Why we should enforce antitrust laws more
Microsoft’s attempt to buy Activision has been a regular topic in financial newspapers this year. Admittedly, I haven’t followed the details of this proposed merger, but Microsoft and the bankers it pays to get the deal done have been constantly moaning about competition watchdogs throwing wrenches into their plans. Personally, I think antitrust laws are not enforced enough, which is one of the reasons why we are now dealing with tech behemoths like Microsoft. New research about the impact of US antitrust lawsuits shows that while M&A advisors and others may moan about such efforts, they are good for business and consumers alike.
Tania Babina from Columbia University and her colleagues looked at 3,055 antitrust lawsuits in the US between 1971 and 2018 and examined the impact of a lawsuit on employment, competition, and prices. Obviously, antitrust lawsuits are brought in order to guarantee sufficient competition between companies. As the chart below shows, most antitrust lawsuits are brought to fight bid rigging and price fixing. If an antitrust lawsuit is successful, one should expect to see more competition in the affected industries and lower prices.
Reason for antitrust lawsuits in the US
Source: Liberum, Babina et al. (2023)
This is indeed what the researchers observe. In response to a successful antitrust lawsuit, they see employment increase by 4.1% in the affected industry and an increase in payroll of 5.9% while sales increase by 2.5%. The relative size of these numbers tells us something important:
Payroll increases more than employment in response to a successful antitrust lawsuit. This means that either the jobs created are better paid or more skewed towards higher paid jobs (or possibly both). In any case, not only are there more jobs available, but these jobs are also better jobs.
Sales increase less than employment and payroll. To put it another way, output prices increase but less than input prices. This of course means that margins decline (as they should in a more competitive environment), but it also means that prices for finished goods are likely to drop.
Employment impact of antitrust enforcement
Source: Babina et al. (2023)
In the end, we find that thanks to successful antitrust enforcement, prices for consumers drop, employment increases, the quality of jobs increases, and people have more money to spend. And that increase in spending power leads to higher sales for businesses even though input costs rise. It’s not the worst outcome and the only ones complaining about this are the large companies controlling a market. But for once, we can say that antitrust enforcement is an area of government intervention that benefits all of us. As I said, I think we should have more rigorous antitrust activity by the government, not less.