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Private interest support for efficiency enhancing antitrust policies.

Recent discussions of antitrust based on the private interest theory of government conclude that the real, as opposed to the stated, purpose of antitrust legislation is to protect politically influential industries against competition. Yet several prominent antitrust scholars who accept the private interest theory of government in general see antitrust legislation serving the public interest by increasing competition. We argue that the private interest theory of government is consistent with the view that antitrust legislation promotes competition. Indeed antitrust legislation may be supported by organized interest groups because such legislation increases the competition they face.

I. INTRODUCTION

The traditional justification for the enactment and enforcement of antitrust legislation is that it serves the public interest by preventing businesses from engaging in practices that reduce competition. Over the last decade some economists have become skeptical of this justification. A small, but growing number of economists see the public interest justification for antitrust enforcement as a pretense for using government to promote the private interests of politically organized groups.[1]

Within the private interest theory of government model, it is natural to see antitrust activity as motivated by the desire to reduce, rather than increase, competition. Certainly a private interest is better served by obtaining an anticompetitive increase in the price of the product being sold, than by obtaining a competitive reduction in the price of one of the many products being bought.

Yet major contributors to, and strong supporters of, the private interest theory of government are reluctant to embrace the private interest explanation of, at least, the origins of antitrust policy. George Stigler, for example, has said, "So far as I can tell, it's [the Sherman Act] a public interest law ... I like the Sherman Act.''2 Bork [1978, 61] has argued that the "legislative history of the Sherman Act ..., displays the clear and exclusive policy intention of promoting consumers welfare." And according to Posner [1976, 23], "the framers of the Sherman Act appear to have been concerned mainly with the price and output consequences of monopolies and cartels."

With the view prevalent, even among those sympathetic with the private interest theory of government, that antitrust legislation owes much to the desire for a more competitive economy, it is not surprising that antitrust policy has been resistant to private interest explanations.3 Our purpose is to weaken this resistance by arguing that the private interest theory of government is not necessarily inconsistent with the view that support for antitrust activity is motivated by the desire to increase the competitive efficiency of the general economy. Indeed, we shall argue that the private interest theory of government suggests that organized interests may favor antitrust actions as a means of limiting their own anticompetitive practices.

It should be emphasized at the outset that we will not attempt to establish that antitrust enforcement does increase economic efficiency. Our more modest objective is to reconcile the seemingly inconsistent views of those who both accept a private interest theory of government and believe that economic efficiency is served by antitrust policy. The difficulty of addressing the issue of the effect antitrust enforcement has on the overall efficiency of the economy is reflected in Stigler's [1982, 44] admission, "It would be gratifying to me if I could report that our profession's changing view [toward support of antitrust policy] was based upon the systematic study by economists of the effects of the policy, in short, that hard evidence carried the day. Unfortunately, there have been no persuasive studies of the effects of the Sherman and Clayton Acts throughout this century.''4

In the next section we present a simple model of a coalition of industries, each of which is interested in achieving its own protection in political competition with other industries. In section III, a conflict among the individual members of the coalition, which is central to our argument, is discussed. The possibility of moderating this conflict with effective antitrust policy is considered in section IV. Concluding comments are offered in section V. II. OPTIMAL OUTPUT RESTRICTIONS FOR A

COALITION OF CARTELS

Each industry favors government policies that protect it against competition. At the same time each industry prefers that the general economy be as efficient, and therefore as competitive, as possible. No industry is in a position, however, to obtain exclusive protection in the political market for special interest privileges. Securing the political support necessary for an industry cartel requires that the industry enter into a coalition of other industries which seek their own cartel restrictions. Although all industries want protection, and therefore membership in the coalition, if the coalition is to be effective at generating gains for its members, membership has to be less than all inclusive.s

For the purpose of this paper the membership, and therefore, the size, of the politically effective coalition under consideration will be taken as given. In particular, it is assumed that, out of a total of N industries in the economy, n industries (with n < N) have obtained government protection allowing them to restrict output and raise price.6 The inverse demand function for each industry i in the coalition is given by [P.sub.i ](Q.sub.i) where [Q.sub.i] is the output of industry i, = 1,...,n. Let MCi be the average and marginal cost of production in the ith industry. In order to simplify the analysis, we further assume that the output restrictions in the protected industries do not affect the consumers' surplus generated in the competitive industries.7 Among other things, this assumption rules out resource transfers from the protected to the competitive industries as output restrictions occur and implies that these restrictions result in increased leisure for all employed inputs in protected industries.

