two people having the same wealth level are willing to pay the same amount for a particular good, they will get the same level of pleasure from it.

Indeed, it is possible that two people who place the same relative values on all goods, and so are willing to pay the exact same amount for each good, might experience very different levels of pleasure from consuming them.

One person might take almost no pleasure from any good. Another might be sent into fits of ecstasy by the smallest purchase.

So long as the relative pleasure conferred by each good vis a vis the other goods is the same for both people, each will be willing to pay the same amount for each good. They will divide their budgets between goods in exactly the same way despite deriving very different levels of pleasure from them.

The Return to the Social Welfare Function

As GLB relate, welfare economists responded to these limitations by giving up on what might be called the overall “revealed value” approach to measuring welfare embodied in the pareto criterion and potential pareto (i.e., willingness-to-pay-based) criterion.

These criteria took a common revealed value approach because they both tried to read value from the actions of economic agents.

Whether a transaction satisfied the pareto criterion could be determined by checking to see whether the parties entered into it voluntarily. If they did, then it followed that neither party was made worse off.

And if a consumer purchased an apple at $10 but not at $11, one could infer that the maximum the consumer was willing to pay for apples was $10 and use that number to determine by how much the consumer could be compensated, pursuant to the potential pareto criterion, for the loss of an apple.

Under both approaches, economic agents were assumed to reveal the pleasure they take in goods via their actions, enabling economists to identify changes in welfare associated with various policies without needing direct access to the pleasure centers in consumers’ brains in order to make those determinations.

With the demise of willingness to pay, welfare economists would no longer try to find a way to read the pleasure and pain of consumers through their economic behavior.

Instead, they would return to the direct approach that they had abandoned more than fifty years before; they would try to measure happiness directly.

They took a variety of approaches to this problem. They would ask people if they are happy or not in various situations; they would study health indicators such as longevity, freedom from disease, and so on, in various situations; they would consult psychologists and neurologists.

Based on the results of these inquiries, they would identify the material circumstances most likely to be conducive to happiness and recommend economic policies (such as antitrust cases) that produce those circumstances.

Medical inquiry might determine, for example, that spinach is good for consumers. Welfare economists would then respond by ranking policy choices that lead to more spinach consumption higher than those that lead to less.

This was a departure from the willingness to pay approach, according to which welfare economists would have given spinach consumption the ranking implied by the dollar value that consumers revealed themselves to be willing to pay for spinach relative to what they would pay for other things.

Now other branches of science, and not revealed preference, determined the ranking.

This takes us up to the present state of welfare economics.

And for GLB, this completes the argument for taking political power and small businesses into account in doing antitrust.

According to GLB, one can no longer argue that, because consumers are manifestly willing to pay high prices charged by dominant firms, consumers like big firms and like the influence they have over politics.

Consumers’ willingness to pay is no reliable measure of the pleasure they get from buying the products of politically influential, small-business-destroying monopolists.

Instead, as already mentioned, GLB point to studies that suggest that consumers are happier in democratic environments free of concentrations of economic power. And that consumers are happier when they have access to small businesses.

It follows, argue GLB, that it is perfectly reasonable, per current practice in welfare economics, to argue that mergers that increase consumer surplus in the willingness-to-pay sense nevertheless make consumers unhappy, and should therefore be targeted for antitrust enforcement.

The Willingness to Pay Measure Is about Choice, Not Happiness

GLB’s paper presents a powerful rejoinder to any antitruster who might have been under the misapprehension that willingness to pay is a good measure of happiness. There are surely some out there.

But I suspect that the paper will not win too many converts, because what attracts people to willingness to pay is not that it is a good measure of happiness, but instead that it is the best way of doing justice to consumer choice that we have.

Welfare economics embodies a tension felt throughout the modern human rights project regarding who decides what happiness means.

Do we study human beings as if they were complex robots, figure out what makes these machines happiest, and impose those conditions on them? Or do we let the machines decide what makes them happiest?

GLB tell the story of welfare economics as if the field has always been interested only in the first option: to figure out what makes people happy and then impose those conditions upon their economic lives.

Under this assumption, GLB’s conclusion follows immediately from the arc of welfare economics. Willingness to pay is not a good measure. Others must be found.

But, as GLB acknowledge, economists have known almost from the inception of the willingness to pay approach in the 1940s that it was unsound. Why hasn’t the field moved on?

GLB chalk it up to “zombie economics.”

The real reason is that many people want to preserve a space in which consumers can vote for what they want through their purchase decisions.

That is, these people don’t view economics as a descriptive science but rather as a democratic project. It is the project of empowering consumers to vote on the character and magnitude of production through their purchase decisions.

The willingness to pay measure is ultimately built upon such a foundation, because willingness to pay is measured by observing the prices at which consumers do and do not buy.

The measure is highly imperfect, even incoherent, but it is the only way economics knows to recommend policy changes that account for the votes consumers have cast in markets. It honors their choices.

Happiness surveys, public health information, and the like are based on consumer input, but they are not based on purchase decisions—they are not based on circumstances in which consumers are forced to put their money where their mouths are.

Of course, the question whether consumers should take direction from experts regarding what to buy, or make those choices themselves, has already been resolved in favor of consumer choice.

Neither GLB nor anyone else will be able to impose purchases on consumers unless consumers vote to elect political leaders who take the GLB approach.

If antitrust enforcers decide to follow GLB’s paper, but consumers don’t like it, consumers can always vote political leaders into office who will sack those enforcers or give them new legislative commands to follow.

The premise of the economic project of enabling consumers to vote through their purchase decisions is, however, that the electoral process is defective.

