Economics » Monopolies

The best books on Antitrust

recommended by Howard Smith

Across sectors and around the world fewer and fewer companies dominate the economy, with negative consequences for consumers, workers and the economy as a whole. Here, Oxford economist Howard Smith introduces books on 'antitrust,' a key policy tool for ensuring that markets are actually functioning properly in market economies.

Interview by Benedict King

Before we get to the books, can I start by asking you what ‘antitrust’ is? It’s essentially anti-monopoly policy, isn’t it? And could you address why it seems to have become a matter of increased political or policy interest recently?

Antitrust is the American word for it. In Europe, we call it ‘competition policy.’ So it’s either anti-monopoly or pro-competition. Competition is the opposite of monopoly. Antitrust is basically the promotion of competition, and therefore, it’s anti-monopoly. It’s all about setting the rules of competition. It’s about making the market system work properly in the interests of the whole of society, and not just in the interests of a few. Antitrust is about making the market mechanism work effectively, and setting the rules of play. There’s a little bit of debate as to what the goals of competition policy should be but, in general, it’s about making competition work well for consumers.

And has it become a more pressing issue with the emergence of huge tech firms?

That’s certainly fair. Big tech—sometimes called GAFAM: Google, Apple, Facebook, Amazon, and Microsoft—has become huge, and it’s become very obvious that there isn’t really enough competition in each of their markets. They’re very high profile, too. So the rise of these firms has certainly led people to believe there’s something wrong with antitrust at the moment and that it has failed with respect to these companies in particular. But, actually, the problem is wider. The rise in monopoly profits—or market power, as we call it—is actually widespread across all sectors. There’s a lot of evidence to say that what’s going on in big tech is actually going on across a lot of markets, maybe in a slightly less dramatic way.

Let’s start with The Profit Paradox: How Thriving Firms Threaten the Future of Work by Jan Eeckhout. What story does this book tell?

The paradox in the title of the book is that profits have risen because there’s a lack of competition and that actually makes everyone worse off in general. Although it makes firms better off, it makes the economy worse off.

This book is written by an economist who, along with other co-authors, wrote one of the most influential papers in recent years, which has tried to measure market power in the economy—the ability to raise prices above costs. Eeckhout shows that this is not just about the big tech firms. He’s looked at accounting data for firms across almost all sectors over 50 or 60 years. It’s a remarkably comprehensive piece of research and what he’s found is that market power has risen in almost all sectors and in almost all continents. It’s a very, very widespread phenomenon.

This is an extremely important piece of research and very influential. It’s made everyone sit up and think about what’s going on. It’s really shaken the economics profession because we had never before realized how widespread the rise of market power has been.

“Market power has risen in almost all sectors and in almost all continents”

The other thing that’s very interesting about the book is that it links this rising market power and profitability to implications for the labour market and another very interesting phenomenon of recent decades, the fall in the share of national income that goes to labour. This has fallen for many years. It used to be that two-thirds of value-added went to workers. That was actually the case for centuries. It was one of the most stable facts in economics, that two-thirds of value-added went to workers. But, in recent decades, this has fallen to less than 60%, which is quite a dramatic change. It’s never, ever moved so much before. Eeckhout says that this is due to the rise in market power. It’s an example of the profit paradox that profits have gone up, but workers haven’t seen the benefits. In recent decades, the median worker hasn’t had any improvement in their standard of living. There have been some workers who have been made a lot better off in recent years, but the median worker hasn’t seen any increase in their pay. There’s been a great widening in inequality. He puts this down to rising market power.

Does he offer a way out of this problem?

Yes, he does. He believes in tougher competition policy. He thinks that competition policy has been too soft. He’s got a chapter “Putting the Trust Back into Antitrust” by which I think he means we should try to restrict mergers and acquisitions—all the usual things that people say when we talk about tougher antitrust policy. That means being much stricter about laws allowing firms to merge together and possibly going back to the idea of breaking up big firms, which we used to do, but we haven’t done in recent years.

