First writes in BusinessWeek op-ed that GM should have been broken up on antitrust grounds over 40 years ago

In an op-ed in BusinessWeek, Harry First, Charles L. Denison Professor of Law and director of the Trade Regulation Program, and Peter Carstensen, George H. Young-Bascom Professor of Law at the University of Wisconsin Law School, argue that the government should have seized the opportunity to break up General Motors more than 40 years ago when it had the chance to do so on antitrust grounds.

The authors write that in the late 1960s, the Wall Street Journal reported that U.S. Justice Department antitrust lawyers began an investigation of General Motors in the Eisenhower administration. The investigation led to a 104-page draft complaint that was finalized in 1966 and leaked to the Journal in 1967, toward the end of the Johnson administration.

"The draft complaint traced the history of the automobile industry, showing how GM grew by acquiring numerous competitors and suppliers, how it engaged in costly annual redesigns of its automobiles, thereby further deterring new entrants and making it difficult for small firms to compete, and how it excluded entry or expansion by potential rivals by forbidding its dealers from selling cars for any competing manufacturer," the authors write. According to the complaint, GM grew from 13 percent of the market in 1920 to more than 50 percent in 1965, while the industry shrank from more than 1,500 auto manufacturers in the early 20th century to only four in the 1960s.

The Journal reported that the government planned to spin off the Chevrolet division, which accounted for 40 percent of GM's production, plus one or two additional auto assembly divisions and enough parts manufacturing and other facilities to make the spun-off companies into effective competitors. But the government's complaint was never filed.

"The failure to pursue antitrust action against GM at a time when it could have spun off healthy assets, not failing ones, is a cautionary tale for antitrust enforcers," First and Carstensen write. "Had GM been reorganized when it was still a powerful and efficient competitor, the result might have been a stronger, larger, and more domestic automobile industry, where firms would have been under continuing competitive pressure to reduce prices and to innovate, whether by producing smaller cars, more efficient cars, or safer cars."

The authors state that three principles can be taken from this history: 1) firms should not be allowed to buy market dominance; 2) reinvigorated antitrust enforcement in the Obama administration can help check the potential for exclusionary practices by other, stronger auto makers; and 3) although market-dominating firms may eventually run down, we don't have to wait until it is too late -- more rivalry is better.

"Monopoly firms need to be broken up," the authors conclude. "Regulatory solutions, or government efforts to control dominant firm behavior, inevitably are poor substitutes."

Posted on June 19, 2009