Regulatory inertia, antitrust edition

Lynne Kiesling

This article in the Wall Street Journal last week got less attention than I expected (perhaps because of budget, Libya, etc. news). It’s a very good analysis of bureaucrat v. bureaucrat competition between the DOJ and the FTC on which agency will take the lead in prosecuting antitrust cases:

Both agencies are charged with enforcing antitrust law, a situation that has prevailed for almost a century, and it’s up to them to sort out disputes. Neither will disclose how often they occur, but antitrust lawyers and agency officials say they have been rising in number and intensity, in part because converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility. …

Some methods used to resolve agency disputes belie the stakes involved. In addition to the most recent coin toss—which several people familiar with the matter said the Justice Department won—the agencies have employed the “possession arrow” system borrowed from college basketball, in which they take turns. That prevents either agency from claiming jurisdiction over a company or industry sector in the future. …

The two agencies have different legal procedures for challenging business deals or practices they believe to be anticompetitive. The Justice Department must work through the federal court system and face judges who are often skeptical of antitrust law. The FTC, by contrast, tries cases in its own administrative law system. This, many lawyers believe, provides a significant home-court advantage.

I’ve always classified the FTC’s jurisdiction as being more focused on mergers in consumer retail products and industries.

The article goes on to describe the real costs that this jurisdictional squabbling creates for firms, adding time and expense to an already long and expensive merger process. It concludes with observations from FTC commissioner and former FTC chair William Kovacic, who argues that it’s time to revamp the structure of the federal government’s antitrust prosecution.

I think there’s a crucially important, more general, broader insight to draw from this story: the inevitability of regulatory inertia relative to the underlying dynamism and change in the economy. Note in the quote above what is cited as an impetus for this conflict: “… converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility.”

By its nature regulation (including antitrust enforcement) relies on establishing definitions, guidelines, limits on behavior (of an agency as well as of firms), and legalistic, administrative procedures for carrying them out. In the case of antitrust and the split jurisdiction between the DOJ and the FTC, these strictures also include stipulations of who will concentrate on which industries. One of the hallmarks of economic and technological dynamism is the Schumpeterian creative destruction of industry boundaries — whole new industries exist that could not have been imagined a century ago, in the heyday of establishing regulatory agencies.

Why are regulatory agencies slow to adapt to such organic, evolutionary changes in technology and the economy? Here I think Schumpeter meets Buchanan and Tullock — once established, those working in agencies have an interest in maintaining the status quo jurisdiction and budget of the agency, despite any apparent mismatch of its functions with changes in the underlying economy. Changes in regulation require changes in legal procedures, and may even require changes in enabling legislation, adding yet another layer of inertia to the process. In addition, I think that legal procedures intended to increase agency transparency and accountability, such as the Administrative Procedure Act, exacerbate the legalistic bureaucracy of regulation and reinforce the slow pace of regulatory adaptation to underlying dynamic change.

One unfortunate consequence of such regulatory inertia is the potential for reduced welfare/total surplus, through both reduced consumer surplus and producer surplus. Such regulatory agencies were established primarily to protect consumer surplus, but one consequence of technological change has been how it enhances consumers’ abilities to investigate and protect their own interests, as personally and subjectively defined rather than as bureaucratically defined (which is usually defined as lower prices). But regulatory institutions adapt slowly to such change, as this example illustrates, to the detriment of total welfare.

This observation extends to other forms of regulation, including state-level public utility regulation. One of the things I find most paradoxical in the current approach to smart grid investment is how the technology adoption decision has been incorporated into the regulatory process, which the above analysis suggests is counter-productive.