Two weeks ago, the Depart-ment of Justice announced it would try to block the merger of two large airlines: American Airlines and U.S. Airways. This will be an interesting business case, and it offers a glimpse into one of the great public policy innovations of the past couple centuries: American antitrust law.
In the middle decades of the 19th century, many private businesses around the world grew to astonishing sizes. In America, the growth of big steel producers and railroads animated populist groups such as the Grange Halls, which dotted rural areas. But, the American worries had nothing to do with highfalutin and pretentious notions of Marxian dialectic materialism.
The problem with big businesses in America was that they were colluding to fix prices for grain shipment.
Unsurprisingly, price fixing didn’t sit well with many Americans, including Sen. John Sherman, the younger brother of William Tecumseh Sherman, well-known for his “urban renewal” work in Atlanta. The Sherman Anti-Trust Act of 1890 explicitly outlawed two firms fixing prices or conspiring to monopolize a market. It was an elegant piece of legislation, crafted in only a few hundred words.
Over the next 60 years, two more major antitrust laws were added, which effectively outlawed a range of business behaviors that limited trade. The most important of these was the 1913 Clayton Act outlawing mergers that substantially reduced competition. So, the recent suit against American Airlines and U.S. Airways is based upon a 100-year-old law.
Over the same time period, economists were busy developing a set of mathematical models that predicted when and how mergers could lead to the twin evils of monopolization: higher prices and lower production. This is a splendid example of the practical use of this sort of formal modeling. The math in these models allowed economists to compile hundreds of cases of mergers and estimate exactly how big the merged firms would have to be before the monopoly problem arose. This remains an active and fruitful area of research today.
Among the insights from this research is that this airline merger would lead to a very concentrated market, with four firms commanding 80 percent of the market. Strong data from literally hundreds of studies suggests that level of concentration would very likely lead to monopoly pricing. That evidence and a very lengthy history of antitrust violations in the airline industry led the Department of Justice to seek to stop the merger.
I won’t predict the final outcome, but this is a good example where decades of thoughtful economic data collection and research (almost exclusively performed by economics and law professors) provided the Department of Justice the tools to protect consumers and competing businesses from monopoly behavior.
Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and a professor of economics at Ball State University. Contact him at email@example.com.