The assumption is that, at least with respect to industrial production, consumers are better able to choose by voting through purchase decisions than by voting for elected representatives to direct production.

That is the subject of public choice theory. It is the view that, at least with respect to some matters, markets are more democratic than democracy.

People who hold this view won’t be swayed by GLB. In their view, markets are most likely to maximize happiness if they are structured to read it in consumers’ purchase decisions, not if they are structured by consumers’ elected representatives to achieve happiness according to any other measure.

Ultimately, the battle in antitrust over the consumer welfare standard, is, like all battles over regulation, a battle over the legitimacy of the electoral process.

And yet progressives have spent remarkably little time contesting the public choice view of the electoral process and government regulation as inherently vulnerable to capture.

I suspect that is in part because many progressives share the public choice intuition.

Indeed, distrust of government seems to be one of the major reasons for which some progressives have focused in recent years on strengthening antitrust instead of pursuing the projects that earlier generations of progressives thought were more likely to be effective, such as price regulation and taxation.

Even an antitrust that imposes an external standard of happiness on markets instead of trying to read a standard from consumer purchase decisions pays a certain amount of respect to those purchase decisions. It is oriented toward preserving markets and empowering consumer choice within them.

In contrast, taxation and price regulation are relatively indifferent to those goals. They represent a pure privileging of choice via the electoral process over choice via markets.

And to many people from both left and right operating in an essentially anti-statist culture, that’s scary.

The irony, then, may be that the worldview required to overturn the consumer welfare standard in antitrust is undermined by progressives’ own attraction to antitrust as a vehicle for progressive change.

Categories
Antitrust Monopolization World

Does It or Doesn’t It?

An important part of the Chicago Revolution in antitrust was the argument that no monopoly is forever. Eventually, someone will innovate and offer a superior product that the monopolist cannot match. And, just like that, the monopolist will be history.

Microsoft’s lock on operating systems looked assured in 1998 when the Justice Department tried to break the company up. But that remedy was never ultimately imposed. And in the end it didn’t matter. For, less than ten years later, smartphones arrived, and now most people do most of their computing on operating systems not made by Microsoft.

It seems to follow that antitrust action is a waste of time.

So interesting, then, to hear all the talk of late about how, despite its best efforts, China won’t be able to catch up with the West in chip production.

Not for decades.

Maybe never.

We are told that chip production relies upon an entire ecosystem of designers and suppliers. That experience matters. And so on.

But if that’s right, then the view that no monopoly is forever must be wrong—or at least not absolutely true in all cases. If the Western chip fabs have a near-permanent lock on the market, then it can’t be the case that we can always rely on markets to erode monopoly power. It can’t both be true that China can never catch up with the West on chips and that no position of market dominance is forever.

So which is it?

I suspect that those who think China can never catch up are wrong.

It may well be the case that the learning curve on chip production is such that a latecomer will never be able to catch up with a first mover absent technology transfer. But the argument about the impermanence of monopoly power has never been that newcomers will one day master the incumbent’s technology. It has always been that newcomers will one day introduce a completely different technology that carries out the same tasks as the old technology, only ten times better.

To this day, Microsoft continues to dominate the market for PC operating systems. What eroded Microsoft’s power was the introduction of a different technology—smartphones—that required a different kind of operating system. Microsoft didn’t start out with a lead in mobile operating systems, and, in the event, Microsoft lost the race.

So the question about whether China can overcome her lack of cutting edge chip supply and find a way to go head to head with the West as computing revolutionizes everything from military equipment to passenger vehicles is really the question whether China can come up with different technologies that do computing better—not just more semiconductors.

I don’t know the answer to that question. But it is perhaps useful to note that while China is not a leader in the design and production of conventional chips, China is a leader in quantum computing—which promises vastly greater processing speeds—and in artificial intelligence.

Indeed, it is worth asking whether TikTok’s success at challenging both Google’s dominance in search and Facebook’s dominance in social media doesn’t contain a lesson. At the same time that at least some Americans were quaking in their boots regarding these American tech giants’ size—and calling for antitrust enforcement—TikTok was quietly applying superior artificial intelligence to revolutionize the core functionality of both companies. TikTok is a Chinese company.

The view that technological advance always ultimately erodes dominant positions is perhaps most closely associated with Joseph Schumpeter, who called this process “creative destruction.”

The question, then, is whether the West should worry that creative destruction will erode its dominant positions.

If the Chicago School of antitrust is right, the answer is “yes.”

Categories
Antitrust Tax

British Direction

Energy companies are making windfall profits in both the United States and the United Kingdom.

In the United States, progressives in the Biden Administration blame monopoly and call for more antitrust enforcement.

The theory is that the antitrust enforcement will cause firms to compete more heavily.

Which will cause them to lower prices.

Which will cause their profits to decline.

Which will cause both rich and poor people to pay less for energy.

Which will make poor people a little richer, completing the redistribution of a portion of those profits.

In the United Kingdom, the government just taxes away the windfall and mails checks to the needy.

When you really want to get something done, you take a direct approach.

The only direct way to redistribute is: tax and transfer.

Categories
Antitrust Monopolization

Antitrust Preemption

The best way to regulate the tech giants is to tax the immense scarcity rents they generate. Instead of doing that, the Biden Administration has gone all-in on antitrust action, which can’t touch those scarcity rents, even if antitrust action does succeed at making tech markets more competitive, which is unlikely.

When I make this point, people tell me: “don’t worry! Taxation and antitrust action aren’t mutually exclusive. The Biden Administration is also pro-tax.”

Well, is it?

The Canadians are planning on taxing the tech giants, and instead of rushing to complement this sound policy, by imposing our own tax, the Biden Administration is threatening to retaliate if they don’t scupper their plans.

