Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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4 thoughts on “Concrete Antitrust Economics

  1. Excellent piece Francisco, thanks for the review. One idea about education and antitrust: public procurement processes. Although there are many other ways in which the governments can work to increase the coverage and quality of education, improving public procurement processes (protecting and enhancing competition) will give more “bang for the buck” spent by the government in education. In that case, both advocacy for competition and cartel prosecution may be pertinent tools.
    Cheers!

    Liked by 1 person

    • Paco Beneke says:

      Hi Juan David! I completely agree with your comment. It is a way in which competition policy can make a contribution to education. The question is how significant this contribution can be. It is important to know this in order to choose where to aim the authority’s scarce resources. The question is of course an empirical one but my guess is that there are other areas where the contribution can be more substantial.

      Liked by 1 person

      • Hola Paco!
        The question of the significance of antirust’s impact is key, not just for education but for any other sector. Competition authorities should include that question whenever they plan their investigative/research agenda.
        Now, let me provide further reasons for considering the impact of competition law and policies in the provision of education in the case of Colombia. As in many other states, expenditures linked to education have a significant share in total government expenditures (almost 16% in 2014). The weight of education expenditures is even more important at the subnational level: in Colombia intergovernmental transfers (and until very recently oil/mineral royalties) are earmarked for education and health. Certainly, an important share of those expenditures is used to fund payrolls of teachers and administrative staff of public schools. However, capital expenditures in education (in new schools, expansions and equipment) may represent around a quarter of total expenditures, a sum that is not insignificant. Investment projects are implemented by governments through procurement processes, including open and public bidding processes. In my research, I have found that in most municipal governments, the average number of bids in public bidding processes in most municipalities is lower than two (Note: all processes, not just the ones related to education). Moreover, less than 5% of the municipalities have an average number of bids (in a yearly basis) equal or above 2. The figures at the departmental level look a bit less grim, but the average is slightly above 3. A red flag should be raised here: the low number of bids makes bid rigging more likely and the high percentage of processes with a single bidder indicate that perhaps some public officials are linked to such result.
        Public schools represent 65% of the total offer of primary and secondary education in Colombia. Is there a role for antitrust in the private offer of education? The infamous notebook’s cartel is one example that comes to my mind. Are there any other cartels related to education? That’s something the competition authority ought to consider.
        Well, these are just some draft notes but the discussion is interesting and I am glad to use this space to discuss it with you.

        Liked by 1 person

      • Paco Beneke says:

        I think you raise some excellent points that should be considered when evaluating the prospective benefits of focusing advocacy and enforcement efforts to aid public education.

        One further point to take into account would be by how much one would expect the purchase prices paid by the state to decrease because of a more intense monitoring of the bidding processes and readjustment of the requirements to open them for more competition. Ideally, antitrust oversight would ensure that no bid rigging occurs. But an actual investigation has a likelihood of error and therefore the prospective benefit is not exactly the hypothetical over-price that a cartel charges. That applies of course to all interventions and not just to education. However, in the case of public expenditures (unlike in markets) a possibility opens up if you are not thinking now how to allocate resources within just the antitrust authority but within the entire public apparatus. It might be more cost effective to give the ministry of education or relevant authority the actual cash instead of spending it in antitrust interventions. These are also just a couple of thoughts, and I admit that when I wrote that line on the post I was only thinking of public procurement and not other aspects, such as the notebooks cartel that you mentioned. If I would be the one making the actual decisions of prioritization I would definitely give it more than just a quick thought.

        I agree with you, the discussion is interesting and even more so because of the information you have shared with us in your comments, which give a clearer picture where the benefits of antitrust on education are concerned

        Like

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