America’s undeniable competition problem requires a regulatory remedy
Competition is the bedrock of the American economic system. It drives companies to lower their prices, improve the quality and diversity of their offerings, and develop innovations that fuel economic growth. Last October, the Biden administration issued guidance that would inject a pro-competition focus into the regulatory process, adding to a broader effort to make our markets more competitive.
We are economists who study competition and took a leave of absence from our jobs at Stanford and Yale last year to work on the White House team that drafted these guidelines. We believe these guidance are firmly grounded in economic principles and research, and should be welcomed by economists and other champions of competition across the political spectrum.
Economists have understood, for generations, how regulation shapes the competitiveness of our markets. George Stigler, the father of the Chicago School of Economics, built his Nobel Prize-winning career studying how companies distort the regulatory process to block competitors. Denouncing the same forces of regulatory capture, Milton Friedman argued that corporations (along with academics) are the greatest enemies of free markets.
By the same token, economists have long recognized that well-designed regulations can enhance competitive forces. Rules requiring banks to display interest rates in a standardized APR format make it easier for us to compare shops to get the cheapest loan. Regulations that allow us to keep our cell phone numbers when we change providers make it easier for consumers to switch cellular plans.
The little-known but influential Office of Information and Regulatory Affairs reviews important regulations to ensure they serve the public interest. Rules that pass the cost-benefit analysis are cleared, while rules that don’t make it this far are generally sent back for modification or withdrawal. Guidance issued earlier this month will increase the importance of competitive influences in the design and review of regulations.
Going forward, it will be easier to pass regulation that promotes competition. Data portability rules in digital industries, which help offset network effects that lock consumers into dominant platforms, will receive due credit for their pro-competitive effects. So do open banking rules, which, by allowing consumers to transfer their personal financial information to another provider, reduce switching costs in the financial services industry.
An increased focus on competition would also encourage agencies to modify rules in a pro-competitive manner, such as replacing one-size-fits-all design requirements with goal-oriented performance standards. The Guidance provides an example of how a target to reduce emissions from concrete used in buildings – rather than specific technical requirements – can allow more competition from companies with different concrete production processes and encourage the entry of innovative companies who are coming up with new approaches to the market. To reduce emissions at a lower cost.
The guidance will also help prevent the types of rules — often pushed by dominant companies — that are intended to stifle competition. Rules requiring new or modified products to undergo expensive and lengthy certification can generate competitive disadvantages that greatly outweigh the benefits to public health or safety. Likewise, unnecessary or excessive licensing requirements for workers can inhibit new business models, raise prices for consumers, and limit employment opportunities for marginalized workers who may bear disproportionate burdens of fees and training requirements for occupational licensing programs.
The American economy has been suffering from declining competition for decades. A wide range of industries – from airlines to beer – are increasingly dominated by a small number of large companies. Profit margins – the gap between the prices we pay and companies’ costs – have risen dramatically since the turn of the century. In his comprehensive report on these trends, economist Thomas Philippon finds that the merger costs the typical family an additional $5,000 annually.
The Biden administration has made restoring competition a key plank of its economic agenda. Next, the administration directed agencies to take action on 72 initiatives to promote competition — such as changing regulations so hearing aids can be purchased over-the-counter at a fraction of the cost — and creating the first-ever competition board to encourage competition. Motivate these efforts. Antitrust agencies are back on the beat and are updating their merger guidelines to reflect the modern economy and advances in economic research. This regulatory guidance is another step in this endeavour.
Competition is in our American DNA—we love to compete in everything from spelling bee to barbecue. However, we have not used all of our tools for a long time to enhance competition in our markets.
There is still work to do, but there are promising signs that we have finally turned the corner and gotten serious about boosting competition again.
Neil Mahoney is professor of economics at Stanford University. Michael Sinkinson is Associate Professor of Economics at Yale University. They are part of the team that drafted Guidance on accounting for competition effects when developing and analyzing regulatory procedures.
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