An administration, like everything else, has a budget constraint, denominated in attention as well as dollars. If it is going all-in on one thing, it’s not going all-in on another.

And to go all-in on one policy, an administration may need to reject others in order to maintain the coherence of the one it favors, which seems to be happening here. The Biden Administration is complaining that it’s unfair for Canada to single out American tech companies for taxation, something that would have less bite if America were singling them out itself.

So, please don’t tell me that yes, you agree that antitrust probably can move the needle only very slightly, if at all, but why not try it anyway?

If you’re trying it, you’re not trying the stuff that actually works.

Categories
Antitrust Monopolization

Some Goliath

I do not understand Paul Krugman here:

Yes, there’s a profit-maximizing price, but the cost to a business of charging somewhat less than its profit-maximizing price is small, because lower margins would be offset by increased sales. (To be formal about it, the losses caused by deviating from the optimal price are second-order.) This wiggle room means that corporate pricing may be strongly influenced by intangible considerations, like fear of alienating buyers. . . . Given this reality, it’s not foolish to suggest that some corporations have seen widespread inflation as an opportunity to jack up prices by more than their costs have increased without experiencing the usual backlash.

Paul Krugman, Do Democrats Have a Technocrat Problem?, N.Y. Times (Feb. 22, 2022).

I agree that corporations don’t have to worry about experiencing the usual backlash. Because they are experiencing way, way more than the usual backlash, and not just from consumers, as shown in the poll to which Krugman cites, but also from, you know, The White House.

I mean, if you asked me what the worst time ever would be to jack up prices, I would say that it’s in the middle of a global pandemic in which any price increase is going to be viewed by a surly public as price gouging.

But I guess that’s just me.

There’s something else I don’t get about this argument.

Monopoly power is the power over price that comes from artificial scarcity; it comes from firms voluntarily holding something back. But firms are producing and selling more than ever before, at least if the amount of stuff transiting through ports is any measure. Savannah, for example, was recently operating 50% above pre-pandemic levels.

How can firms be holding something back while increasing their output by anywhere near that order of magnitude?

It’s possible that they could go even further but purposefully aren’t. But we have almost no true monopolies in this country in the sense of single firms alone serving entire markets. The meatpacking market that is so concerning the Biden Administration is concentrated, but it still has four large players.

How does a group of three or four firms ramping up output to meet surging demand still manage to hold something back, especially when the true extent of demand is unknown (as it always is) and holding back by too much while other firms continue to increase supply is a recipe for a catastrophic loss of market share?

The answer is: by actually coordinating output directly with each other—forming a cartel—just as we often see firms that are trying to reduce output in response to declining demand meet to try to manage the reductions in a mutually profitable way.

But no one seems to be alleging that American industry is cartelizing. Antimonopolists want to break up large firms, not bust cartels.

It’s much more likely that the price increases are what they appear to be: driven by scarcity.

I’m also a bit confused about this:

And perhaps an even more important point, cracking down on excessive industrial concentration and market power would help reduce inflation, regardless of the role market power played in causing inflation in the first place. As an old line puts it, you don’t have to refill a flat tire through the hole.

Antitrust cases last a long time. The Department of Justice sued AT&T in 1974. The company was broken up in 1982. If inflation is still 7% in 2030, it will have become structural, and only another Saturday Night Massacre will save us.

There are plenty of good reasons to want to eliminate monopoly pricing, and industrial deconcentration is one way to do that. But reducing inflation isn’t one of those reasons. I’m all for faster antitrust enforcement, but the reality is that the courts and inflation move at very different speeds.

And that’s before we even consider that antitrust action is a one-time fix. You can only deconcentrate the economy once. But inflation is a perennial problem. Once all those antitrust cases have gotten prices down ten years from now, antitrust won’t have anything to offer in combating the next inflation, either.

Even if Krugman is right about market power and the current inflation, what being right here gets progressives is almost nothing. Here’s how Krugman puts it:

Nobody sensible would argue that opportunistic exploitation of market power is the main factor behind recent inflation. But contrary to what some people might want you to believe, economic theory by no means rules out the possibility that it may be a factor.

It cannot be ruled out that monopoly is a factor in inflation? The progressive movement I signed up for pursues policies that it knows make a difference. Like taxing the rich. Not stuff that “can’t be ruled out as being a factor.”

And Krugman is usually all about the big stuff. So why not one, but two columns now trying to defend the possibility that monopoly might matter albeit not as much as other things?

Sadly, I think that’s because antimonopolism has eaten the progressive mind over the past few years.

It’s no longer mere policy serving as a means to an end.

It’s now ideology. An end in itself.

Progressives know that Goliath must be slain, and they are going to insist on it, no matter what, even if the most that can be proven about Goliath is that he can’t be ruled out as a secondary cause of the economic problems we care about.

Some Goliath.

Categories
Antitrust Monopolization

Progressive Cologne

So here’s my suggestion: Give Biden and his people a break on their antitrust crusade. It won’t do any harm. It won’t get in the way of the big stuff, which is mostly outside Biden’s control in any case. At worst, administration officials will be using inflation as an excuse to do things they should be doing in any case. And they might even have a marginal impact on inflation itself.

Paul Krugman, Why Are Progressives Hating on Antitrust?, N.Y. Times (Jan. 18, 2022).

It probably won’t work, so let’s do it?

We need to do it for other reasons, so let’s do it for the wrong reason?

There’s a word for this: Obsession.

Meanwhile, elsewhere in the piece, Krugman dismisses price controls, which are one remedy that would actually solve a few problems in the highly efficient (and hence unwise-to-break-up) industries, like meatpacking, to which he’d like to take the antitrust axe. (Not even price controls would, however, help with inflation.)

