High-Stakes Antitrust: The Last Hurrah?
Patrick Dudley

Introduction
On October 3, 2002 the Joint Center hosted a conference to examine several high profile, high-stakes antitrust cases from the 1990s. Chief among these: Microsoft, Visa/Mastercard and AMR (American Airlines). The four experts assembled for the conference panel differed sharply on whether these cases represented a shift from past policies, whether the government pursued a desirable course of action and how those actions are likely to affect antitrust enforcement in the future.

Robert H. Bork, American Enterprise Institute
Mr. Bork agreed that antitrust policy in the Clinton years was largely defined by the three cases, two of which, he asserted, were based on sound economics and law.

In Microsoft the government charged that the company had used its monopoly in operating systems to promote use of its Internet Explorer browser software and to crush the competing Netscape browser. Microsoft’s tactics, Mr. Bork argued, could not be justified on grounds of advancing efficiency; moreover, evidence from the trial revealed that the sole motive was to stop Netscape from becoming a viable competitor. The court, he said, agreed that Microsoft was guilty of tying. Unfortunately, he concluded, the settlement does not address the tying issue and Microsoft is free to continue as before.

According to Mr. Bork, the Visa/Mastercard prosecution was clearly justified on the merits, and would have been brought under any administration. Visa and Mastercard are related joint ventures run and owned in large part by the participating banks. Under the bylaws, member banks are prohibited from issuing competing cards, such as those from American Express and Discover. This exclusion, Mr. Bork maintained, amounted to horizontal restraint of trade. Mr. Bork agreed that, as a joint venture, Visa/Mastercard should have some flexibility in setting rules collectively. But there is no efficiency justification for this specific prohibition.

Mr. Bork argued that the case against American Airlines was the weakest of the three. According to the government, American Airlines used predatory pricing to keep low-cost carriers from flying certain routes. Since American Airlines met, but did not undercut, their rivals and kept prices above average variable cost, a predation case would normally be rejected on its face. The government argued that other aspects of the package of services delivered, such as frequent flyer miles, implied that American was underpricing more than it would seem by the traditional measures. However, a strict interpretation of the government’s logic would lead to a court-based re-regulation of the airline industry -- a very undesirable outcome in Mr. Bork’s view.

George L. Priest, Yale University
Mr. Priest argued that the Clinton administration’s antitrust policy was a break from the past, not because it was more interventionist, but because its focus was on network industries. In Mr. Priest’s view, the Clinton Administration had an opportunity to develop a coherent framework for applying antitrust laws to network industries, but failed to take it. The administration failed to prevail on key aspects in all three cases, and left no coherent legacy for regulating network industries under the antitrust laws.

In the Microsoft case, the government said it wished to open the door to competing networks, but had no theory to explain why that would benefit consumers or why competing networks had not already emerged. Consequently, the appellate court affirmed several minor violations but rejected both the more serious charges against Microsoft and the draconian proposed remedies.

In the Visa/Mastercard case, Mr. Priest claimed that the government’s ideas about network industries were in conflict. Part of the suit aimed to break up the dual governance of Visa and Mastercard on the premise that such activity amounted to collusion. The other part of the case sought to allow banks from the Visa/Mastercard network to join the American Express and Discover networks. This would have increased opportunities for collusion that the first part of the case sought to eliminate. Furthermore, it was not clear to Mr. Priest that freedom to associate with the proprietary card networks would increase competition between networks -- which is what the government sought in the Microsoft case.

In the airline industry, Mr. Priest noted, individual carriers form networks that compete on some routes and complement each other on others. The government was intervening on the behalf of low-cost carriers who wish to "cream-skim," that is, to capture only the most profitable segments of the network. The government, he said, was not able to explain why such cream skimming, which threatened the viability of American Airlines’ more complete network, would be good for consumers.

Richard L. Schmalensee, Massachusetts Institute of Technology
Mr. Schmalensee argued that the important question is not whether the Clinton Administration was inclined to intervene more than other administrations, but whether a precedent has been set that will make it easier for future administrations to be interventionist. Mr. Schmalensee claimed that the Clinton Administration has made life easier for would-be activists because its antitrust policy weakened the consumer harm standard in two ways. First, the distinction between harm to competitors and harm to consumers was blurred. Second, the obligation to show consumer harm through factual evidence was weakened.

When attempting to show that harm to competitors implied consumer harm, in the past the government was expected to demonstrate three things: (1) that the practice in question hurt competitors enough to weaken their effectiveness; (2) that the harm to competitors created a significant harm to the functioning of the market; (3) that the conditions would persist unless remedied by government intervention. For its part, however, the Clinton Administration chose to ignore this three-part obligation, blurring the distinction between harm to competitors and harm to consumers.

Furthermore, Mr. Schmalensee said that the government failed to provide evidence on issues of consumer harm that were primarily factual in nature. In the Microsoft case, the government claimed Microsoft’s Java development tools would confuse programmers, yet offered no evidence to this effect. The government also claimed that consumers could not install Netscape on a Windows machine; but again, no evidence was presented. In the Visa/Mastercard case, the government never explained why practices that allegedly reduced American Express’s market share had any adverse consequences for consumers. Nor, for that matter, did it introduce evidence that Visa and Mastercard rules had in fact cost American Express market share.

Lawrence J. White, New York University
The final panelist argued that the antitrust policy of the Clinton Administration, formulated by the Federal Trade Commission as well as the Department of Justice, displayed elements of both continuity and evolution. While there was more activism, there was no return to the populism and small business protectionism that has marked some previous administrations, Mr. White said. The administration continued to follow the merger guidelines that had been developed in earlier administrations and did not overreact to the wave of consolidation in the late 1990’s.

According to Mr. White, some of the more successful aspects of antitrust policy in the Clinton years include greater incentives for employees to report violations and advocacy of pro-competition positions before other federal government agencies. The merger of Union Pacific and Southern Pacific, he said, was an excellent example of the latter.

On other matters, he argued that pursuing pharmaceutical companies that paid firms not to compete was a good decision. The decision to prosecute the American Airlines case was also a good one to pursue, although the court’s decision was only favorable in part. The issue at stake in AMR, he noted, is often called predatory pricing, but should be thought of as predatory expansion. That expansion met the critical requirement of predatory behavior because it could not be profitable unless it destroyed the firm’s competitors. The Clinton Administration also failed to act in several areas where it should have, such as breaking up the aluminum cartel, slowing the wave of hospital mergers, and intervening in the NYNEX/Bell Atlantic merger.