Grocers Have the Right to Merge
by Ari Armstrong, June 20, 2007
If Whole Foods buys out Wild Oats, the combined grocers would constitute under 4 percent of the total Colorado food market and just 15 percent of the natural-foods market (as The Denver Post has pointed out). Anybody who has shopped around has noticed that big chains such as King Soopers, Costco, and Target have added more organic and "natural" products. Moreover, many shoppers regularly switch between organic and traditional products based on price and other considerations.
Even by the contorted view of monopoly power entrenched by antitrust law, the FTC's claim that the Whole Foods buyout would somehow hamper competition is laughable. Yet the case does illustrate the broader absurdity of the government's use of force to impede voluntary, market transactions.
The proper role of government is to protect individual rights, including the rights to own and control property and coordinate voluntarily with others. Business owners have every right to attract willing customers by offering a better price, better service, and/or better quality. They also have the right to structure their business operations as they think best. Businesses succeed only when customers reward them with voluntary payment. Obviously, businesses must not engage in fraud or threaten physical force against customers or competitors.
The FTC is the organization violating the rights of business owners to freely compete, all in the name of protecting competition. Antitrust law is based on an absurdity. In the 2005 book, The Abolition of Antitrust, Harry Binswanger calls antitrust "'free competition' at gunpoint." Thus, in practice the policy is disastrous.
In the same 2005 book, Eric Daniels notes that, into the mid-nineteenth century, a "monopoly" generally was understood to mean coercive government intervention leading to "businesses protected by the government's power to quash competition." First-class mail and Amtrak remain coercive monopolies, for example; it's illegal to compete in those areas. But in the late 1800s, Daniels reviews, the trend went from cutting back coercive monopolies to using government force to restrict free, voluntary business activity. Daniels writes that, "instead of curtailing coercive government restrictions on business," antitrust law "opened the door to an ever-growing regulatory state."
As Alan Greenspan wrote years ago, antitrust laws have at times been applied for the express purpose of tearing down companies that have expanded output and driven down prices. Greenspan argues that antitrust law "inhibits businessmen from undertaking what would otherwise be sound productive ventures." (See "Antitrust" in Capitalism: The Unknown Ideal.)
Bruce Yandle summarizes the "public choice" case against antitrust enforcement in the 1995 book, The Causes and Consequences of Antitrust. He notes that the "antitrust statutes had more to do with appeasing special interests than with correcting a perceived source of market failure." Antitrust laws, far from increasing free competition, often use the fist of government to limit competition to the benefit of particular parties. Moreover, Yandle points out, antitrust officials and the courts that oversee cases lack the knowledge to figure out which mergers are beneficial, even assuming perfect motives.
Ayn Rand adds a further point: the antitrust laws are inherently ambiguous and thus impossible to enforce objectively. (See "Antitrust: The Rule of Unreason" in The Voice of Reason.) How big is "too big?" Every good and service in the economy has substitutes; how will "market share" be defined? The consequence is that businesses are subjected to the capricious whims of bureaucrats and judges.
A merger can be beneficial for two basic reasons. First, a merger might allow more competent managers to control a bigger business. As Greenspan points out, maintaining a large business over time "requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one's product and technique." Businesses that fail to meet the demands of their customers will begin to lose sales to competitors.
Second, "economies of scale" can mean that, in a particular industry, a firm of a larger size can more economically provide the goods and services that its customers demand. The flip side of this, as economists such as David Friedman have pointed out, is that "diseconomies of scale" imply that, beyond a certain size, a firm will suffer from coordination problems and thus lose out to smaller competitors. But in any case the "right size" can be determined only by free association of businesses and customers on a free market, not by central government controllers.
We as consumers do not need the FTC's protection from Whole Foods. Instead, if we care about the quality and prices of our goods and services, our liberty, and the rights of business owners, we need protection from the FTC's aggression against Whole Foods.
Letter to the Editor
The following letter appeared in the June 16 business pages of the Rocky Mountain News:
I was disgusted to read that the FTC's thugs are interfering with the business operations of Whole Foods and Wild Oats grocery stores. The owners of those stores have every right to merge their businesses if they wish. Yet, in this case, rather that protect people's rights, government agents are running roughshod over them.
The FTC's inherently ambiguous charge that the merged stores would dominate the market ignores the consensual nature of shopping. The stores can be successful only if they attract willing customers to shop with them. If the stores fail at that task, their customers have every right and ability to shop elsewhere.
As Gary Hull writes in his introduction to The Abolition of Antitrust, antitrust law such as the FTC is invoking in this case is "based on bad economics," and it "violates the sanctity of contract and abrogates a businessman's moral right to produce, trade, and profit."