Krugman did write the introduction for a recent edition of the General Theory, but he diverges from his teacher on antitrust.

Keynes famously thought inflation, or the lack thereof, had nothing to do with competition, monopoly or any other microeconomic phenomenon, which is why he disdained both the N.R.A. and Thurman Arnold. Instead, he invented a whole new branch of economics—macroeconomics—to explain it.

But if there’s no intellectual foundation for progressive antimonopolism, why does it so appeal? As Krugman’s evocation, elsewhere in the piece, of J.F.K. talking tough to the steel industry suggests, it’s a macho thing—progressives thumping their chests at corporate America.

If that sounds a bit savage, there’s a cologne for that, too.

Categories
Antitrust Monopolization

Victor Hugo: Pro-Trust

[T]he prosperity of [the town] M. sur M. vanished with [its mayor and leading business owner] M. Madeleine; . . . lacking him, there actually was a soul lacking. After this fall, there took place at M. sur M. that egotistical division of great existences which have fallen, that fatal dismemberment of flourishing things which is accomplished every day, obscurely, in the human community, and which history has noted only once, because it occurred after the death of Alexander. Lieutenants are crowned kings; superintendents improvise manufacturers out of themselves. Envious rivalries arose. M. Madeleine’s vast workshops were shut; his buildings fell to ruin, his workmen were scattered. Some of them quitted the country, others abandoned the trade. Thenceforth, everything was done on a small scale, instead of on a grand scale; for lucre instead of the general good. There was no longer a centre; everywhere there was competition and animosity. M. Madeleine had reigned over all and directed all. No sooner had he fallen, than each pulled things to himself; the spirit of combat succeeded to the spirit of organization, bitterness to cordiality, hatred of one another to the benevolence of the founder towards all; the threads which M. Madeleine had set were tangled and broken, the methods were adulterated, the products were debased, confidence was killed; the market diminished, for lack of orders; salaries were reduced, the workshops stood still, bankruptcy arrived. And then there was nothing more for the poor. All had vanished.

Les Miserables
Categories
Antitrust Monopolization

Yet Another Amazon Antitrust Paradox

Amazon paradoxes are proliferating. Here’s another: to the extent that Amazon is engaged in anticompetitive conduct, it is the conduct of opening its website to third-party sellers, not, as Amazon critics hold, the conduct of failing to be even more welcoming to those third-party sellers.

As the Times’ David Streitfeld, who has perhaps done more than anyone else to advance the notion that Amazon is unreasonably severe with third-party sellers, seems slowly to be realizing, Amazon’s third-party sellers are, well, a problem. They sell junk. They sell defective products. They fool their customers. And then they disappear.

As the Wall Street Journal alerted us more than two years ago now: Amazon’s open door policy with respect to third-party sellers, which sellers constitute more than 50% of sales on Amazon.com, has caused Amazon effectively to “cede control of its site,” badly degrading the shopping experience.

Which begs the question: why? Why would Amazon let this happen? The answers is: “dreams of monopoly.”

Every other retailer in the world seems to understand that one of the biggest pieces of value retail can deliver to consumers is: curation. The retailer does the hard work of sifting through the junk and the fakes and the defectives to find the good stuff, so that consumers don’t have to do that themselves. Why do you shop at Trader Joe’s instead of your local supermarket? Because you know that if Trader Joe’s is selling it, it’s probably not only of reasonable quality, but likely tastes great too. That’s the value of curation.

But, as Streitfeld correctly notes, Amazon has all but given up on it. Anyone can list products on Amazon. And the company makes almost no effort to flag the best products for you. Ever since that Journal article, the public has known that “Amazon’s Choice” is just an empty label slapped on a piece of third-party seller junk by an algorithm parsing sales trends. No one at Amazon can vouch for the underlying product’s quality, usefulness, or safety.

You might have hoped, as I once did, that at least the products Amazon itself sells under its own brand names, like Amazon Basics, are competently curated. But those, too, have turned out to be no more than the outputs of sloppy and stupid algorithms. The programs troll Amazon’s site for popular third-party products and flag them to Amazon product teams, which then contact the original equipment manufacturer in China, slap on an Amazon Basics logo, and bring the rebranded product back to market. The result is that the Amazon-branded products can blow up in your face, just like the stuff sold by third-party sellers.

What would cause Amazon intentionally to forego delivering curation value to its customers and so risk alienating them from its website? The answer must be that Amazon gets something that it thinks is even more valuable in return for running this risk.

That thing is scale.

By opening its doors to third-party sellers, Amazon was able to bring much of the commercial internet onto its website, ensuring that if a consumer wanted to find something, he didn’t need to search the Internet, he just needed to search Amazon.com. And that in turn ensured that most consumers would do their online shopping on Amazon. And that in turn ensured that if you wanted to sell something online, you wanted to do it as a third-party seller on Amazon. And so on. In econ speak, opening the door to third-party sellers created massive “network effects” for Amazon, effects that make Amazon.com essential for both buyers and sellers.

Curation would destroy that because curation is costly. Algorithms aren’t good enough to curate effectively, as the piles of fakes, defectives, and junk on Amazon.com today shows. So if Amazon were to take curation seriously the company would need to pay people to do it. And even Amazon can only afford so many people. So Amazon would only be able to curate so many products. Which means that Amazon would not be able to offer everything on its website anymore. Which would mean that everyone would no longer shop on Amazon. Which would mean that fewer third parties would need to list their products on Amazon. And so on. Amazon would be better. But it would also be smaller.

