Knowledge And Decisions

Third-party observers may dismiss product differences as negligible, just as they dismiss production cost differences as negligible. However, there is no “objective” measure of what is negligible. Something is negligible or not negligible to someone. In baseball, for example, the difference between a .250 hitter and a .350 hitter is only about one hit out of every three games, which might seem negligible to a casual onlooker, but that can be the difference between being sent back to the minor leagues and ending up in the Hall of Fame. Customers or stockholders may differ greatly from third-party observers as to what is or is not negligible. Products sold to professional photographers and photographic organizations exhibit the same strong customer preference patterns and attendant “market concentration” as products sold to the supposedly “irrational” general public. What is repeatedly ignored in attempts to discount buyer preferences is the cost of knowledge — knowledge of where to buy a product, knowledge of its characteristics and of ways of using it, and knowledge of the way quality varies from specimen to specimen. To approach this from the standpoint of whether the producer “deserves” such a large market share is to dismiss consumers’ interests. To say that a firm’s reputation gives it an advantage — presumably an unfair advantage — in competition⁷¹ is to say that consumers economize on knowledge by sorting and labeling only to the firm level, in cases where a company’s history of product reliability makes finer sorting not incrementally worth the cost. The issue is not so much the retrospective justice of rewarding a firm for establishing a reputation for reliability. What is more important socially is the prospective incentive to all companies to acquire or maintain such a reputation — that is, from a social point of view, to localize monitoring incentives where they can be most effectively carried out.

Preoccupation with the firm’s market share has led to adverse antitrust decisions even when there was no adverse economic effects discernible by the courts. In the celebrated antitrust case against the Aluminum Company of America — one of the very few privately created monopolies on record — it was found that the profit rate averaged only about 10 percent,⁷² like firms in competitive industries. Nor did the Court find any negative effects on the economy — but Alcoa still lost. Its “exclusion” of competitors consisted solely of building plant capacity in anticipation of the growing demand for aluminum.⁷³ The chilling effect of this finding could be seen in the later history of cellophane, which was in chronic shortage because Dupont refused to build plant capacity ahead of the growing demand, for fear of antitrust suits.

Most antitrust cases involve legal actions against individual firms having nowhere near monopoly proportions of output or sales. In the celebrated case of Brown Shoe Company v. United States, a merger which gave the combined firms a total of 5½ percent of American shoe store sales was found to be in violation of the antitrust laws.⁷⁴ Another merger which gave the Pabst Brewing Company 4½ percent of the nation’s beer sales was also broken up as a violation of the antitrust laws.⁷⁵ In yet another well-known case, the Supreme Court broke up a merger between two local grocery chains in Los Angeles who together had only 7½ percent of the grocery sales in that city.⁷⁶ “Secular religion” may not be too strong a characterization for antitrust doctrines which dismember firms that are that far from “monopolistic” control, in industries with sometimes hundreds of competitors. However, the processing of such cases by governmental agencies is by no means irrational as institutional policy. Agencies with a mandate to fight monopoly firms have every incentive to define the term as broadly as they can, to see “incipient” monopoly in as many places as possible — and especially so in an economy where private monopolies are rare. To restrict themselves to fighting real monopolies or significant monopoly threats could mean losing the bulk of their staff, appropriations, and power. A more basic social question is how they find the outside support that is politically necessary to continue such activities into the region of diminishing (or negative) returns. This has to do with the intellectual climate, and so will be discussed in Chapter 10.