Competition Policy in Distressed Industries: Keynote Remarks

• Pages: 17-36

17

CHAPTER II

COMPETITION POLICY IN DISTRESSED

INDUSTRIES: KEYNOTE REMARKS

Carl Shapiro



A. Introduction

I am delighted to have the opportunity to speak at the American Bar

Association‘s Antitrust Symposium on Competition a s Public Policy. In

sponsoring this symposium, the ABA Antitrust Section indicates that

―capitalism as we know it is under attack‖ and worries that ―heavier

government regulation is being tout ed as the solution. ‖ Tomorrow we

will continue our discussion of the central question posed in this

symposium: ― whether competition will continue to serve as the

foundation for economic policy and legislation.‖

This is no small question in these difficult economic times. But it is

one I am eager to address here, in my first speech since rejoining t he

Antitrust Division as Deputy Assistant Attorney General for Economics.

The Antitrust Division‘s short answer is this: keeping markets

competitive is no less important during times of economic hardship than

during normal times.

As we map the course ahead for regulatory reform and competition

policy, the first step is t o diagnose the public policy failures that caused

the current crisis so we can correct past errors and avoid r epeating them.

In this regard, it seems clear to me that the crisis in the financial sector

primarily reflects a failure of government r egulation, not any underlying

failure in the ability of well-regulated competitive markets to serve

consumers and promote economic growth.

 Deputy Assistant Attorney General for Economics, Antitrust Division,

U.S. Department of Justice. The author is grateful to Wayne Dunh am

and Kenneth Heyer for their assistance in preparing this speech. He has

greatly benefited from discussions of these issues over the years with

Jonathan Baker, Joseph Farrell, William Kovacic, and Steven Salop.

None of these in dividuals should bear any responsibility for the opinions

offered here.

18 Competition as Public Policy

Many vigorous supporters of free market capitalism have had their

faith shaken in the past year. In testimony before Congress last Fall,

Alan Greenspan, former Chairman of the Federal Reserve, confessed that

he was ―shocked‖ to have ―found a flaw‖ in the model underlying his

free market ideology.1 Even more recently, Richard Posner has

published a book entitled ― A F ailure of Capitalism: The C risis of ‘08

and the Descent into Depression.‖2 Need I say more?

While the current crisis has caused many to lose faith in the market,

that is not at all my reaction. As an industrial organization economist

who has devoted much of his research career to studying the interaction

between government and business, I regret to say that the recent

problems in the financial sector do not fundamentally surprise me. One

hundred years ago, food safety regulation was put into place in response

to problems with the food supply that the unfettered market was not able

to solve. Forty years ago, environmental regulations were put in place in

response to problems with air and water pollution that the unfettered

market was not able to solve. And, of course, we have had a heavy

overlay of financial regulations going back at least to the Great

Depression, again in response to a crisis that the unfettered market was

not able to solve, and arguably exacerbated.

Nor does the current crisis call into question the basic utility of

neoclassical microeconomics for understanding how firms behave and

how markets perform. In particular, notwithstanding great advances in

the field of behavioral economics, I have seen nothing in the past year

that would cause me to depart from the tried and true working

assumption in antitrust economics that for-profit firms generally seek to

maximize profits and that this quest usually benefits the public in a

myriad of ways. Adam Smith‘s teaching in t his respect remains as valid

as ever. But I hasten to add that this does not by any means imply profit-

maximizing firms are always acting in the public interest, Adam Smith‘s

famous invisible hand notwithstanding. Indeed, much of industrial

organization economics involves the study of markets in which firms

have market power, where Adam Smith understood full well that

business interests often depart from those of the public. Recall his

1. Alan Greenspan, Testimony Before the House Committee on Oversight

and Government Reform (Oct. 23, 2008). Greenspan t estified that ―yes,

I found a flaw, I don‘t know how significant or permanent it is, but I have

been very distressed by that fact.‖ See Edmund L. Andrews, Greenspan

Concedes Error on Regulation, N.Y. TIMES, Oct. 24, 2008, at B1.

2. RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF ‘08

(2009).