And Amazon would face more competition, because now Amazon’s advantage wouldn’t be its network—the fact that Amazon carries everything and so everyone shops there—but rather the quality of its curation. There can only be one retailer that carries everything and at which everyone shops. But there are lots of retailers that curate—and compete on curation.

So, Amazon’s open-door policy toward third-party sellers, and the danger and frustration to which that exposes its customers, is anticompetitive. At least in the sense that it is meant to extract Amazon from the fierce competition based on curation that confronts most retailers, and to put Amazon instead in the unique position of being flea market to the Internet.

Amazon clearly believes that the benefits it gets from avoiding having to compete on curation outweigh the costs to the company of forcing its customers to wade through oceans of junky, fake, or defective products on its website. How could Amazon not, when imposing those costs on consumers makes Amazon indispensable, and hence immune to any consequences associated with alienating those consumers?

Well, not completely immune. There are still other retailers out there. And the more toxic Amazon’s site becomes—the more it really does come to resemble a flea market—the more willing consumers will be to put up with the cost and inconvenience of shopping elsewhere. I personally no longer buy books from Amazon because I hate dodging fakes on its site—buying elsewhere costs more, and sometimes I have to wait weeks longer for my books to arrive. But I’m happier.

The key for Amazon is finding a way to engage in just enough curation to prevent consumers from leaving in droves, but not so much that sellers abandon the platform and it ceases to become indispensable to consumers.

The irony here is that the anti-Amazon zealots, in fighting, under the banner of “self-preferencing,” every attempt by Amazon to impose order on third-party sellers or to curate by promoting its own brands, are effectively pushing Amazon to retain its monopoly position by continuing to welcome the entire commercial Internet onto its website.

Amazon critics: If you really want to make Amazon small, and quickly, help Amazon to engage in more self-preferencing. Ask Amazon to sell only its own branded products on the site, kicking all third-party sellers off. Or ask it to discriminate more heavily against some third-party sellers in favor of others, until Amazon.com becomes like every other retailer: offering a relatively small selection of products that Amazon believes consumers will like the most.

It should be clear that Amazon’s policy of being a flea market, instead of a normal, curating, retailer, is anticompetitive. But just because something is anticompetitive—in the sense that it harms competitors and hence competition—doesn’t make it bad, or an antitrust violation, unless the conduct also harms consumers. So, does it?

The answer must be no. Because, as I have said, Amazon is not completely immune to consumer dissatisfaction. You can find almost everything sold on Amazon elsewhere; it just takes more time and expense to get it. So Amazon today presents the following choice to consumers, who can shop elsewhere: Speed or safety; A low price or the genuine article; One stop shopping or purchases free from defects. And consumers so far have chosen the former, which suggests that they prefer it.

Antitrust cannot eliminate the tradeoff that seems to exist here between scale and quality. But consumers can decide which they prefer. If Amazon doesn’t do something about its site, if it doesn’t strike a better balance between scale and quality, if the junk and the fakes and the defectives continue, consumers will rebel. They will learn that the extra time and expense required to secure curation is worth it. And Amazon will go down; or change to save itself.

I for one don’t plan on buying any more books from Amazon anytime soon.

Categories
Antitrust Monopolization

When You Can Win with Advertising, Why Win in Fact?

By the end of last year, 150 million Chinese were using 5G mobile phones with average speeds of 300 megabits a second, while only six million Americans had access to 5G with speeds of 60 megabits a second. America’s 5G service providers have put more focus on advertising their capabilities than on building infrastructure.

Graham Allison and Eric Schmidt, Opinion: China Will Soon Lead the U.S. in Tech, Wall St. J. (Dec. 7, 2021), https://www.wsj.com/articles/china-will-soon-lead-the-us-in-tech-global-leader-semiconductors-5g-wireless-green-energy-11638915759.

Of course, it’s a bit rich to be reading this in the opinion pages of the Journal, which can usually be found defending laissez-faire commercialism.

The American telecom industry is a marketing-driven oligopoly that colludes tacitly to minimize expensive investment in infrastructure and competes instead for market share via worthless, unproductive advertising.

Things would have been different if we had not broken up the old Ma Bell, an engineering-focused organization that took national defense very seriously. As a monopoly, it knew that it had to serve a public purpose or the pitchforks would come out.

Unfortunately, they came out anyway, and antitrust got it, and we are left with the miserable, middling shards that we have today—shards that quickly replaced their engineering culture with a marketing culture, because once they were small they didn’t need to worry about public scrutiny and were free to work exclusively for themselves.

Categories
Antitrust Monopolization

To Produce Is to Self-Preference

When you first enter antitrust from the left, you are struck by what appears to be a travesty: that a firm that monopolizes an input can get away with denying that input to downstream competitors.

One thinks to oneself: A monopoly using its power to smash a competitor. How is that not an antitrust violation? An antitrust that fails to prohibit that is a perverse, hollowed-out thing captured by the evil it was constituted to destroy. It is the equivalent of the criminal law not prohibiting killing with malice aforethought. Or the contract law not enforcing promises.

And then you get over it, because actually prohibiting monopolists from denying essential inputs to their competitors makes no sense. (I will explain momentarily.)

The trouble with antitrust today is that those setting the agenda from the left haven’t been in the field long enough to get over it.

And so we are left with the embarrassing legislation against “self-preferencing” that is currently making its way through Congress.

Self-preferencing as a concept is nothing new. It is denial of an essential input to a competitor, something that antitrust has, at various times, called a “refusal to deal,” “denial of an essential facility”, and “monopoly leveraging.”

The tech giant that “self-preferences” owns an essential input—its platform—that it denies to firms that compete with it in selling things on the platform. When Amazon uses its control over its website to prioritize advertisements for Amazon-branded products over those of third-party sellers, it denies full access to the platform input to those third-party-seller competitors.

