Monday, January 20, 2014

New Antitrust Suit and Government Role in Free Market

     The president's signature legislative achievement, aka Obamacare, has been and will continue to be highly scrutinized.  Many Republicans specifically object to the law's effect on the economy in terms of "illegal subsidies," and its interference with a free market to name a few.  Many believe government intervention in the economy is counterproductive and inhibits innovation.  So what is the government's role in economic interjection and ensuring a fair marketplace?

     On January 2, 2014, the Department of Justice (DOJ), filed a suit against a metal company for its role in monopolizing a portion of the market.  In United States v. Heraeus Electro-Nite Co., the DOJ is challenging Heraeus's local Langhorne, PA branch purchase of all the assets of their largest competitor in the sensor and instruments industry (S&I), which was used to measure the temperature of molten steel.  Heraeus's 85% control of the market had significantly decreased to 60% and Minco, or Midwest Instrument Company Inc., controlled 35%.  Heraeus decided to acquire assets of Minco virtually eliminating their competitiveness in the market and creating a monopoly in the market.  According to the Justice Department, "Heraeus acquired substantially all of Minco's assets on September 7, 2012." 

     The DOJ is suing on grounds of interstate commerce and violation of Section 7 of the Clayton Act.  The Clayton Act was enacted in 1914 as an extension of the Sherman Antitrust Act.  The Sherman Antitrust Act was crated at the end of the 19th Century in the midst of prominent monopolies such as Standard Oil and Carnegie Steel.  At the root of Heraeus is a key amendment to the Clayton Act in 1950, which "prohibit[s] the acquisition of the whole or any part of the assets of another corporation when the effect of the acquisition may substantially lessen competition or tend to create a monopoly."          

     The Justice Department asserts that S&I is part of interstate commerce and Heraeus's acquisition will substantially affect the interstate S&I market.  By reducing competition in the market, prices are sure to be subject to unchallenged increases offering consumers no alternatives.  The DOJ states, "Heraeus became the dominant supplier in the United States by acquiring its competitor."  The Justice Department is asking for Heraeus to "divest all of Minco's tangible and intangible assets related to" the market and "award such temporary and preliminary injunctive and ancillary relief as may be necessary to avert the likelihood of the dissipation of Minco's" assets aside from other government compensation for action. 

     This suit raises questions about the role of government in market competitiveness and fairness.  The two pieces of legislation involved in this case were created to assist market competitiveness and help with regulation.  Of course, many in Congress are opposed to government regulation and have made deregulation a staple in their campaigns.  Again, this same issue can be brought back to the issue of Obamacare and the major piece being scrutinized by Republicans, the individual mandate.  Their chief argument asks how the government can force individuals to purchase health insurance against their will (and most recently with the cancellation of thousands of plans, how can the government force individuals to purchase certain coverage if they want barebones plans)?  

     The irony in this argument is the individual mandate came out of the Heritage Foundation, a top conservative think tank now headed by former Republican Senator Jim Demint.  The Heritage Foundation holds a lot of clout among conservatives often times pressuring Republicans to vote certain ways out of fear of backing challengers in primaries if they vote contrary to Heritage.  The reason the individual mandate is a perfect conservative ideal is it establishes a free market in which insurance companies compete for the business of those shopping in the exchanges or marketplace as opposed to the old system where individuals were subject to certain plans.  They can now shop for the coverage they want at a price they can afford.  It also contributes to the conservative ideal of personal responsibility.  Pre-Obmacare, individuals without insurance coverage often treated at emergency rooms forcing others with plans to basically pay for their care.  Now, everyone must be covered and take responsibility for themselves.

     On the other hand, does the government have a right to tell a company like Heraeus, who's success allows them to buy out their competition, that their practices are illegal?  Last week on CNBC's The Kudlow Report, Morgan Stanley's Senior Economist Ellen Zentner and host Lawrence Kudlow were discussing government intervention in the markets.  The debate touched on "government meddling" where Zentner asserted that when entrepreneurs are left alone, they must innovate and the market is better served.

     After reports of private equity firms such as Bain Capital commandeering jobs and markets for personal gains and 19th Century monopolies, the government believes there is a public interest in protecting consumers.  Despite President Obama's track record on market innovation and intervention, it will be interesting to see how the DC district court Judge James Boasberg, an Obama appointee, will rule in Heraeus.  Furthermore, this suit may also generate a greater discussion concerning the general role of government intervention.  Looking down the road of Heraeus, the Supreme Court in the past has ruled favorably for business in antitrust cases, which may be an indicator of its fate given the conservative makeup of the current Court.  Regardless, it is clear we now live in a world controlled by large corporations and whether one believes in government intervention or not, the acts of Heraeus are frightening for the future of our markets.          

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