Let’s move on to the next book, which is The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon. What’s the story being told in this book?

This book is written by an economist who went from France to America when he was young, 20 or 30 years ago. He was amazed and impressed by how competitive America was compared to Europe. But his view is that whereas 30 years ago America had a better antitrust framework and had more competitive markets than Europe, this has now reversed. America now has a weaker antitrust system than Europe. He praises the setup of the antitrust system in the EU in particular. He thinks that the EU has become much more effective in its pursuit of big companies than America. The book is full of evidence. It’s got lots of empirical evidence and charts and data. This idea of a ‘great reversal’ is a very interesting thesis and it’s a very enjoyable read.

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I think he’s a bit on his own, actually, in the way he praises European competition policy. He certainly does that more than the other authors on my list. He relates it to the way in which the two continents work. In Europe, it’s important to ensure that the institutions of the EU are at arm’s length from any kind of lobbying from individual states, so EU competition policy is quite removed from political pressure. That’s the way the treaty structure of the EU works and the way competition policy works. So competition policy is less susceptible to lobbying from big companies and political pressure. That is not the case in the US. He’s got a lot of chapters in his book setting out how susceptible the American antitrust system has become to lobbying. He believes that there’s a lot of lobbying of politicians, which is putting political pressure on the institutions carrying out competition policy in America, which has had the ultimate effect of leading to a much softer competition policy.

And, going back to what we were talking about earlier, does he show that the share of national income going to labour is higher in the EU than in the US as a result of this or anything like that? Does he show any of the malign impacts of failing competition policy in the US?

He does draw some comparisons. This book is full of charts and data but I don’t think he has the share of GDP going to labour comparison. He does compare the amount of investment and other indicators of a healthy economy, including concentration measures, how much markets are dominated by big firms. He says the concentration has risen a lot more in America than in Europe. He argues that profit levels have gone up a lot more in America than Europe. And he also argues that investment levels have gone up less in America.

I don’t think his thesis is the consensus. For example, the book that we discussed previously, The Profit Paradox, finds that measures of market power are just as bad for Europe as they are for America. So I think Philippon’s thesis is not one that Eeckhout would agree with.

Let’s go on to your next book, How Antitrust Failed Workers by Eric Posner.

I really liked this book because it’s got a very simple thesis and it looks at an angle of antitrust that I think has been overlooked. The thesis of the book is that antitrust has tended to look at market power in the product market, firms raising prices above costs when selling to consumers. But the mirror image of that is monopsony power, which is the ability of firms to reduce wages below the productivity of workers. This doesn’t happen in a competitive economy where you have to pay your workers their marginal product, but if you’ve got monopsony power, you can get away with reducing the wages of workers. What’s very interesting is that competition policy seems to have evolved in a way where there’s nothing really in the law, particularly in American law, to say you can’t look at labour markets as well as product markets. But, for some reason, as competition policy has evolved, it has looked at product markets and not labour markets. This book suggests that we should start looking at labour markets more. It goes hand in hand with a lot of consensus now in the economics profession, that monopsony power is everywhere. We didn’t used to believe in monopsony power 30 or 40 years ago. It’s only recently that competition economists have begun to realize that this is one of the major costs of having a weak competition policy.

Is the book looking at the US in particular, or is it more global in its focus?

His book is really US-centric. He is an American antitrust lawyer and most of the evidence that he puts forward is American evidence. But the conclusions that he draws and the arguments he makes apply equally well to other countries. There’s no reason to think that monopsony power is less of a problem in the UK or in Europe than it is in America.

What are the other cures for monopsony power? Are they exactly the same as they are for monopolistic behaviour in general, or are there specific things you can do in terms of policy when faced with this problem?