The reason you cannot ban all denials of access to essential inputs—can’t ban self-preferencing—is that every single product produced and sold in the United States is a vast agglomeration of denials of access to essential inputs, as I point out in a recent paper. To ban all denials of essential inputs is, therefore, to ban production. Full stop.

And so the proposed legislation, which would ban self-preferencing by all firms that have websites with more than 50 million users and a market capitalization in excess of $600 billion, would simply make it illegal to have more than 50 million users and a market capitalization in excess of $600 billion.

The Make or Buy or Market Decision and Input Denial

To understand why all products are agglomerations of denials of essential inputs, it is useful to reflect that a company can go about adding a component to a product in only three possible ways.

The firm can make the product itself. The firm can buy the product. And the firm can let consumers buy the component on their own and attach it themselves. I call this the firm’s “make or buy or market” decision.

The first two options—to make or to buy—are what we conventionally mean when we say that a particular component has been incorporated into a product, and the decision whether to “make or buy” has long been a famous one in law and economics.

What has not been properly understood about these two options is that both always involve the denial of an essential input to competitors. Only the market option is consistent with an antitrust that would prohibit input denial as a blanket matter.

It follows immediately that production—the process of making or buying components and adding them together to generate a product—is impossible without input denial, and that a blanket antitrust ban on input denial would make production impossible.

Consider, for example, the act of adding an eraser tip component to a pencil.

The pencil maker can add this component in three basic ways. First, the pencil maker can manufacture the eraser itself from its basic components. It can buy the chemicals needed to make the eraser dough and then bake the dough in molds to produce the erasers. Of course, the firm would then need to solve the problem of how to acquire the precursors (and the oven, molds, and labor services required to run the operation), so making is in the end always buying. But for purposes of showing that making or buying both involve input denial, that doesn’t matter.

The second way the pencil company can add eraser tips to its pencils would be for it to buy them from an eraser supplier. The company would go out into the eraser tip supply market, find the supplier that offers the best quality at the lowest price, and do a deal.

The third and final way the pencil company can add eraser tips to its pencils—or, better put, can ensure that eraser tips are added to its pencils—would be for the company simply to sell eraser tips to consumers and leave it to consumers to affix them to pencils. The firm might sell eraser-less pencils and also separate eraser caps that consumers can buy and affix to the pencils. Or the firm might put a special ferrule on each of its pencils, perhaps like the one currently included with Palomino Blackwings, that would allow consumers to snap in a properly-shaped eraser that they could purchase separately from the pencil company.

Now, when a firm makes its own eraser tips to place on its pencils, the firm denies access to an input—its pencils—to outside manufacturers of eraser tips who would like their own eraser tips to be included on the firm’s pencils. The firm is in effect competing against those other eraser manufacturers in the market to supply eraser tips for the firm’s pencils, and in choosing to make its own eraser tips, the firm uses its control over pencils—an essential input from the perspective of eraser tip makers who have no way to get their products into the hands of consumers other than attached to pencils—to favor its own homemade product in the eraser tip market relative to those of competitors.

In the language of platforms and self-preferencing, the firm’s pencils are the platform that eraser tip manufacturers need in order to reach consumers, and in choosing to use only its own homemade eraser tips on its pencils, the firm engages in self-preferencing in the eraser tip market.

This is equally true when a firm chooses to buy rather than to make.

When the firm chooses a particular third-party supplier of eraser tips, the firm denies the pencil input to all of the other eraser-tip makers in the market. Once the firm has placed its order, none of the others can reach consumers, at least until the firm places a new order for more eraser tips.

Is Buying Really Input Denial?

There seem at first to be two problems with this argument that buying components is input denial. The first is that the third party supplier whose erasers are not picked by the pencil company at least had a chance to have them picked when the pencil company was still deciding which supplier to use. The supplier presumably lost out in some potentially competitive bidding process, which cannot necessarily be said for the case in which the firm chooses to make erasers in-house.

Be that as it may, it has nothing to do with the basic concept of input denial. A firm is no less forced from a market by denial of an essential input when the input holder thought it would not be profitable to supply the input than when the input holder thought that it would be profitable to supply the input. Indeed, one would expect that the underlying motive for input denial would always be the determination that supplying the input would be less profitable than denying it.

Where Is the Downstream Competition When You Refuse to Buy?

The second problem is that the pencil company does not seem to be competing against the eraser suppliers at all. Unlike in the first case, the pencil company does not actually manufacture any erasers of its own, much less sell them. But if the pencil company is no longer competing with eraser suppliers—just buying from them—then the pencil company cannot be said to be denying essential inputs to competitors.

But that is to miss what really bothers us about input denial. What we dislike about it is not that a product that is manufactured in-house by the denier benefits from the denial, but rather that competitors are harmed and the denier somehow benefits from that harm.

And here we can be sure that the denier does benefit.

For the denier would not choose a particular third-party supplier over others unless the denier stood to benefit from buying from that supplier rather than others. This benefit might come in the form of a discount on the price of erasers. Or it might come in the form of willingness of the supplier more faithfully to execute the instructions of the pencil company with respect to the specifications of the erasers. It might even involve a profit-sharing agreement without the pencil company formally owning the operations of the third-party supplier.

Whatever it may be, the pencil company benefits, and as a result of that benefit it is possible to say that, through the third-party supplier chosen by the pencil company the pencil company does in fact compete in the eraser market, and indeed favors its avatar at the expense of competing eraser suppliers.

