Loyola University Chicago

Institute for Consumer Antitrust Studies

School of Law

Don't Forget Antitrust in the Current Corporate Crisis


Don't Forget Antitrust in the Current Corporate Crisis

Spencer Weber Waller
Professor and Director
Institute for Consumer Antitrust Studies
Loyola University Chicago School of Law

Not a day goes by when another corporation or entire sector of the economy is hit by a new scandal involving corporate wrongdoing. The stock market punishes these companies brutally, the SEC usually enters the picture, some of the firms enter bankruptcy, others endure Congressional inquiry and a tiny handful get criminally prosecuted. The effects are devastating to shareholders, employees, and customers. What is getting overlooked in all the headlines is the havoc these scandals are playing with competition which benefits all consumers, the need for vigorous antitrust enforcement going forward, and how antitrust could have prevented some of the worst crises from arising in the first place.

The companies going under are frequently among the market leaders in highly concentrated industries which only had a handful of viable competitors in the best of times. The demise of Arthur Andersen has left a Big 4 in accounting when once publicly traded companies could choose among five accounting firms for auditing services. The bankruptcy of World Com threatens competition both in the vital internet traffic market and in the nation's long distance and local telecommunications market, as does the current turmoil at both Global Crossing and Qwest.

Competition is endangered whenever fraud or other misconduct eliminates a leading firm in a highly concentrated industry where entry is lengthy, costly, and difficult and customers and consumers have no place to turn beyond the shrinking handful of surviving firms. The remaining firms have less incentive to compete on price, quality, and innovation. When few in number, these firms are more likely to collude, reach tacit understandings avoiding vigorous competition, or one of the firms is able to exercise significant market power unilaterally.

And it is only going to get worse. Each time, one of the current firms leaves the market the successful bidders for their assets and their customers more frequently are the surviving industry leaders, not the current fringe firms or new entrants. This is already happening in the telecommunications market where deals are already being made on a daily basis with blockbuster deals ahead both in and outside the bankruptcy process.

Fortunately, there is a weapon to prevent the situation from being compounded further. Since 1950 the antitrust laws have prohibited any merger or acquisition where the effect may be to substantially lessen competition or may tend to create a monopoly. These laws are enforced by the Antitrust Division of the Justice Department, the Federal Trade Commission, the attorney generals of the fifty states, and private parties who are injured because of a lessening of competition. So far, the Bush Administration has brought one unsuccessful antitrust challenge to an acquisition of a bankrupt company which allegedly would have injured competition. The federal agencies will be reviewing many more such deals in the months to come and must be vigilant in their scrutiny and challenge those deals whose primary purpose or effect is to injure competition.

If a firm is utterly bankrupt with no hope of recovery and no other buyer exists then the harm has already been done, and a merger with a leading firm may be the only way to obtain some relief for creditors and employees. But too often, firms with market power view the bankruptcies of their competitors as fire sales to either buy more power over consumers on the cheap or are even willing to pay a monopoly premium to obtain or maintain market dominance. The remaining market leaders also must be scrutinized carefully under all the antitrust laws to detect and punish resulting cartels and monopolization. Tragically, much of the harm to competition could have been avoided in the first place if the antitrust laws had been vigorously enforced preventing many of the ill-conceived mergers that are now being unwound.

There are so many victims in the current round of corporate malfeasance. We should not allow competition and consumers to be added to the list.