That’s a very good question and it is addressed in the book. The answer is yes and no. There are certainly some things you can do that are the same as for monopoly behaviour. When you’re assessing a merger, you can start looking at the impact on workers, because there is evidence that certain mergers have depressed wages. So you could start to factor in the effects on workers when you decide whether or not a merger should go ahead. You could also penalize collusive agreements between firms. There’s quite a lot of evidence that firms have been agreeing with each other not to poach each other’s workers. This is a bit like colluding over prices, but instead of colluding over prices in the product market it’s colluding over wages in the labour market. Sometimes firms have agreements with their own workers that they can’t go and work for a competitor. Now, if that was in the product market, that would be considered an anti-competitive practice. But because it’s in the labour market, it’s tended to be overlooked.

He’s arguing that, really, a lot of the policies that we have for product markets can just be transferred, quite simply and directly, across to the labour market. He suggests that we can just take the tools straight across. You can really think of the input market of labour and monopsony as being essentially just the mirror image of monopoly. A lot of the tools and things you’ve learned about on the product market side can be used on the labour market side.

“EU competition policy is quite removed from political pressure”

But he says that product markets and labour markets are different in certain respects. For example, it’s probably a bit naive to think that antitrust policy can be used to solve all these problems of monopsony on its own. He thinks that other things can be used such as a minimum wage, for example. The minimum wage has been quite a successful policy in the UK. When it was brought in back in the 1990s, we thought it could cause unemployment but it hasn’t. That’s part of what’s led us to change our thinking on monopsony. It seems that the reason it didn’t lead to unemployment was because there is a lot of monopsony power. In fact, the minimum wage could cause employment to go up in certain circumstances. Giving trade unions an exemption from competition policy so that they can collectively bargain up wages is another way of tackling the monopsony power of employers. So, there are additional labour market policies that you wouldn’t use on the product market side, but which you can use on the labour market side. I’m very sympathetic to the view that antitrust has ignored the workers and I think the arguments are convincing. It’s time for antitrust to start looking at them a bit more.

Next up is Competition is Killing Us: How Big Business is Harming our Society and PlanetAnd What To Do About It by Michelle Meagher.

As you can tell from the title, it’s quite clear what this author’s view is. Michelle Meagher is quite interesting; she’s not an economist, she was originally a competition lawyer. She says that she started off thinking that competition was something that worked for the social good. She came to review her attitude after some decades working as a competition lawyer. She gave up her job and turned to thinking more critically about competition. She doesn’t think much of the way competition policy currently operates and she’s got a lot of suggestions. She divides her book into two, the first half of the book describing what’s going wrong and then the second half of the book offering some suggestions as to how to fix it. Her suggestions are a little wider and broader, and a bit different from the other people that are on the list of books.

What does she bring as a lawyer to this debate that economists can’t?

It’s a good question. I don’t know whether it’s because she’s a lawyer or because she’s not an economist but she’s very much of the view that we need to move away from focusing on profit maximization as a model for firm behaviour. She thinks that we should move instead towards stakeholder value. So instead of maximizing profits, we should encourage firms to have a much wider set of interest groups they’re looking after.

An implication of this is that firms should be concerned about acting in a socially responsible manner. She is critical of the Milton Friedman argument that firms should just maximize profits. She points to things like pollution, inequality, pay, workers conditions, and she argues that the boards of companies should be constructed on something like the German model where you have worker representatives and a wider range of interest groups represented in making the decisions of the firm.

The other books don’t really go into that. She thinks we need to make firms act in a socially responsible manner. Most of the other books are just saying that we should increase the effectiveness of antitrust policy, whereas she’s arguing the need to change the model for firm behaviour. She also argues that competition policy shouldn’t just focus narrowly on prices, but should also address many different dimensions of welfare.

Some economists are coming around to those kinds of ideas, aren’t they? Or is that all still a bit radical?

Yes. Some economists have started to argue we should consider income inequality, sustainability, and other things, as a goal of antitrust policy. So she’s not completely alone. But she goes a little bit further than most economists.

