Why Antitrust Activism May Be Bad News For Shareholders


A big story in this morning’s Wall Street Journal warned that the new antitrust activism of Obama’s Justice Department might spell trouble for corporate profits.  But should investors worry?

As the Journal points out, investors tend to shrug off antitrust enforcement. Part of the reason is that it is hard to quantify or predict the costs of antitrust enforcement. But investors may be underestimating the damage that can be done to companies from the distraction of defending against charges of monopolistic behaviour.  There’s a good chance, for instance, that Microsoft’s need to defend itself against various antitrust charges in the past decade has hurt its ability to innovate and provide new products.

One of the weirder arguments we heard about antitrust enforcement this morning came from Daniel Indiviglio at The Atlantic.

Anyone who’s taken intro level economics knows that monopolies and anticompetitive activity are actually bad for the market. So while monopolies might not like it, the rest of the overall economy should be very happy when antitrust regulators do their jobs.

That’s true as far as it goes. But Indiviglio goes on to argue that this means investors shouldn’t worry when regulators beef up their enforcement, which simply doesn’t follow from his statement about the desirability of competitive markets. 

If markets are already competitive, not dominated by inefficient monopolies, then beefed up enforcement can be a dead weight cost. What’s more, anyone who has been watching the more active European antitrust authorities over the last decade should have reason to be sceptical that antitrust enforcement is likely to improve even markets riddled with monopolistic behaviour. Regulators can easily get both the correct level of enforcement and the type of enforcement wrong.

Indiviglio’s position seems to be that because competition is good, having activist regulators charged with keeping markets competitive must be good also. It’s a version of the intentional fallacy, which looks to the intention of antitrust rules rather than their effects. But often enough regulations have unintended costs, so looking only to intentions is a serious mistake.

Better competition is indeed good news for everybody. But it is at least an open question whether increased antitrust enforcement leads to better competition.

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