Antitrust will not fix inflation
As U.S inflation hit a 40-year high of 7 percent in January, officials in the Biden administration sought to place the blame squarely upon monopolies manipulating prices. Raising the specter of monopolistic price manipulation, the White House has encouraged the Federal Trade Commission (FTC) to investigate the matter with the possibility of enhanced enforcement.
Not only is the allegation entirely without merit or evidence, but it also misses the underlying causes of inflation and represents nothing more than political scapegoating. The allegations also ignore the reality that cracking down on large companies might result in higher — not lower — consumer prices, which does not help inflation.
Rather than blaming large companies, the administration should pursue policies that could have a real impact, notably cutting government waste, easing tariffs, and incentivizing domestic production.
The White House’s misguided belief that large companies are driving inflation was made public in November 2021 when Biden sent a letter to the FTC Chairwoman Lina Kahn alleging “mounting evidence of anti-consumer behavior by oil-and-gas companies.” He then instructed the FTC to “bring all of the Commission’s tools to bear if you uncover any wrongdoing.”
Biden later issued the same instructions to the Department of Agriculture, ordering them to “investigate large meatpackers that control a significant share of poultry and pork markets.”
Despite Biden’s allegations against large companies, economists are skeptical that antitrust enforcement would lower prices. In a survey of economists from America’s top universities, only 5 percent of respondents agreed that “antitrust interventions could successfully reduce U.S. inflation over the next 12 months.” Additionally, only 7 percent of economists surveyed said that “a significant factor behind today’s higher U.S. inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices.”
President Biden’s desire to use antitrust enforcement to lower inflation ignores the reality that it is being driven by a few goods and services in highly competitive markets, specifically: used cars, which saw prices increase by 34 percent; energy, which saw prices increase by 33 percent; and gasoline, which saw a 58 percent increase.
While these sectors saw significant increases in prices, they are also among the most competitive. For example, in the gasoline sector, five large companies operate in the U.S., and no single company owns more than a 12.5 percent market share. The used car market is also highly competitive — “the top 10 used vehicle retailers contribute to less than 10 percent of used car sales in the U.S.” The energy market is also highly competitive, with numerous providers existing in the marketplace and offering consumers multiple energy sources.
The highly competitive nature of industries driving inflation shows that antitrust enforcement is simply the wrong tool to lower prices for consumers, and the administration needs to address supply-side issues, not market concentration.
Biden’s allegation that large companies increase consumer prices also ignores economic realities that they routinely offer lower prices. When Amazon purchased Whole Foods in 2017, the tech giant used its supply chain and purchasing power to cut prices. Similarly, when Facebook acquired WhatsApp, it cut the annual subscription fee, allowing consumers to access secure mobile messaging for free.
The examples of Whole Foods and WhatsApp show that large companies can lower prices for consumers rather than raising them. However, it also raises the possibility that cracking down on large companies could see consumers paying more for goods and services, further inflating prices.
While encouraging federal agencies to investigate the practices of large corporations may be a politically smart move given Biden’s low approval ratings and growing concern over inflation and the state of the economy, it is clear that cracking down on large companies will do little to alleviate inflationary pressures. In fact, enhancing antitrust enforcement might have the inverse effect. Further limiting the effectiveness of antitrust enforcement to combat inflation is that inflationary pressures are emerging from highly competitive markets.
Rather than scapegoating large corporations, Biden should perhaps acknowledge this reality. Once he does, he might be able to address the real causes of high inflation and diminishing consumer spending power.