The Legal Janitor

The bloggers at the aseanist have a reply on my policy suggestion of weak anti-trust laws and weak ‘intellectual property’ restrictions.

They cite a case decided by the Supreme Court of the USA (commonly known as SCOTUS) from 1941: FASHION ORIGINATORS’ GUILD v. FEDERAL TRADE COM’N, 312 U.S. 457 (1941).

I shall quote the case summary from the aseanist:

In that case, the Court held illegal per se an arrangement by which fashion designers protected their uncopyrightable designs by boycotting textile makers and retail stores that supplied or sold imitators? works. Since fashion designs aren?t protected by intellectual property, the designers had argued, this was the way they defended their investments.

I have no expertise at all in American law, so what little I can comment on, must be from the perspective of economics, and probably what little features that are still common to all common law jurisdictions.

if competition law is weakened in order to permit this, then they?re likely to accomplish their goals in ways that would raise private entry barriers into their industry, such as exclusive dealing arrangements, tying contracts or refusals to deal with rivals.

Firstly, I respectfully disagree that there is anything to fear from exercises of market power. In Fashion Originator’s Guild, the garment manufacturers colluded such that they withheld trading with retailers who sold clothes with ‘pirated’ designs. We must remember, that was in the early 1940s. If we look at the import tariff figures in the USA from the 1930s to the 1940s, we can see that a protectionist economic policy was in place. I may not have the figures for import tariffs on textiles in particular, but we can certainly infer that they do exist, and were not insignificant.

So what does protectionism have to do with cartels? Import tariffs shifts the balance of total surplus from consumers to producers. In other words, goods become more expensive, local producers sell at high prices, and consumers suffer. With that level of import tariffs, such market power is inevitable. Which group of manufacturers in our modern era has that kind of market power?

In this globalised world that we live in today, if you do not trade with me, I can easily find someone else to trade with. That is the essence of why free trade is so empowering. It offers consumers greater variety of choices, drives down prices through competitive pressures, destroys local monopolies and in a voluntary trading exchange, all parties are better off.

My first argument would be, that only protectionist economies need fear monopolies and cartels. There is a qualifier however, which I will discuss below.

So there?s a problem when we allow firms to turn themselves into a private enforcement force. And there?s a problem when the way they?ll enforce their ?intellectual property? is through raising entry barriers, because in the absence of civil or criminal liability, they are unlikely to remove those barriers themselves.

Yes, I completely agree with you that they would not agree to remove those private barriers out of irrational self-interest. I say irrational, because for that reason they are blind to the fact that any sort of collusion would be the cause of their doom. As I have pointed out, once trade barriers are dropped, any policy to maintain high prices through output restriction would become useless. The onslaught of cheap foreign imports would sink them like a stone.

Furthermore, changes in technology also destroys monopolistic market power. Constraints such as space, geographical location and time become immaterial, or at least, lesser in significance. Improvements in shipping technology is probably the greatest leveller in the playing field. It reduces the costs of transporting goods from cheap foreign manufacturers to far off destinations. Without protectionist measures, local monopolies don’t stand a chance.

Telecoms companies used to charge an arm and a leg for international calls. Now, with VoIP, the best that they can do is scramble around, begging for state interference to protect their monopolies through regulatory measures i.e. quality of service, licensing, content control etc etc. And while they’re begging for state handouts, the innovators continue to innovate.

There is no doubt that the RIAA is a cartel. And yet, their ability to raise private barriers to entry is only good as long as their product is a physical thing. As soon as music is no longer shipped through atoms, but transferred electronically as bits, their power vanishes. Their only recourse? Seek state protection, in the form of expanded and extended copyrights, and in some jurisdictions, criminal penalties (i.e. Singapore).

No other company in the world enjoys control over 95% of their market except Micro$oft. And yet, even the US Department of Justice can do nothing to tame them, leaving such discipline to the market, in the form of competitors like Apple and a community effort like Linux. Regardless of anti-competitive agreements like bundling or tying (M$ makes it compulsory for all computers sold to have a Windows license), sometimes the cost argument is just too compelling.

