Predatory Pricing and International Trade

A classic piece of industrial organization literature is John McGee’s 1958 article in the Journal of Law and Economics Predatory Price Cutting: The Standard Oil (NJ) Case.

In the article, McGee looks at price-cutting allegations leveled against Standard Oil in the early 1900’s. He examines the evidence of the case but also lays out a rather brilliant critique of price cutting as an effort to secure/gain monopoly power in a market. In short, he logically shows that price cutting is, by far, the least effective means of accomplishing this. It tends to be far more devastating to the price-cutting firm and, if the market is competitive, such price cutting could go on for years and years. It is far cheaper to simply buy up competition.

Dr McGee’s analysis should give us pause when considering “dumping” allegations in regard to international trade.  Dumping is a form of predatory pricing: manufacturers exporting goods to foreign markets and selling well below cost in order to grab market share.  As Dr McGee logically lays out in his article, predatory pricing tends to be extremely costly to the predator.  This could be why governments need to subsidize the firms in order to perpetuate the scheme.  However, as GMU economist Don Boudreaux points out in this blog post, subsidies harm the economy as a whole, while enriching the few who receive them.  Assuming China is subsidizing exports for the purpose of monopolizing highly-competitive markets, China is opting for short-term gains for firms by socializing the losses from the predatory pricing behavior on the off-chance they can monopolize a market.  Dr McGee’s analysis in the article indicates this is an extra-risky strategy (mergers and partnerships with US firms would be a far more effective way of accomplishing this goal).

Right to Work vs Right to Contract

One of the local ballot issues in Tuesday’s election here in Virginia was a constitutional amendment to the state barring “closed-shop”, that is barring agreements between firms and unions to require union membership or dues as a condition of employment.  Such legislation, referred to as “right to work” (RTW) are common in the US. However, the ballot measure was defeated here in Virginia, an outcome which I support and voted for.

On the surface, this could be seen as a violation of my free market (free from coercion) principles.  Aren’t such agreements coercive?  Why should a worker be compelled to join a union?  These questions are legitimate, but ultimately inaccurate to describe closed shops.  In fact, the RTW legislation is coercive.

I will make a simple case.  Firms should be allowed to enter into voluntary agreements as they wish.  They have property rights, just like people.  If a firm wishes to enter into an agreement of its own free will with a union for a closed shop, then it should be able to.  Legislation to prevent such agreements violates the firm’s right to contract.  If a worker voluntarily agrees to take a position in a closed shop knowing full well of the requirements, he has no right to complain or challenge the agreement between the firm and union.  This would be akin to a person buying a home in a HOA knowing the rules require it to be painted green and then complaining he can’t paint it orange.

Firms, unions, and individuals all have the right to enter freely into contracts.  None of them have the right to use government coercion to change the terms of the contract after the fact.

PS: please forgive any typos.  I am typing this on my phone while trapped underground on the Metro

Update: Fixed typos and grammatical errors.