Lawmakers Fail to Understand the Benefits of Economies of Scale

A year ago, President Joe Biden signed Executive Order 14036 on promoting competition in the American economy. Since then, the Department of Justice’s (DoJ) Antitrust Division and the Federal Trade Commission (FTC) have launched a single-minded crusade against “big tech” and other concentrated industries, as well as proposed mergers. The agencies appear determined to disrupt successful businesses and industries regardless of the negative consequences for consumers.

Despite this coordinated initiative from the executive branch, lawmakers from both parties believe that these actions do not go far enough. Several bills circulating in Congress would give the FTC and DoJ significant new powers while upending decades-long antitrust regulatory orthodoxy.

For half a century, the widely accepted “consumer welfare standard” dictated that antitrust should only be used to protect American consumers. In other words, large companies and megamergers are permissible so long as they advance consumer welfare. The Competition and Antitrust Law Enforcement Reform Act (CALERA) would undo this precedent. The bill would abandon the economic analysis of the consumer welfare standard by eliminating the burden of proof on the government to demonstrate an acquisition would harm consumers, thereby making mergers guilty until proven innocent.

Whereas previous rules forced agencies to prove that a merger would substantially lessen competition before intervening, CALERA would empower the DoJ and FTC to go after mergers that only “create an appreciable risk of materially lessening competition.” As explained by Arnold & Porter, this new standard would make “violations of the Clayton, Sherman, and FTC Acts easier to prove.” As a result, the amount of litigation against large acquisitions would increase significantly — a development that would hearken back to the “big is bad” mentality from the progressive era of antitrust regulation that focused more on quashing powerful firms than protecting consumer welfare.

Although supporters of the bill may argue that these loosened requirements allow agencies and state attorneys to go after mergers “before they ripened and caused harm,” this logic is based on the faulty assumption that large acquisitions do not provide profound, meaningful benefits to the consumer.

The aviation industry proves how much consumers can gain from certain megamergers. Before the temporary shock to jet fuel reserves, which led to a considerable increase in plane ticket prices over the summer, average domestic airfares in 2021 were $222 cheaper in today’s money compared to the average ticket price in 1996. For American consumers, such a decline in airfares means more consumers can travel and reconnect with distant family members.

Despite theories that larger companies will raise prices, the considerable decline in airfares has occurred alongside the greatest period of airline consolidation. Aviation, an industry with tremendous entry costs and regulation, benefits tremendously from economies of scale — the basic economic concept that more efficiently run companies save more on expenses. With larger airline carriers, operations become increasingly efficient, reducing costs for airlines passed down to the consumer through lower ticket prices. In the past, regulators have widely accepted this reality after approving previous mergers.

While the top five carriers in the United States controlled 77% of the market share as of 2018, competition is still robust with new entrants challenging incumbents, as seen with the rise of new carriers in the past few decades such as JetBlue, Frontier and, most recently, Breeze and Avelo. Because of this competition, aviation has not been plagued by price gouging.

The recently announced merger between JetBlue and Spirit, two airlines outside of the top five, illustrates the high degree of competition and how consolidation can lower prices. In the face of concerns that the elimination of Spirit would reduce budget offerings, theoretically driving up costs, in a joint statement made by both airlines, executives outlined how a larger JetBlue would instead lower prices by bringing more competition to the top carriers and forcing them to slash ticket prices to meet JetBlue’s challenge.

Of course, not all mergers and acquisitions are bound to lower consumer costs. However, banning all mergers simply due to their size could deny consumers many potential benefits, from lower prices to better services. Critically, antitrust bills such as CALERA fail to recognize the importance of the guardrails provided in the consumer welfare standard that protect consumers from counterproductive government overreach.

Dylan Shepard is a Policy Intern at the American Consumer Institute. For more information about the Institute, visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.

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