ENTREPRENEURIAL CHOICE: RESTORING A RELEVANT ANTITRUST POLICY.

• Author: Grimes, Warren

ABSTRACT

Current antitrust orthodoxy focuses on short-term price/output factors. This increasingly criticized model does not adequately protect competition in industries in which individuals and small firms thrive. Small entrepreneurs may be efficient for a variety of reasons, including the incentives that flow from owner operation, the personal relationships that lead to superior service, or the strong creative component of the business. Despite advantages in efficiencies and superior willingness to innovate, small providers have been forced out of the market by intended or unintended effects of antitrust enforcement decisions and regulatory initiatives. This Article explores the concept of entrepreneurial choice and its application to small entrepreneurs. Recognizing the metric of entrepreneurial choice, along with consumer choice, is critical to protecting competition and restoring antitrust relevancy. To address these issues, the Article examines shortcomings in enforcement and regulatory policies in three critical industries--agriculture, healthcare, and communications and entertainment--and compares these industries to the wine and beer industries, where creative small entrepreneurs have a revitalized presence. This Article concludes by offering an approach for protecting efficient and in-demand small entrepreneurs while enhancing life choices for consumer and seller alike. In industries in which small entrepreneurs are efficient, this formula includes enhanced merger control, more vigorous antitrust enforcement to maintain open distribution, and greater tolerance for small seller collective actions needed to offset monopsony power.

CONTENTS INTRODUCTION I. ENTREPRENEURIAL CHOICE II. WHEN SMALL CAN BE SUPERIOR TO BIG A. The Efficiencies of Small Businesses B. Creativity C. Lifestyle Preferences for Entrepreneurial Independence III. ANTITRUST AND REGULATORY FAILURES IN THREE CRITICAL INDUSTRIES A. Agriculture B. Healthcare C. Communications and Entertainment IV. WHY SMALL FIRMS THRIVE IN THE BEER & WINE INDUSTRIES V. THE WAY FORWARD INTRODUCTION

Current antitrust orthodoxy focuses on short-term price and output factors in determining what constitutes an antitrust violation. (1) Under this approach, mergers to tight oligopoly or oligopsony have been permitted and little attention has been paid to distribution restraints that stifle entry. Enforcement policies, it turns out, are particularly suspect when it comes to protecting individuals and small firms that efficiently perform in industries suited to small entrepreneurship. A focus on entrepreneurial choice--the flip side of protecting consumer choice--starkly highlights the shortcomings of a focus on price and output.

This Article examines how greater sensitivity to protection of the efficient individual entrepreneur or small firm--one that offers products and services in demand--can enhance efficiencies, promote innovation, provide needed guidance for regulatory initiatives, and increase the quality of life for both consumers and those who provide critical products and services. This approach has the added benefit of enhancing democratic values through dispersed economic power.

After first describing the concept of entrepreneurial choice in Part I, Part II focuses on the efficiencies and other advantages that explain the resilience of small firms and solo-practicing service providers. Part III examines some of the perverse effects of antitrust and regulation in three key industries: agriculture, healthcare, and telecommunications and entertainment. By way of contrast, Part IV examines why small providers have mounted a comeback in the beer and wine industries. This Article concludes that consumer and entrepreneurial choice should be given greater weight in setting antitrust and regulatory policies, particularly for industries suited for small entrepreneurs. Part V provides suggestions on how this might be done.

1. ENTREPRENEURIAL CHOICE

   How do you buy what you eat? Do you shop primarily in supermarkets that are part of large regional or national chains? Would you prefer to have the choice of also buying from local farmers, whose products might be more expensive, but who offer enhanced freshness and genuine organic options?

   How do you get your healthcare? Do you rely on an HMO or an insurance-company controlled medical plan that excludes some physicians from the network? Would you prefer to deal with a solo-practicing or small-practice physician whom you trust and who has longstanding ties to your family?

   What are your choices for home video entertainment? Do you rely on traditional cable programming supplied by large vertically integrated firms that control both distribution and content? Do you prefer the more open-ended options provided by the internet?

