Competition Corner: Race to The Bottom

Issue #42

Hi there,

It goes without saying that at Competition Corner, we love competition and talking about it. It’s the reason we don’t get invited to parties.

But there’s a kind of competition that I detest.

It’s the race to the bottom: when governments, bureaucrats and legislators compete vigorously to see who can overregulate businesses out of existence with costly policies and laws that let them beat their chests while riding into the sunset as everything explodes behind them, to the detriment of consumers and innovation.

State governments are a great example. America’s competitive federalism is generally a thing of pride. States can freely experiment with laws across a vast range of domains to figure out what works for them and to test different tax policies, regulations and laws to find what works best. Businesses respond by bringing jobs, investment and tax revenues to places that are friendly to commerce and competition. Everyone’s happy.

But sometimes, state legislators seek clout by appearing tough on businesses in the name of punishing wrongdoers. Rather than passing targeted laws aimed at holding wrongdoers accountable, they may pass expansive legislation that impacts all businesses in a particular market or industry through compliance burdens. Often, these laws duplicate rules that already exist at the federal level. In doing so, they add additional burdens to businesses that do the right thing, and capture businesses that need to operate freely across state lines due to the nature of their line of commerce. Costs are often passed on to consumers. Business practices or initiatives that support innovation and competition may fail the risk-reward calculation when they didn’t before.

In such cases, federal rules that pre-empt disparate state ones may be warranted. Many states already recognize this principle by passing laws that preempt illiberal local rules and ordinances that needlessly impede competition, as I have written about previously.

State-level Merger Notification Rules

Writing for Forbes this month, Alden Abbott takes note of newly enacted pre-merger notification rules in Colorado and Washington that will significantly increase the costs and time entailed in M&A in these states. California and New York are considering similar proposals. With last year’s federal pre-merger notification rule already expanding the costs, time and range of information requested by the FTC and DOJ to undertake a merger by the admission of the FTC itself, it’s hard to see reasonable grounds for new state-level notification requirements. It’s also entirely unclear whether all of the new federal and state rules would better help with identifying anti-competitive deals, rather than simply putting strain on agency resources needed to sift through bigger piles of documents. Ironically, this could lead to more anticompetitive deals slipping through the cracks. Raising the costs of pro-competitive deals means that businesses are less likely to combine synergies and utilize assets in ways that could lower costs and foster the development and rollout of new products.

For more hot merger-related analysis, see Alden’s recent column on why the DOJ should reconsider its attempt to block the merger of HPE and Juniper Networks.

State-level Data Privacy & AI Regulation

I previously wrote about the need for a pragmatic federal data privacy standard that upholds user agency and choice in light of the grim patchwork of proposed state-level privacy legislation that would create uncertainty and increase costs of doing business across states. Plans to regulate AI at the state level are likely to have similar impacts, and could help cede competitive advantage to China where policymakers have instead adopted a strategy of fostering AI rollout and implementation to turbocharge economic productivity. US states can instead foster competition and innovation by harmonizing regulation and adopting a permissive innovation approach, as Mercatus scholars have previously argued.

Trump’s Executive Order on “Most Favored Nation” (MFN) Drug Pricing

Americans are rightly frustrated about having to pay over twice or thrice what other nations’ citizens pay for the same patented medications. What most don’t know is that artificial policy settings play a huge role in the problem. Public insurers in other countries use their buyer monopsony power to bargain down the prices of these drugs, saving their taxpayers a lot, but underpricing the value of R&D undertaken by US companies. The pharma companies accept these low prices while gaming distortions in the statutory model under which the US Centers for Medicare and Medicaid Services (CMS) pay them for drugs to inflate prices in both the public and private US market.

It’s a problem that more Americans should know about, and I’ve written about it here.

Simultaneously, American taxpayers and health plans ought no longer shoulder a disproportionate share of the burden for funding new cures that the whole world benefits from. Unless other countries pick up the slack, lower prices paid in America would leave less revenue for future cures. This would mean less competition and innovation.

Most recently, the Trump administration tried to address the problem of high drug prices by trying to peg what CMS pays for drugs to the prices paid by other countries’ public insurers. However, rather than actually introducing MFN pricing as he attempted to during the first Trump administration, President Trump instead issued an executive order that aims to control prices by threatening pharma companies that don’t lower them with antitrust investigations, export restrictions, revocation of drug approvals and other penalties. This approach is beset by both constitutional and policy issues. I recently wrote about the order for Inside Sources/DC Journal, and discussed the pros and cons of MFN pricing and how the Trump administration could still introduce it legally.

That’s all for now, see you in July.

Satya Marar
Visiting Postgraduate Fellow
Mercatus Center at George Mason University