I am typing this post right now on my Linux laptop, despite having paid for the Windows license, simply because the time spent on fixing the damn Windows is worth more than what I paid. Linux costs nothing for me to install and get working. And if a home user can think like this, think of all those hardware manufacturers who would just LOVE to have a commodity OS that costs nothing for them to sell their hardware with. It is no surprise then, that Walmart sells Linux PCs, and M$ is hemorrhaging in the server space.

My second argument is that private barriers to entry in any industry are still subject to competitive pressures, such as changes in technology and laws, as long as governments do not interfere.

In fact, in a world in which competition law and intellectual property rights are weak, I?d wager we?d see even stronger and more invasive protection of intellectual property, because private parties have more of an incentive to set the bar higher for protection since they?re operating out of their own financial self-interest.

Private barriers to entry, no matter how high or how invasive, are ultimately still breakable. Trade secrets are a barrier only as long as they remain secret. There is nothing to prevent independent discovery. Furthermore, information, in this Internet Age, is impossible to contain. I don’t believe there is much that can be done once an idea is ‘thought’, because as long as humans communicate, ideas WILL travel.

The ultimate difference between private and state-mandated barriers of entry, is that Governments are not subject to competition, where private enterprises are. The state machinery can bring the awesome power of a criminal justice system to bear on the challengers, whereas private barriers, when breached, can no longer be resuscitated.

My third argument is that private barriers to entry, no matter how high or ‘invasive’, cannot be compared to the power of state-created barriers of entry.

This world actually resembles most Southeast Asian economies, and explains to some extent why we have a lot of oligopolies and why it?s hard for small to medium enterprises to grow. We don?t protect competition, and we don?t encourage investment in innovation.

I have an alternative theory for the predominance of oligopolies in Southeast Asian economies. I point the finger squarely at state interference.

I don’t think I have to mention names, I believe it is common knowledge that the biggest and most dominant companies in Southeast Asia have something in common, which is that they have, in some form or another, links to their governments. Be it owned by the government, owned by people IN government, or simply having the ears of the government, we find a variety of state-supported competitive advantages that SME’s do not have, such as subsidies, import tariffs, licensing restrictions, exclusive government deals etc etc.

I submit to you that the reason why there is a lack of innovation and competition in Southeast Asia is because of TOO MUCH government interference and control in the free-market, and all too often for the wrong reasons and implementing the wrong policies.

I also disagree with your conclusion that the lack of competition in Southeast Asia is because of insufficient government action in protecting competition and encouraging innovation. The papers found here should offer some insight into how weak ‘intellectual property’ protections often create conditions which offer fertile ground for innovation AND competition, without any mention of government interference to enforce competition. I won’t pretend to understand the papers completely, but I can say that from what I can understand, they appear to support my hypothesis.

My fourth argument is that state interference often lead to unintended negative consequences, and offers plenty of opportunities for moral hazard (aka corruption). The market can discipline monopolists and often do, and when they cannot, it is usually because of government intervention.

I agree that there?s a great deal of room here for adjustment, especially in the duration of the intellectual property right, but I don?t think the move towards more robust antitrust enforcement schemes on the member state level should be abandoned, nor should intellectual property rights be tossed away. The key is to find the right policy balance.

I agree with you that the issue boils down to one of policy balance. I do not believe in doing away with ‘intellectual property’ protections either. But I do believe that balance does not mean 50-50. To me, balance means an aggressive scaling-down on the breadth and depth of monopolistic powers granted by the state to these industry incumbents, and as far as possible, minimal interference by the state in the market. Only then, will competition truly flourish. Should incumbents want to exclude competition through private means, I say let them try. The punishment from a free-market would be swift and brutal.

*cases*
FASHION ORIGINATORS’ GUILD v. FEDERAL TRADE COM’N, 312 U.S. 457 (1941)

*blog posts*
the aseanist ? Blog Archive ? The Opposite of Antitrust: Part 2
Wannabe Lawyer ? Blog Archive ? Antitrust: Why state intervention is anti-competitive

*secondary sources*
U.S. Tariff Rates - Ratio of Import Duties to Values: 1821-1996
Spatial Economics, by Wolfgang Kasper: The Concise Encyclopedia of Economics: Library of Economics and Liberty

*research papers*
Research on Innovation - Online Working Papers