   Answers to these questions will vary. Most of us, however, value choices and the opportunity to change our mind. Recognition that meaningful choices are a vital part of competition is hardly novel. In 1776, Adam Smith wrote that "the private interests and passions of men" lead them to allocate resources "as nearly as possible in the proportion which is most agreeable to the interest of the whole society." (2) In focusing on how naturally occurring competition controlled allocation, Smith was cognizant of the preferences "of the whole society." (3) Both consumer and entrepreneurial choice were implicit in his approach. By 1890, the Sherman Act's proponents were not in the least reticent about their goal of protecting the small entrepreneur, particularly small farmers and ranchers--a theme that continues to be echoed in modern treatises. (4)

   The antitrust approach to large firms has long focused on balancing their potential efficiencies against the risk of oligopolistic conduct--conduct that can directly affect downstream buyers and consumers. The oligopsony risks associated with large firms have received less attention. In 1966, Donald Turner, then Assistant Attorney General, addressed the issues raised by concentrated industries and focused on seller power and pricing. (5) Turner did not mention buyer-power risks. Half a century later, although the literature has expanded our understanding of buyer-power abuses, (6) the Turner observations still reflect a mainstream antitrust focus on seller power.

   On the demand side, the Supreme Court has recognized that one of the goals of competition law is the protection of consumer choice. (7) Antitrust theorists have provided rich supportive commentary that describes the benefits of sensitivity to consumer choice issues. (8) Protecting the choices and opportunities of a vulnerable atomistic seller would seem a natural corollary when the power lies not with the large seller but with large buyers who can coerce the small seller.

   The connection between consumer choice and entrepreneurial choice is direct. If small firms that offer services and products consumers want are driven from the marketplace, consumer choice is undercut. When a relatively small craft brewer sells a popular product, but cannot survive because of lax antitrust enforcement or misguided regulatory policy, the loss in choice falls not only on the would-be craft brewer, but also on the consumer. Meaningful consumer choice exists when market structure allows for new entry and sustainability for small firms that offer what consumers want. Maintaining entrepreneurial choice is also linked to dynamic efficiency. A small firm with a novel idea appealing to consumers can have a difficult time sustaining its entry if large existing competitors can engage in exclusionary conduct. Innovation can be delayed or suppressed. (9)

   The protection of entrepreneurial choice should not be a ticket for favored treatment of small firms. What should be protected is a right to compete on the merits, unhindered by exclusionary or abusive conduct by large firms and as free as possible of government regulation that discriminates against the small provider.

   Properly viewed, the connection between competition law and government regulation is straightforward. If competition law is effective in preserving competition, the need for government regulation should be minimized. (10) Where regulation is needed--as it may be for health and safety reasons--the regulation ought to show the same sensitivity for survival of small firms that antitrust policy should show. Regulations that are designed for, and sometimes at the behest of, large firms can and often do undermine entry, competition, and entrepreneurial choice.

2. WHEN SMALL CAN BE SUPERIOR TO BIG

   Today, Americans are accustomed to big corporations that provide sophisticated or high-tech products our predecessors could only imagine. Airplanes, automobiles, sophisticated drugs, computers, and other digital products are examples. Many every-day consumables, including processed food, cigarettes, toothpaste, and laundry detergent are the products of very large firms. Critical sectors of retailing are now dominated by large chains.

   Despite the prominence of large firms and downturns in the number of newly created and surviving small businesses, (11) a great deal of what is bought and sold in the marketplace continues to flow through individuals or relatively small businesses. That was true in 1890 and remains true today. According to Census data, 78.5 percent of all firms with paid employees had fewer than ten employees. (12) The largest number of employer firms operate in professional, scientific and technical services, retail trade, construction, and health care and social assistance. (13) Small firms and atomistic providers still have a major presence in most service professions, in providing food and drink, in the arts, and in other creative professions. For example, there is high concentration among firms that provide auditing services for large business entities, but there remain hundreds of smaller or solo-practicing accountants that ply their trade for small...