Finally, we’ve got The Antitrust Paradigm: Restoring a Competitive Economy, by Jonathan B. Baker. Does this deal more with the solution than the problem?

This is an important book. It’s sort of the opposite of Competition is Killing Us. Competition is Killing Us is a very polemical book which attacks competition policy. The Antitrust Paradigm is written by an insider who really believes in competition policy, but just thinks it needs to be made more effective. He doesn’t believe in changing things that much, he just thinks we need to make what we have much more effective. This book is very useful because it’s written by someone with an extremely detailed and very authoritative knowledge of competition law and how it operates. He’s in a great position to understand where it’s gone wrong and how it can be improved. He includes a lot of material on the history of antitrust, and on the political economy of antitrust.

He hasn’t just got practical suggestions as to how the details of antitrust can be changed in principle, but also ideas on how you might get the political environment to change so that antitrust goes up the political agenda. He points out that it was in 1930s America that antitrust became strong. It happened then in America because of the political context. That strength in competition policy lasted for quite a long time. It led to quite major interventions, for example the breakup of AT&T. More recently, there was the decision to go against Microsoft. Proposing the break-up of Microsoft was admirably aggressive, although it didn’t happen in the end. But they went far enough to think about it.

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Starting around the 1970s, a group called the Chicago school of economics has successfully pushed back against that 1930s type of thinking and proposed, in effect, a weaker type of competition policy, which allows big companies to emerge. This book argues that it’s possible to reverse this, and get back to a stronger antitrust regime, provided that the political conditions are right. Arguably, we are now entering a period in which people are starting to question the benefits of these big companies. Economists and other groups have to be ready with good quality arguments and economic analysis, in order that that political attitude can be joined with strong economic analysis to then bring competition policy back to the stronger type of competition policy that we had back in the mid-20th century.

Why did it get weaker? Was that directly related to the rise of the lobbying power of large corporates, or was there something else that enfeebled competition policy?

It got weaker for a number of reasons. One was that the Chicago school of economists were very effective in their economic analysis. They had persuasive arguments based on coherent economic models. These arguments were, of course, welcomed by big business so that it was both well-founded and well funded. The existing practice at that time tended to argue that market share is what matters but these Chicago economists argued that small firms are inefficient and that we should welcome the rise of big firms because they’re more cost-efficient, and that can help the consumer. These arguments were quite coherent and convinced a lot of people. At the same time, there was a lot of lobbying going on from big business.

There was also a political change. During the era of Reagan and Thatcher, the 1980s, the planets all came together in a way that allowed the antitrust regime to become weaker. That’s why Baker says that we might be in a period now where antitrust can become stronger again, because the conditions now are right for the arguments to go the other way.

Is that the story that is being told in The Curse of Bigness: Antitrust in the New Gilded Age, the book that you were minded to choose, but didn’t by Tim Wu or is he telling a slightly different story?

He’s telling that story. In fact, it’s a very compelling read. Wu’s book is certainly a better place to start for the general reader. He links competition to politics quite closely. He tells the story of how competition policy has changed over time, how it was once strong, in the 1950s, 60s and 70s, and became weaker and was weakened during the Reagan and Thatcher era and subsequently. It’s only in recent years that people have started to question it all again.

Interview by Benedict King

May 13, 2022

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Howard Smith

Howard Smith

Howard Smith is an Associate Professor in the Department of Economics at the University of Oxford. He specialises in competition economics. He is a member of the Academic Economics Advisory Group at the Competition and Markets Authority (CMA) in London and has advised the CMA on numerous competition cases.

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Howard Smith

Howard Smith

Howard Smith is an Associate Professor in the Department of Economics at the University of Oxford. He specialises in competition economics. He is a member of the Academic Economics Advisory Group at the Competition and Markets Authority (CMA) in London and has advised the CMA on numerous competition cases.