Opinion and Economic Analysis

Hicks: Antitrust suit rests on decades of tradition

August 24, 2013

The attempt by the Department of Justice to block the merger of American Airlines and U.S. Airways offers a glimpse into one of the great public policy innovations of the past couple of centuries: American anti-trust law.

In the middle decades of the 19th century, many private businesses around the world grew to astonishing sizes. While there were previously large companies such as Hudson’s Bay or East India Co., they had always been state-sponsored. The trend of bigness was seized upon by Karl Marx who believed (wrongly) there was no limit to firm growth.

In America, the growth of big steel producers and railroads also animated populist groups such as the Grange halls, which dotted rural areas. But the American worries had nothing to do with highfalutin and pretentious notions of Marxian dialectic materialism. The problem with big businesses in America was that they were colluding to fix prices for grain shipment.

To no surprise, price fixing didn’t sit well with many Americans, including Sen. John Sherman, the younger brother of William Tecumseh Sherman, well-known for his “urban renewal” work in Atlanta. The Sherman Anti-Trust Act of 1890 outlawed two firms from fixing prices or conspiring to monopolize a market. It was elegant legislation, crafted in only a few hundred words.

Over the next 60 years, two more major antitrust laws were added, effectively outlawing a range of business behaviors that limited trade. The most important of these, the 1913 Clayton Act, outlawed mergers that substantially reduced competition. So, the Aug. 13 suit against American Airlines and U.S. Airways is based upon a 100-year-old law.

Over the same period, economists were busy developing mathematical models to predict when and how mergers could lead to the twin evils of monopolization: higher prices and lower production. This is a splendid example of the practical use of this sort of formal modeling. The math allowed economists to compile hundreds of cases of mergers and estimate exactly how big the merged firms would have to be before the monopoly problem arose. This remains an active and fruitful area of research.

Among the insights from this research is that this airline merger would lead to four firms commanding 80 percent of the market. Strong data from hundreds of studies suggests this level of concentration would likely lead to monopoly pricing. That evidence and a lengthy history of antitrust violations in the industry led to the lawsuit.

I won’t predict the outcome, but this is a good example where decades of thoughtful economic data collection and research provided the tools to protect consumers and competing businesses from monopoly behavior.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.
 

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