It is further assumed that the economy is totally specialized in production and totally non-specialized in consumption. All persons are producers, with each supplying inputs to only one industry. Each person consumes products of all industries, with each consuming an equal share of the products of each industry. Therefore, the consumers' surplus accruing to each industry in the coalition is directly proportional to the number of persons in the industry. The number of persons in coalition industry i is given by W,., with the number of persons all in coalition industries given by

n The number of persons in all N industries in the economy is given by W.

Those associated with each coalition industry expect to secure net benefits from output restrictions in their own industry, but expect to suffer losses as consumers from the output restrictions of other industres in the coalition. The total value of the profits and consumers' surplus realized by the coalition of industries is given by where the first term represents total coalition profits, the second term represents the share of the consumers' surplus generated by the coalition industries that accrues to those in the coalition, and the third term is the share of the consumers' surplus generated by the competitive sector of the economy (given by CSC and independent of the Qi) that accrues to those in the coalition.

The objective of the coalition is to restrict the Qi to those levels, denoted by Q;, which maximize (1). This maximization necessarily satisfies the conditions where MRi represents the marginal revenue of industry i. The left-hand side of (2) represents the marginal loss of profits to industry i from expanding output beyond the level called for by the profit maximizing condition M[R.sub.i] = MC.sub.i]. The expression Pi-M[R.sub.i.]. on the right-hand side of (2) equals the marginal increase in the consumer surplus generated by industry i when its output is expanded. Therefore (2) instructs each industry in the coalition to expand output until the marginal cost in terms of lost profits is equal to the coalition's share, We/W, of the marginal gains in terms of increased consumers' surplus.

When the coalition includes all producers, [W.sub.c]= W, and (2) collapses into the competitive condition Pi = MCi, i = 1,...,N. With an all-encompassing coalition, there is no possibility of realizing differential benefits from efficiency reducing restrictions, and so the competitive solution is the best solution. At the other extreme, when only one industry is cartelized, We is small relative to W and in the limit condition (2) becomes MRi = MCi. If one industry were able to obtain the political support necessary to cartelize without entering into a coalition with other industries, and if that industry is very small relative to the entire economy, then members of that industry could ignore the loss of consumers' surplus resulting from their own restrictions and the standard monopoly profit maximizing solution would apply.

III. THE COALITION VS. THE CARTEL

From the perspective of the entire coalition, it is clearly appropriate to consider the consumer surplus loss to all members of coalition industries stemming from the output restrictions of each industry. But from the perspective of the members of each industry, the consumer surplus loss their own industry's restrictions imposes on those in other industries is irrelevant. Therefore, the objective function for members of, say, industry j is where [W.sub.j] is the number of persons associated with industry j. The Qj that maximizes (3), denoted by [Q.sub.j], must satisfy the condition since [P.sub.j-] MRj > 0 when evaluated at any positive Qj. Therefore, since the sufficient condition to the maximization of (3) requires that (4) be decreasing in Q/, it follows that [Q.sub.j] < Q.sub.j]' The Qj that maximizes the benefits to those associated with industry j, both as producers and consumers, is less than the Qj that maximizes the benefits to all those in the coalition of industries. What is true for industry j is true for all industries in the coalition.

If the government protection against competition provided each coalition industry determined within tight limits the output of that industry, then the tension between what is best for the individual industries and what is best for the entire coalition would be of little consequence. Rather than be left out of the coalition of cartels, each industry would be willing to accept the protection offered, even though that protection fixed industry output at a level higher than the industry would ideally like. But while government can provide an industry with either more or less protection against competition, the form the protection takes often leaves the protected industry significant discretion regarding its output level.

General protections that are intended to allow a moderate level of output restriction can create an environment which the protected industry can exploit to achieve a further output restriction. For example, import restrictions which are intended to reduce domestic availability of an industry's product by reducing sales by foreign producers may make it easier for the domestic industry to collude effectively for the purpose of reducing domestically available output even further.8 So individual industries within the coalition of cartels not only have the motivation to violate the coalition "agreement" by reducing output excessively, they often will have the ability as well. IV. ENFORCING THE COALITION AGREEMENT

WITH ANTITRUST

The members in the protected coalition are confronted with the well-known prisoners' dilemma problem. The members are collectively better off if all cooperate by passing up the opportunity to reduce output below agreed upon levels. On the other hand, no matter whether the others are expected to cooperate or not, from the perspective of each coalition member the advantage lies in behaving noncooperatively by reducing output below that level which is most advantageous to the coalition.