In the language of platforms and self preferencing, the firm’s pencils are again the platform, and in choosing to buy from one supplier only—a supplier that necessarily offers some special benefit to the firm otherwise the firm would not buy from it—the platform self-preferences, in the sense that it puts the interests of a favored supplier above those of competitors.

Thus the only two ways in which a firm can incorporate a component into a product—making the component itself or buying the component—are both instances of input denial.

Only Selling Components Directly to Consumers Avoids Input Denial

Only the third means of adding a component to a product—that of selling the component directly to consumers and allowing them to add the component on themselves—manages not to be input denial. Indeed, only this “market” case corresponds to what we mean when we speak of the sort of freely competitive market that antitrust is meant to promote.

Only when the pencil company chooses neither to make the component itself nor purchase it and incorporate it into the pencil, but instead merely makes its pencils available for any consumer to use to affix erasers, does the pencil company make its input—its pencils—freely available for any and all eraser manufacturers to use as a vehicle for delivering their erasers to consumers. For now the question which eraser manufacturer’s erasers should appear on the pencil company’s pencils is no longer answered by the pencil company at all. It is answered only by downstream consumers, who have complete freedom to decide which erasers win out in the eraser market.

That is precisely the world antitrust seeks to create: a world in which firms that control inputs do not decide who wins in the market but rather consumers themselves decide.

But Selling Directly to Consumers Is Not Production

The trouble is: that is not a world that is consistent with the production of products that incorporate multiple components. And because all products incorporate an infinite number of components—it all depends on how you define component; if each molecule is a component of a pencil, then how many components does a pencil have?—it is therefore not consistent with the production of anything at all.

It is a world in which everything is pulled apart and atomized, and the atoms are presented to consumers in a vast menu from which no sane consumer would ever be able to choose because choice would require infinite knowledge regarding how to assemble every single product that we have today from individual atoms on up.

What those setting the antitrust agenda today miss is that banning self-preferencing by, for example, Amazon, does not merely prevent Amazon from favoring its own Amazon-branded products over those of third parties.

It also prevents Amazon from choosing the look and feel of its own website, for Amazon.com is a platform upon which web designers notionally compete in selling web design services for Amazon, and when Amazon designs its own website in-house it necessarily denies access to that input to competitors.

A rule against self-preferencing would require that Amazon enable Amazon users to buy Amazon site design from third party software developers and apply it to the Amazon website, so that every Amazon customer could, in theory, choose his preferred look and feel for the Amazon website.

It doesn’t stop there.

Amazon would also be required to allow customers to choose each and every employee who works at the company, for each of these employees is, in a sense, a labor component of Amazon, and in making hiring decisions on its own, Amazon necessarily prevents other competing workers from using the Amazon platform to supply their labor services to Amazon’s customers.

If this seems absurd, that is because it is.

The market approach to adding components cannot work as a blanket matter, and so antitrust, which is tasked with insisting upon the market approach, cannot be applied in blanket fashion to everything, or even just to everything that has more than 50 million users and $600 billion in assets. It can work only if applied sparingly, severing a component of one product here, a component of another product there, when doing so is thought to be in the best interests of consumers, whose preferences are the ultimate measure of the value of production.

That is why the actual rule antitrust applies, the rule of reason, can be summarized as the rule that input denial is illegal when it fails to improve the product that is ultimately sold to consumers.

Self-preferencing is not, in other words, something that can become the subject of a right, as in: “consumers have a right against self preferencing.” It is instead fundamentally about the best way to organize production in individual markets. The question it poses is whether the input denier can be relied upon to choose the component supplier that will make the product as good as possible for consumers, or whether consumers can instead be relied upon to make that decision.

Because consumers do not want to have to decide how everything they purchase is made, it follows that in almost every case the best answer is to let the input denier make that decision—by denying its input to downstream competitors that the denier believes will do a poor job.

Is Every Input Really Essential?

One might object that while every make-or-buy decision might well involve input denial, it does not involve denial of an essential input—it is not denial of an input by a monopolist of that input, not self-preferencing by a platform monopolist as opposed to any old platform—and so is not the sort of behavior that outrages the antitrust neophyte’s intuition that antitrust should ban input denial.

The pencil company’s effective denial of its pencil to third party eraser tip makers when the company makes its own erasers in-house is not input denial, the argument would go, unless there is only one manufacturer of pencils in the pencil market. Only then would eraser tip makers have no way of getting their wares to consumers other than through the medium of supplying eraser tips to that particular pencil company.

This argument would be good enough were all pencil companies to make the exact same pencil—same size, same wood, same graphite, same barrel color, same name, and so on. Only then would it be a matter of complete indifference to eraser tip makers whether they were to supply tips to our pencil company or another.

But, in fact, save for a few standardized commodities, like Class C crude oil, every company’s product is different from every other, even if only in brand name. The result is that every firm will prefer some inputs to others—find some more profitable to use relative to others—and so input denial will always deprive a firm of something that it cannot get anywhere else. In that sense, all input denials deny essential inputs and every maker of an input monopolizes that input.

Dixon Ticonderoga pencils are different from Palomino Blackwings are different from Faber-Castells, and so putting Acme Eraser Tips on each produces a slightly different finished eraser-tipped pencil, one that may be more or less desirable to consumers and indeed more or less profitable for Acme Eraser Tips. If Acme’s preferred pencil company—let’s say it’s Dixon—stops sourcing from Acme, Acme will end up worse off, even if Acme is able to supply Palomino or Faber-Castell instead. In this sense, Dixon is essential to Acme.

Of course, if there were only Dixon, then the consequences of rejection for Acme would be more severe—not just a hit to the bottom line but perhaps bankruptcy—but is it the magnitude of the harm that bothers us about input denial, or is it that a particular business opportunity has been put off limits?

