On May 10, Judge Sullivan ruled in favor of the FTC’s request to block the $6.5 billion merger between Staples and Office Depot. In a vague ruling, Sullivan claims that there is a “reasonable probability” that the merger could “substantially impair competition” for “Business-to-Business customers.”
The emptiness of this line of reasoning, particularly how to define “substantially impair” or “substantially reduce” competition, shows how it can be applied haphazardly and arbitrarily—and Sullivan’s decision is not the only example. The FTC has blocked mergers between Sysco and US Foods, AT&T and T-Mobile USA, and Comcast and Time Warner Cable, to name a few, and threatens to block many more. In December, we pointed out that bureaucrats tend to protect competitors, not consumers.
Of course, many companies are still able to merge. Last year had a record amount of mergers and acquisitions. But there are two problems to be addressed: why so many companies are choosing to merge, and what effects haphazard “antitrust” policies create.
Companies become larger by creating goods and services that customers like, as opposed to make shoddy products that nobody wants. That same logic can apply to mergers as well. Two companies may have complementary strengths and resources, and that means they can be more effective at meeting customers’ needs by combining than by remaining separate. Did Judge Sullivan consider this when crafting his ruling?
But there is also a deep problem driving the consolidation that President Obama’s Department of Justice tends to overlook: over-regulation. As the number of regulations in the United States continues to grow at an exponential rate, the costs of complying continue to increase as well. Consolidation helps businesses deal with these regulatory costs. Which is more efficient, four small companies each having to expend resources to comply with government rules four times, or one large company expending resources to comply with the rules once? And with the Federal Reserve keeping short-term interest rates near zero, it has never been cheaper to merge, acquire, and consolidate.
The logic is obvious and can be seen quite starkly in the banking industry. The top five banks hold almost half of the industry’s assets. The thousands of pages of regulations from Dodd-Frank have favored larger banks over medium-sized banks, and the barriers to entry have grown. Fewer than 50 banks have opened in the United States since the financial crisis as of July last year. Contrast that with an average of more than 150 new banks opening every year in the United States from 1997-2007. We see similar declines in new or young companies across the economy.
Consolidation and mergers are not driven primarily by “anti-competitive” agendas, but by cost and benefit analyses of capabilities and regulatory compliance. But the FTC’s anti-market agenda masquerading, ironically, as a “pro-competition” agenda has a chilling effect on companies’ decisions about how to be most efficient and productive in today’s business and regulatory environment. Besides imposing large costs on companies that have spent time and resources to prepare for a merger or acquisition, the FTC and courts also make the market less dynamic with their arbitrary antitrust enforcement.
Judges’ time would be better spent policing regulatory agencies for anti-competitive policies. That is the best way to advance the interests of consumers and businesses alike.
Paul Mueller is an assistant professor of economics and Brian Brenberg is an associate professor of business and economics at The King’s College in New York City.
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