What's $11.5 million between friends?

July 1, 2006 9:57 PM by S.M. Oliva | Other posts by S.M. Oliva | Comments (1)

This week, U.S. District Judge Larry McKinney of Indianapolis made an important statement. McKinney was sentencing Builder’s Concrete & Supply for their role in a “price fixing� scheme. Builder’s plea agreement with the Justice Department said the company could be fined anywhere from $1.5 million to $11.5 million.

Naturally, prosecutors sought the maximum fine. But McKinney opted for the $1.5 minimum, because, as he put it, he didn’t want to put the company out of business: “It’s kind of unusual to be deciding how much money I can fine a company without putting them in the poorhouse.�

Conversely, the DOJ didn’t think that paying $11.5 million was that big a deal:

The prosecution said the severity of the crimes warranted a large fine. They said the company could afford it by buying fewer trucks than it planned to, finding a lender to replace one that recently dropped the company and passing along some of its increased costs to customers. (Emphasis added)

Now, the stated purpose of the antitrust laws is to protect consumers, particularly from short-term price increases. That was the reason Builder’s was prosecuted in the first place—they talked to their competitors about prices. So how does fining Builder’s a punitive amount and passing the costs along to consumers in the form of higher short-term prices protect competition? It doesn’t. Furthermore, impairing Builder’s ability to buy trucks and invest in its business doesn’t help consumers at all.

Whether the fine is $1.5 million or $11.5 million, the effect is the same: capital is transferred from the market—where it can be used to satisfy consumer demand—to the government’s treasury, where it will be used to further distort the market and buy political support for officeholders.

Prosecutors argued that Builder’s “price fixing� was a crime because it “enriched offenders’ wants at the expense of consumers.� But that more aptly describes the government’s punitive fine. Builder’s was not accused of fraud, mind you. Customers knew what prices they were paying at the time of transaction. The DOJ’s argument is simply that consumers might have paid a lower price had Builder’s not communicated with its competitors without government permission.

If “price fixing� were a real crime, then mergers should be punishable by death. A merger eliminates all competition between two firms and entails a total exchange of price and customer information. Yet the government allows all but a handful of mergers to proceed, while imposing fines and imprisonment for the far-lesser cooperation that takes place in a so-called cartel.

The difference is psychological rather than economic. A merger is reported to the government before consummation, and the state is paid a tribute (in the form of a filing fee) that demonstrates obedience. When prosecutors do raise objections, most firms either withdraw the merger or concede to whatever arbitrary divestiture is demanded. The key is obedience. So long as businesses accept the state’s authority without question, there will be relative peace.

A cartel, in contrast, may have less economic impact than a merger, but it represents a blind rejection of the state’s authority. Cartels are nominally secret, which incidentally makes them less potentially harmful than a merger. It is relatively simple to exit a poorly conceived cartel, but far more complicated to undo a bad merger. The state receives no tribute from a cartel, however, hence the irrational anger of prosecutors.

Incidentally, the government and civil plaintiffs’ attorneys are not the only beneficiaries of antitrust’s capital-destruction. Academia has gotten in on the act, in the form of “grants� awarded from civil cartel settlements. Just this week, the University of California, Davis, received $6.5 million confiscated from numerous vitamin manufacturers who previously settled “price fixing� charges. UC Davis was not an alleged victim of the cartel, nor will the money address anything antitrust-related. Instead, the $6.5 million will establish a Center for Health and Nutrition Research, which “will probe the roles of California fruits, vegetables and nuts in providing vitamins and other phytochemicals that lower the risk of chronic disease.�

Such fraudulent “grants� helps keep academia behind antitrust policy. And in the case of a state school like Davis, it will also grow the government’s payroll. Meanwhile, the vitamin companies are left to ponder their future and their legal bills.