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The Emperors of Ice Cream
The FTC's antitrust bureaucracy should be frozen in its tracks.


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Donald L. Luskin

When antitrust cases are about complex technical subjects like Microsoft and the market for PC operating systems, or Hughes/Echostar and the market for satellite TV broadcasting, it’s easy just to throw up your hands and assume that the government’s experts must be right. But when an antitrust case is about ice cream, you don’t have to be an expert to form a solid opinion.

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Take a look at the Federal Trade Commission’s decision this week to block the proposed merger of Nestlé Holdings and Dreyer’s Grand Ice Cream on antitrust grounds. The issues at stake are so simple that the injustice, arbitrariness, and sheer absurdity of American antitrust regulation jump out with breathtaking clarity.

The FTC decision allows the government to disrupt a voluntary and mutually sought combination of two private businesses. The decision also slashed a billion dollars in market value from Dreyer’s stock as soon as it was announced.

The FTC believes “that the elimination of Dreyer’s would likely lead to anticompetitive effects in the market for superpremium ice cream.” Before this action, did you even know that there was something called a “market for superpremium ice cream”? Well, now you know.

Imagine, if you will, an incredibly complex diagram covering a wall in the office of a Ph. D. at the FTC. The diagram is titled “The Market for Food,” and the hierarchical scheme branches from there to include every possible food group. Now erase everything that isn’t under “The Market for Deserts,” and then erase everything that isn’t below “The Market for Frozen Deserts,” and then erase everything that isn’t beneath “The Market for Ice Cream.” Not much of the diagram remains (we’re already down to something the size of a postage stamp). But now erase “The Market for Cheap-o Ice Cream,” “The Market for Regular Ice Cream,” and “The Market for Premium Ice Cream.” What you have left is about the size of Abraham Lincoln’s nostril on a penny. This is “The Market for Superpremium Ice Cream.”

In this tiny little sub-sub-sub-sub-market, Dreyer’s brands Dreamery, Godiva, and Starbucks battle it out with Nestlé’s Häagen Dazs and Unilever’s Ben & Jerry’s. The big issue, according to the FTC — or the reason why government intervened and cost Dreyer’s shareholders $1 billion — is that “this deal will reduce the number of significant competitors from three to two” and “would likely raise prices and reduce choice for consumers.” Even if you think the government should be concerned with such matters, none of this action means a thing unless you accept “The Market for Superpremium Ice Cream” as a meaningful reality.

Who’s to say this market is of any importance? Who’s to say it needs the government to interfere with its private business decisions?

What if consumer choice in “The Market for Superpremium Ice Cream” was narrowed to a single brand and prices became astronomical? What if “The Market for Superpremium Ice Cream” vanished from the face of the earth altogether? So what? Consumers would simply choose from the dozens of remaining premium, regular, and cheap-o ice cream brands. Or they could switch to some other desert. Let them eat superpremium cake!

Even if “The Market for Superpremium Ice Cream” needed to be policed for competition, who’s to say that the correct number of competitors is two rather than three? Is it always better to have more competitors in a market?

In this country we have only two political parties of real influence. Would we be better off with more parties, as is the case in Italy and Israel? Maybe we would, and we are free to have them — or not. But in the category of ice cream — or rather, superpremium ice cream — we are not free to have less than three competitors positioning for space in the superpremium ice cream aisle.

And why should we necessarily be concerned that prices might rise with a drop in the number of competitors? First, there’s no axiomatic reason to be absolutely positive that prices will rise in this situation. And what’s the correct price for superpremium ice cream, anyway? Maybe prices should go up. Maybe today’s prices are too low.

To insist arbitrarily that lower prices are always better — and to bring government power to bear to make sure that they are — is a form of price control in the name of antitrust. The FTC is taking what should be a free bargaining process between producer and consumer and is stacking it in favor of the consumer. Why are people who make ice cream less entitled to equal protection under the law than people who eat ice cream?

Even if you believe the FTC ought to be interfering with private transactions on all of these grounds, we need to ask a purely pragmatic question: Will this interference work? Suppose that Dreyer’s now goes out of business because it can’t be sufficiently profitable without the merger it wanted (maybe there are too many competitors in the category and prices are too low). The result would be the same. We’d still end up with two competitors — but that’s the hard way to get to the same undesired result.

And don’t think it can’t happen. It’s happened before. How different would the U.S. telecommunications business be today — indeed, the whole corporate landscape — if antitrust authorities hadn’t blocked the merger of Sprint and Worldcom in 2000? That case wasn’t about ice cream. The chart on that Ph. D.’s wall was a little bigger at the time. The ideas being debated had more syllables. And there was more money at stake.

But all the same principles applied, and the result was ruination.

Maybe President Bush — when he’s done ending the double-taxation of corporate income, reforming Social Security, and winning the war on terrorism — can do something about demolishing America’s antitrust bureaucracy.



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