Because of this tension between the interest of the coalition and the apparent interests of its individual members, the net gain the coalition can expect to realize from government protections is influenced by the cost it incurs monitoring the behavior of the industries in the coalition. In addition, for such monitoring to be effective it has to be backed up with some means for imposing sanctions on those cartels which cheat. The advantages of being able to rely on the government to support such policing are therefore twofold. First, the cost of monitoring is reduced for the coalition if some of this cost is assumed by the government. Second, without government support for enforcement of the cartel agreement it would be difficult, if not impossible, for the coalition to impose penalties on uncooperative cartel members.

It is possible then to see why a coalition of cartels would favor antitrust policy as a means of increasing the competitiveness of its members even though the overriding purpose of the coalition is to obtain government protections against competition. It is mistaken to argue that antitrust policy is supported by special interests which desire to reduce the competition that they face and then conclude that antitrust policy must be supported by special interests because it reduces competition.

We believe it is useful to think of antitrust enforcement in much the same way economists have come to think of the owner of a firm who, as the residual claimant, monitors the performance of the workers he employs. It is not only the residual claimant boss who benefits from this monitoring, but the workers as well. Although workers are better off collectively if they all apply themselves diligently to insure the viability of the firm, the temptation is for each to shirk and free ride on the diligence of others. In order to overcome this temptation, to the collective benefit, each worker is willing, indeed eager, to submit to a boss who has an incentive to monitor the behavior of all. In fact, it is reasonable to ask whether the boss hires the workers, or the workers hire the boss.9

The ability of individual interest groups to exert some political influence on their own leads us to a necessary qualification of our thesis. We are not suggesting that antitrust policy was the creation of identifiable industries which formed a coalition to exert unified political pressure for protecting its members and then lobbied for antitrust legislation as a means of monitoring its membership. An interest group typically acts independently in its effort to obtain political advantages. But in doing so the group invariably finds that it, or its political representatives, has to go along with the special interest requests of other organized groups if it is to obtain effective support for its own requests. A coalition of special interests of the type discussed in this paper tends to emerge from the logrolling that characterizes the legislative process. Such a legislative coalition will represent a loosely organized grouping, its membership will change over time, and it will not likely act in concert to support a proposal that in some general way advances the common interests of its members. Yet, if the common interest of the coalition is advanced by legislation enacted in response to other special interest activity, the coalition can be thought of as implicitly supporting that legislative by accepting it, and accommodating to it. It is in this sense that we argue that it is useful to conceive of our coalition of cartels, and of its support for antitrust legislation and enforcement.

V. CONCLUSION

In the literature on the private interest theory of government, antitrust policy has remained something of a puzzle. The private interest theory would seem to imply that political support for antitrust legislation is derived primarily from its ability to protect the politically influential against competition. And there have been some who have embraced this anticompetitive view of antitrust legislation and supported it by pointing to instances in which antitrust enforcement has reduced the competition faced by organized interests. But, antitrust enforcement continues to be widely supported by economists as an effective means of increasing competition in the economy. And indeed, even some leading proponents of the private interest theory of government, most notably George Stigler, have supported the view that antitrust laws promote the public interest by enhancing competition.

In this paper we present a private interest model of antitrust policy that is consistent with the view that, on balance, such policy enhances efficiency by promoting competition. In our model, as in all private interest models, organized groups use the government to promote their narrow advantages rather than to advance broad public objectives. Organized industry groups are politically motivated by the desire to obtain protection against the competition they face rather than to increase the efficiency of the general economy. But in order to succeed in obtaining restrictions on the competition it faces, an industry must be willing to accept restrictions on the competition other industries face. This leads to a coalition of protected industries with each industry preferring more protection for itself than that which is considered optimal from the perspective of the overall coalition. The temptation, then, is for each industry in the coalition to reduce the competition it faces by more than is in the best interest of the other coalition industries. The advantage to the coalition of being able to monitor these anticompetitive practices when they go too far is obvious. Equally obvious is the advantage to the coalition of shifting the cost of this monitoring and enforcement to government.

In sum, the view (assumption) that antitrust legislation enhances economic efficiency is consistent with a private interest explanation of the political support for that legislation. Effective antitrust legislators can serve the private interests of a coalition of protected industries by making these industries more competitive than they would be in the absence of antitrust laws.

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Title Annotation:Economics and 100 Years of Antitrust
Author:Buchanan, James M.; Lee, Dwight R.
Publication:Economic Inquiry
Date:Apr 1, 1992
Words:3158
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