What We Learn From Past Government-Imposed Corporate Breakups Is That They Don’t Work

by on June 28, 2018 · 0 comments

Voices from all over the political and professional spectrum have been clamoring for tech companies to be broken up. Tech investor Roger McNamee, machine learning pioneer Yoshua BengioNYU professor Scott Galloway, and even Marco Rubio’s 2016 presidential digital director have all suggested that tech companies should be forcibly separated. So, I took a look at some of the past efforts in a new survey of corporate breakups and found that they really weren’t all that effective at creating competitive markets.

Although many consider Standard Oil and AT&T as classic cases, I think United States v. American Tobacco Company is far more instructive. 

Like Standard Oil, the American Tobacco Company was organized as a trust and came to acquire nearly 75 percent of the total market by buying both the Union Tobacco Company and the Continental Tobacco Company. But unlike Standard Oil, as soon as these companies were bought, they were integrated within American Tobacco. In 1908 the federal government filed and eventually won a lawsuit under the Sherman Act, which dissolved the trust into three companies, which in theory matched the original three companies.

Yet, the breakup wasn’t as easy as simply splitting the larger company into its original three companies, since the successor companies had intertwined processes. A single purchasing department managed the leaf purchasing. Processing plants has been assigned to specific products without any concern for their previous ownership. For eight months over tense negotiations, the government pulled apart factories, distribution and storage facilities, and name brands. Office by office, the company was pulled apart by government fiat.

Historian Allan M. Brandt had this to say in The Cigarette Century,

It was one thing to identify monopolistic practices and activities in restraint of trade, and quite another to figure out how to return the tobacco industry to some form of regulated competition. Even those who applauded the breakup of American Tobacco soon found themselves critics of the negotiated decree restructuring the industry. This would not be the last time that the tobacco industry would successfully turn a regulatory intervention to its own advantage.

While some might think that breaking up companies would be a clean operation, American Tobacco suggests the opposite. And I’m not alone in this assessment. Here is what Robert Crandall had to say a couple of years back in a piece for the Brookings Institution:

[W]ith one exception, the breakup of AT&T in 1984, there is very little evidence that such relief is successful in increasing competition, raising industry output, and reducing prices to consumers. The exception turns out to be a case of overkill because the same results could have been obtained through a simple regulatory rule, obviating the need for vertical divestiture of AT&T.

In other words, this method simply does not achieve competitive markets.

If you’re interested in the longer piece, you can find it over at American Action Forum.

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