During the Great Depression, a period of significant price deflation, Presidents Hoover and Roosevelt both imagined that price fixing would stem deflation and help in recovery. The more common approach today is to use monetary and fiscal policy to combat the business cycle. After NIRA was found unconstitutional, Roosevelt became a strong proponent of competition policy, and the U.S. promoted the adoption of such policies around the globe after World War II.
The analogy to the situation we find ourselves in today is that the primary tools for combating the pandemic should be public health tools. Competition authorities are appropriately focused on providing exemptions and flexibility narrowly, to address the public health crisis, without unduly undermining competition for the long term.
Q: What can government do to ensure that companies don’t take undue advantage of the situation, in either the near or long term?
A: After Congress passed the American Recovery and Reinvestment Act of 2009 to counteract the Great Recession, the DOJ launched a program to train government officials at all levels on detecting collusion to reduce bid rigging (a form of collusion) in procurement. Oversight of the dispersal of large quantities of money is critical to preventing collusion and corruption. There are other mechanisms that antitrust authorities can put into place and pitfalls to watch for, as we have written about before.
The biggest long-term threat to competition may be from closures of otherwise stable and productive firms, which result in increased concentration of market power. Similarly, there may be acquisitions of firms that have been weakened by the crisis. The crisis has brought attention to the level of concentration that has been permitted to emerge in many supply chains (e.g., meat packing). This level of concentration can have efficiencies but can also undermine competition, and in this instance can create serious vulnerabilities in food supply.
Following the Great Recession, the rate of entry of new firms in the U.S. stayed low for a decade. Not surprisingly, entry of new businesses has plummeted in the past two months. We know that new entry is an important component of competition, deterring collusion and bringing new ideas, technologies, and products to the forefront. It is critical that steps be taken to encourage new firm startups (or re-starts, for those who are now paused) in order to preserve competition as we recover.
Q: Over the past few decades, the U.S. and many other nations have greatly enhanced their capacity to guard against corporate collusion. Given this level of government scrutiny, what would lead some companies to run the risk of getting caught at cartel activity?
A: There’s a lot of money to be made by raising prices, and certain firms (particularly in certain types of industries, locally, nationally, and internationally) are willing to take the risk. At this time, there may be a sense, given signals from DOJ and others, that the government is likely to be more flexible, reducing the deterrence that has resulted over the past couple of decades from earlier prosecutions.