What Am I Missing About Antitrust Exemptions?

Josh Wright —  15 October 2009

Geoff mentions the pending bills on the Hill that would grant merchants an antitrust exemption to negotiate interchange fees.  The insurance industry exemption has also been in the news of late in the wake of the Democrats’ threats of repeal.  Here’s what I’m puzzled about.  Other than self-interested parties that have a lot to gain from an exemption (I’d like an exemption from income taxes if anybody cares), why won’t anybody say that industry exemptions from the Sherman Act price-fixing prohibitions are decidedly not a good thing for consumers?

For example,the USDOJ Antitrust Division “generally supports the idea of repealing antitrust exemptions” but takes “no position as to how and when Congress should address” repeal of the insurance industry antitrust exemption?  (HT: Antitrust Review).  That is the Antitrust Division.  One of the agencies responsible for enforcing the antitrust laws.

And by the way don’t give me the argument that antitrust laws can be misused and abused in ways that harm consumers.  I know that argument.  I agree with it.  I make it all the time.  But it doesn’t make out a justification for an exemption against prohibitions on naked cartel activity.  It applies most strongly to monopolization and single firm conduct cases where we don’t have much hard evidence of the benefits of antitrust and false positives are very costly.  It doesn’t apply to hard core cartel activity and collusion.  There is plenty of evidence that that stuff is bad.  Real bad.  And most of what we are talking about for these exemptions is allowing horizontal agreements on price.  If your argument is about chilling effects of monopolization liability, then one should say that we should tailor the exemption that way but not to include collusion.  Nobody is saying that so far as I can tell.

Megan McCardle equivocates too.  She’s in favor of price-fixing prohibitions “in principal” but notes that antitrust cases can also be used for all sorts of bad purposes and sometimes generate silly remedies.  All true.  McCardle doesn’t “see why insurance companies should have an exemption from whatever laws we do have” but notes that “it’s hard to escape noticing that this basically amounts to political extortion, which is not the way our laws should be used.” She’s responding to the news that the Democrats are threatening to repeal the insurance exemption, but I’m pretty sure that the political process to get the industry wide exemption wasn’t pretty either.

Look, when Harry Reid says that he knows insurance companies are anti-competitive “Because they make more money than any other business in America today,” its pretty hard to refrain from criticizing a political ploy that doesn’t have anything to do with the antitrust merits.  Not to mention that Congress is simultaneously considering passing other antitrust exemptions while its striking down others.  I’m sympathetic.  But just to be clear.  Whatever one thinks about the difficulties of application of the antitrust laws to single firm conduct (I’ve certainly been a critic of much of the modern approach to monopolization), it is worth repeating:  cartels are bad.  They raise price.  They reduce output.  That is not what the economy needs.  There is a substantial economic literature on this.  And I don’t think that any economist who has looked at the literature has or would ever support an industry wide antitrust exemption.

If I’m wrong, I’d love to see some citations.  Maybe there is some evidence out there that I’ve not seen that indicates that exemptions improve consumer welfare in practice.  I doubt it.  But that’s what the comments are for.

As the Antitrust Modernization Committee Report and Recommendation says:

Statutory immunities from the antitrust laws should be disfavored. They should be granted rarely, and only where, and for so long as, a clear case has been made that the conduct in question would subject the actors to antitrust liability and is necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general.

And:

to extent that insurance companies engage in anticompetitive collusion, however, then they appropriately would be subject to antitrust liability.

To be absolutely clear, I am NOT saying that I believe that repeal of the federal exemption will do much to lower prices or that I believe there is a high incidence of collusive behavior by the insurance firms.   But that’s not the point.  The point is that we should not be defending the merits of exemptions for prohibitions on cartel activity.  Personally, I believe that state imposed barriers to entry, regulatory constraints and rate regulation are more likely a much bigger problem for consumers than anticompetitive behavior and efforts aimed at increasing competition between the states will have a much bigger bang for the buck for consumers.  But the fact that state regulation is also a problem is not a good argument in favor of an antitrust exemption that allows collusion.