The U.S. Only Pretends to Have Free Markets

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The Atlantic | Thomas Philippon | Oct 29, 2019

free markets no longer in America - The U.S. Only Pretends to Have Free MarketsFrom plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year.

When I arrived in the United States from France in 1999, I felt like I was entering the land of free markets. Nearly everything—from laptops to internet service to plane tickets—was cheaper here than in Europe.

Twenty years later, this is no longer the case. Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales.

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None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents.

This is in part because the rest of the world was inspired by the United States and caught up, and in part because the United States became complacent and fell behind. In the late 1990s, legally incorporating a business in France took 15 administrative steps and 53 days; in 2016, it took only four days. Over the same period, however, the entry delay in the United States went up from four days to six days. In other words, opening a business used to be much faster in the United States than in France, but it is now somewhat slower.

The irony is that the free-market ideas and business models that benefit European consumers today were inspired by American regulations circa 1990. Meanwhile, in industry after industry in the United States—the country that invented antitrust laws—incumbent companies have increased their market power by acquiring nascent competitors, heavily lobbying regulators, and lavishly spending on campaign contributions. Free markets are supposed to punish private companies that take their customers for granted, but today many American companies have grown so dominant that they can get away with offering bad service, charging high prices, and collecting, exploiting, and inadequately guarding their customers’ private data.

In Europe, greater integration among national economies turned out to be a force for greater competition within individual economies. The very same politicians who disliked free markets at home agreed to promote them at the European level. Why? Because everyone understood that the single market required independent regulators as well as a commitment that individual countries would not subsidize their domestic champions.

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As it turned out, politicians were more worried about the regulator being captured by the other country than they were attracted by the opportunity to capture the regulator themselves. French (or German) politicians might not like a strong and independent antitrust regulator within their own borders, but they like even less the idea of Germany (or France) exerting political influence over the EU’s antitrust regulator. As a result, if they are to agree on any supranational institution, it will have a bias toward more independence.

The case of the industrial giants Alstom and Siemens provided an almost perfect test of my theory. After Germany’s Siemens and France’s Alstom decided in 2017 to merge their rail activities, the EU’s two largest and most influential member states both wanted the merger approved. But the EU’s powerful competition commissioner, Margrethe Vestager, stood her ground. She and her team concluded that the merger “would have significantly reduced competition” in signaling equipment and high-speed trains, “depriving customers, including train operators and rail-infrastructure managers, of a choice of suppliers and products.” The European Commission blocked the merger in February 2019.

In the United States, meanwhile, antitrust enforcement has become less stringent, while the debate over market competition has become highly ideological and untethered from what data actually show.

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share save 171 16 - The U.S. Only Pretends to Have Free Markets