Antitrust regulation of monopolies and mergers is largely a second-best policy. In a nation open to trade with well functioning capital markets and without regulations that burden incumbents and exclude entrants, monopoly prices are hard to sustain. Like a dinner bell, they are instead a signal to others to come and get some juicy profits. These profits not only encourage existing firms to expand their operations but also entice entrepreneurial individuals to enter these markets. But if regulations make markets less dynamic, the price mechanism won’t work nearly as well. Regulations can make it harder for new firms to enter and for incumbent firms to expand.
In applying its merger policy, the Justice Department should take more account of the relevance of economic dynamism — or the incentives to enter and exit markets — and thus of the regulatory landscape companies face. While I am not privy to all the details, two recent cases make me doubtful that it is doing so. In one, DOJ approved the merger of American and US Airways, and in the other, it sued to prevent Swedish- owned Electrolux’s proposed takeover of GE’s electric appliance business. But the airline merger took place in a marketplace burdened with regulations that make competition sluggish, while there seem to be few regulatory barriers to vigorous competition in the appliance market.
The obstacles imposed by government to competition from both new entrants and established players in the airline market are manifold.