Product differentiation makes of every input, in other words, a mini monopoly. In the “market definition” analysis that antitrust undertakes in merger and monopolization cases, antitrust has traditionally dealt with this by defining a company as a monopoly only if its products are very different from others’—in the lingo, only if they are not “close substitutes”—choosing an arbitrary cutoff between “too different” and “not different enough”.

But here’s the interesting thing: antitrust does not take this approach in deciding whether an input is essential or not. It does not do this in deciding whether a firm monopolizes an input. Instead, antitrust does this only in considering whether the input denier has a monopoly in the downstream market to which the firm is denying the input (another quirk of antitrust law that will not be considered further here because blanket bans on self-preferencing would not require such a downstream inquiry into monopoly power).

With respect to the question whether an input is monopolized, antitrust instead takes a holistic approach, sometimes asking whether the input is an “essential facility,” for example. Indeed, the proposed self-preferencing legislation eschews the market definition approach, instead prohibiting self-preferencing by those who are a “critical trading partner,” defined to mean those who have “the ability to restrict or impede . . . the access of a business user to a tool or service that it needs to effectively serve its users or customers.”

That’s pretty broad language.

The reason antitrust has always been so vague about what constitutes an essential input is that antitrust recognizes that because every input is unique, every input has a downstream firm for which it is essential.

Must an Input Be Something that You Buy?

One might also object that I have been using “input” in rather a peculiar way here, because I have called the buyer the input supplier whereas an input ought to be something that is sold, not bought. The eraser tip suppliers in my example do not buy the pencil company’s pencils. They sell eraser tips to the pencil company and are paid for doing so. In what sense does a pencil company’s refusal to buy eraser tips from some suppliers count as denial of the pencil input to those suppliers?

The answer is that the proper definition of input—the one that corresponds best to our intuition regarding the injustice of input denial—is not “a thing you buy to use in production” but rather “a thing that is necessary for you to do business.”

This broader definition is necessary to prevent clever changes in the locus of product assembly from undermining the antitrust laws. Consider eraser tips again.

I could equally have told the story of an eraser-tip company that purchases pencils, adds eraser tips to them, and then sells the bundle to consumers. In this case, it would be crystal clear that the pencil is the input and the pencil company’s decision not to supply pencils to the eraser tip company would be input denial. In this telling, the eraser tip company would be injured, just as before, by the fact that the pencil company decided either to make eraser tips in-house or to supply pencils to other eraser tip companies seeking to sell eraser-tipped pencils downstream to consumers.

Why should the pencil company be considered any less of an input denier if it were instead to decide to assemble eraser-tipped pencils itself and to start buying eraser tips from eraser tip manufacturers, though not from the eraser tip manufacturer that it targeted before for input denial? The harm to the eraser tip maker is the same, because either way that company is prevented from getting its eraser tips to consumers on the ends of pencils manufactured by that pencil company.

What matters to antitrust here is not how the eraser-tipped pencil makes it to consumers—whether by being assembled by the pencil company or the eraser tip company—but only that a decision of the pencil company not to do business with a particular eraser tip manufacturer harms the eraser tip manufacturer.

The Inevitability of Power and Suffering in Production and Life

And harm the eraser tip manufacturer it does.

But, as I have explained, that does not matter—indeed, cannot matter—unless it makes for a worse end product served up to consumers, because every act of combining two components to make a new product involves a choice regarding which components to join and which not, and so involves a decision to exclude some component makers from the business and not others. Thus the process of product design, production, and creation is always an exercise of power and the infliction of harm.

This, I think, is why it is so difficult to come to antitrust from the left.

Because progressives are uncomfortable with power and the infliction of harm. Progressives want that to go away. But it turns out that everything—everything—they have is inescapably a product of the exercise of power and the infliction of harm.

You cannot build, you cannot create, you cannot make, without choosing—rejecting some additions and embracing others—and each such decision destroys someone’s business (at least to a small extent) and leaves someone out in the cold, if not physically, then socially and mentally.

It would be nice to be able to avoid this ugly scene in which private firms make private decisions about how to make things, hurting each other along the way, and instead to commit all such decisions to the public—here the market, meaning consumers. This is the market option—to just sell all the components directly to consumers and let them decide which should be used and which not.

But the public has trouble enough selecting a President every four years. It does not want, nor does it have the intellectual capacity, to decide how everything is to be made.

And even then harm and the exercise of power could not be avoided, for the public would still have to decide. Consumers might not like Acme Eraser’s eraser tips and so not buy them to put on their pencils. And so Acme would be denied an essential input—a market—and wither as a result. We might, for the moment, think it more just that the public carry out these executions, as opposed to private firms.

But if you really are concerned about the wielding of power and the infliction of harm, then you should not much care who is doing the wielding and the inflicting, but abjure it all.

Thus input denial forces on the progressive the need to come to terms with the inevitability and pervasiveness of power and suffering in business, and, indeed, once one comes to think of it, in life. For all human behaviors involve choices regarding what to prefer and what to reject, with whom to spend time and with whom not, and so all involve input denial and the infliction of pain to a greater or lesser degree.

The really important question then appears to be not whether to condemn power and suffering but rather how to regulate their deployment and infliction. The question is: who should have the power and who should suffer?

In antitrust, the answer the law currently gives is that firms that make inferior products should suffer, and private firms should decide what combinations of components (i.e., what products) are inferior and what not, except in a relatively small set of cases in which consumers, despite their limited cognitive bandwidth, would do a better job of designing their products.

That, it seems to me, is the right approach, and one that leaves progressives plenty of scope to do good by taking authority from firms and giving it to consumers in cases in which firms produce junk.