The Antitrust Modernization Commission staff has released Tentative Recommendations, propositions for which at least six commissioners have expressed support, and which are thus likely to appear in the final report.

Several of these are listed in a section called "New Economy," and are thus of interest to techies. One is worth particular attention, though:

1) Rec I-A-2-b:

A price above marginal cost, by itself, does not suggest market power in a relevant antitrust market. Firms with low marginal costs but large fixed costs, particularly for research and development and other innovative activity, may need to price significantly above marginal costs simply to earn a competitive return in the long run.

This recommendation is absolutely correct in spirit (see infra for the devil in the details), but it is absolutely appalling that it needs to be made -- that the antitrusters do indeed tend to regard marginal cost pricing as a goal of the system, and moral norm, and see departures from it as problems requiring government action.

This view is insane, and if you do not believe my contention that the antitrust industry is this demented, then consult a more reputable source than my scribblings, Regulation Misled by Misread Theory (AEI 2006) by distinguished economist William Baumol:

Economists have generally been careful to point out that perfect competition is an artificial concept . . . But the optimality properties long associated with this market form . . . have tempted some who are not as careful as they should be to use perfect competition theory for guidance in their rulings . . . . [O]nly this year I heard a conference presentation dealing with the economic and legal principles of copyright suggest that the innovating Schumpeterian entrepreneurs are automatically to be deemed proper subjects for antitrust attention because in the period before imitators enter the market, they can charge prices that exceed the marginal-cost levels of perfect competition. Never mind that this is a prescription for undermining intertemporal efficiency. Never mind that marginal-cost pricing would generally preclude recoupment of the research and development (R&D) costs of the innovations at issue, costs that will have to be incurred many times again if innovation is to continue. And never mind that a world of perfect competition requires constant returns to scale and firms so small that that they would never attract the attention of regulators or antitrust personnel. Because perfect competition has been shown in certain circumstances to yield efficient results, it is proposed that the regulated firm be constrained to act accordingly. I have witnessed a multiplicity of regulatory proceedings in which this was at least implicit in the positions taken by some parties to the litigation.

The idea of marginal cost as some sort of benchmark or goal must be eradicated from the law. And Baumol is much too easy on his own profession, which has not been at all "careful" and which is largely responsible for this mess.

For more, see the day-long seminar that CEI did in 2004 on Declining Marginal Cost Industries in the Global Information Age. And searching this blog for "marginal cost" produces a useful list of comments and links.

The second problem with the recommendation is that it is right in spirit but wrong in detail. In fact, if a firm can charge above marginal costs then it does indeed have market power: stemming from overall supply constraints, superior products, services, or reputation, or intellectual property. But firms must have market power to function; an industry producing products that are commodities in an environment of high fixed and low marginal costs is on the road to stagnation and disaster. Intellectual property does indeed confer some level of market power -- that is its purpose.

So, to assume that market power is bad is also simplistic. Market power is not the problem, market power is the solution to the inherent problem of an economy in which high fixed and low marginal costs are endemic. The more the antitrusters devote themselves to stamping out market power, the more they discourage innovation and promote stagnation.

The third problem applies to the Commission's work as a whole. Yes, Virginia, there is an "antitrust industy" -- see The New Trustbusters -- and the one thing its members all agree on is that everything is immensely complicated and requires elaborate legal and economic inquiry about everything, at at least $700 per hour. To be conducted by the same people who got us into the current mess, which shakes one's faith a bit. In fact, the whole antitrust enterprise needs serious rethinking, not just a few tweaks.