So take a look for yourself at the Federal Trade Commission's decision yesterday to block the proposed merger of Nestlé Holdings and Dreyer's Grand Ice Cream on antitrust grounds. The issues at stake are so simple that the injustice, arbitrariness and sheer absurdity of American antitrust regulation jump out at you with breathtaking clarity.

Let's take a look at what was behind the FTC's decision -- a decision which inserts the power of government to disrupt a voluntary and mutually sought combination of two private businesses, a decision that slashed a billion dollars in market value from the stock of Dreyer's last night as soon as it was announced.

The essence of it as that the FTC believes that "that the elimination of Dreyer's would likely lead to anticompetitive effects in the market for superpremium ice cream." Did you know, before this, that there even was something called "the market for superpremium ice cream"? Well, there is now. Imagine some incredibly complex diagram covering the wall in the office of some Ph. D. at the FTC's offices in Washington showing "the market for food." Now erase everything that isn't "the market for deserts," and then erase everything that isn't "the market for frozen deserts," and then erase everything that isn't "the market for ice cream." There's not much of that diagram left -- we're already down to something the size of a postage stamp. But now erase "the market for cheap-o ice cream" and "the market for regular ice cream" and "the market for premium ice cream." That little thing you have left -- that thing that's about the size of Abraham Lincoln's nostril on a penny -- is "the market for superpremium ice cream." And that's what this is all about.

In that tiny little sub-sub-sub-sub-market, Dreyers' brands Dreamery, Godiva and Starbucks battle it out with Nestlé's Häagen Dazs, and Unilever's Ben & Jerry's. The big issue, according to the FTC -- the reason for government to intervene and cost Dreyer's shareholders a billion dollars -- is that  "this deal will reduce the number of significant competitors from three to two" and "would likely raise prices and reduce choice for consumers." But, even granting that the government ought to be concerned with such matters at all, none of it means a thing in this case unless you accept the idea of "the market for superpremium ice cream" as a meaningful reality.

Who's to say that's a market of any importance? Who's to say that market needs the government to interfere with private business decisions to be sure that there's a certain amount of competition in it -- or any competition at all? Let's say that there were so little competition in "the market for superpremium ice cream" that choice was narrowed to a single brand and prices became astronomical. What if "the market for superpremium ice cream" vanished from the face of the earth altogether? So what? Consumers could simply buy any of dozens of premium, regular, or cheap-o ice cream brands instead -- or some other desert. Let them eat superpremium cake!

Even if we grant that "the market for superpremium ice cream" needs to be policed for competition, who's to say that the correct number of competitors is two rather than three? Is it always better to have more competitors in a market? In this country we have only two political parties of any influence -- would we be better off with more, like Italy or Israel? Maybe we would,  in which case we are free to have them -- or not. But in the case of ice cream -- or rather, superpremium ice cream -- we are not free to have less than three.

And why should we necessarily be concerned that prices might rise with a drop in the number of competitors? First, there's no axiomatic reason to be absolutely positive that prices would rise in the first place. And what's the correct price for superpremium ice cream, anyway? Maybe prices should go up -- maybe today's prices are too low. To insist arbitrarily that lower prices are always better -- and to bring government power to bear to make sure that they are -- amounts to a form of price controls in the name of antitrust. It takes what should be a free bargaining process between producer and consumer and stacks it in favor of the consumer. But why are people who make ice cream less entitled to equal protection under the laws than people who eat ice cream?

And even granting that the FTC ought to be interfering with private transactions on all of these highly questionable grounds, we need to ask the purely pragmatic question: will it work? Suppose that Dreyers now goes out of business because it can't be sufficiently profitable without the merger it wanted -- with too many competitors, and with prices too low. That way we'd still end up with two competitors -- but that's the hard way to get to the same undesired result.

And don't think it can't happen, because it's happened before. How different would the US telecommunications business be today -- indeed, the whole corporate landscape -- if antitrust authorities hadn't blocked the merger of Sprint and WorldCom in 2000? In that case it wasn't about ice cream. The chart on that Ph. D.'s wall was a little bigger, the ideas being debated had more syllables, and there was more money at stake -- but all the same principles apply, and the result was ruination.

So President Bush, when you're done ending the double-taxation of corporate income and reforming Social Security -- oh, and don't forget to win the war on terrorism -- do you think you could do something about demolishing America's antitrust bureaucracy?

>> Update... Silber at The Light of Reason has an anti-antitrust crusade you can participate in personally. Check it out -- click here.
>> Update II... Outstanding information about the inmates running the asylum at the FTC on our letters page, from an anti-antitrust "passivist."

Posted by Donald L. Luskin at 3:00 AM | link    

Tuesday, March 04, 2003