Posted 10:05 AM by Robert

Subsidy By Another Name?

Consider two types of competitors:

Category One competitors are competitors that are well-run but inefficiently small. Suppose two of them want to merge. But antitrust regulators won't let them merge. If the competitors had merged, they would have been able to consolidate operations and compete profitably. Instead, each goes bankrupt.

Category Two competitors are competitors that are badly-run but their size is not a cause of their problems. Suppose two of them want to merge (or enter into a contractual combination) so that they can obtain market power and charge their customers more than the customers would have to pay in an efficient market. But antitrust regulators won't let them merge. If the competitors had merged, they would have been able to consolidate operations and compete profitably, subsidized by their market power. Instead, each goes bankrupt.

Peter Huber says that a lot of Category One competitors are being treated as if they were Category Two competitors:

Regulators and antitrust courts must come to grips with the economic realities of network industries. Huge economies of scope and scale mean that competition will inevitably involve small numbers of very large players. 'Cuisinart' policies that chop and dice networks, services and corporations into little pieces don't promote competition, they undercut it. Most of the time, it's a mistake to force companies to share reservation systems, power transmission lines, copper loops and other core assets, on terms minutely prescribed by regulators. Such meddling promotes a short-term illusion of competition, but not the long-term reality.

What Mr. Huber says certainly seems correct. And his general focus on the difficult and often perverse connections between bankruptcy and antitrust policies is wonderful - especially with regard to the effects on the markets of "walking zombies" who continue to compete after bankruptcy. Market competition theory depends on poor competitors actually failing - but modern bankruptcy law seriously complicates all of that. However, he also seems to suggest than some bankruptcies themselves are evidence of bad antitrust policy. But I don't see how a bankruptcy itself helps tell us whether the bankrupt competitor/debtor was Category One or Two.