AEI-Brookings Joint Center Policy Matters 01-09

 

Microsoft and the Antitrust Laws: Old-Fashioned Problems and a New Economy Company. Irwin M. Stelzer.  March 2001.

Despite all the controversy it has already and will in the future engender, the Microsoft case is nothing more than an unremarkable step down a well-trodden path to the preservation of a competitive economy – unremarkable because it merely presents an example of a traditional antitrust violation:

1)  The acquisition of monopoly power;
2)  By methods other than sheer efficiency;
3)  Which methods were deployed pursuant to a clear intent to monopolize.

If this is so, why has the case received so much attention? I believe that is because:

• Microsoft was touted by its friends as the entity that led America into the "new economy" era, this at a time when the asset side of many families' balance sheets was swollen by the generous market valuations placed on the shares of new-economy companies;
• Microsoft's leader, Bill Gates, had an image of boyish innocence unlike that of the great pot-bellied, so-called "robber barons" of the J.P. Morgan era;
• the flamboyant and brilliant David Boies skillfully seduced the media into playing the story as a gladiatorial battle between good (him) and evil (Gates); and
• the conservative think tanks, in their rush to oppose what they viewed as government intervention in the affairs of a successful company that had brought huge benefits to consumers and the American economy, forgot the importance of preserving competition if we are to minimize the government regulation they so abhor.

To defend the application of the traditional antitrust concepts to new economy industries, we start by disposing of two arguments:

1) The "network effects" argument to defend the acquisition of monopoly power is surely old wine in new bottles, the modern version of the economies of scale argument once popular with counsel for the steel and other industries, the leaders of which have since succumbed to competition from new entrants. If the network effect is so overwhelming, Microsoft would not have found it necessary to prevent PC manufacturers from incorporating other operating systems in its machines.

2) The argument that Microsoft's monopoly of the operating systems market was (indeed, is) the result of mere efficiency surely collapses in light of the predatory tactics, many of them rather old-fashioned, that the company used to acquire and maintain that power.

Now, to the question of whether old-fashioned antitrust doctrine can be applied sensibly to new economy industries.

Surely, the goals of antitrust policy remain unchanged: principal among them are the preservation of a marketplace in which consumer demand dictates what products are offered and at what prices; preservation of opportunities for new entrepreneurs to challenge incumbents on a level playing field; and the maximization of the development and introduction of new technologies.

These policy goals can be achieved only if the antitrust laws are applied in all their aspects to high-tech as well as to low-tech industries:

• A firm with substantial market power, even power fairly won in the marketplace, cannot be allowed to leverage that power by tying other products to the one that it dominates.
• A firm with substantial market power cannot be allowed to use that power to bludgeon independent manufacturers not to deal with its competitors, or impose a pricing system that accomplishes that same result.
• A firm with substantial market power over a product, access to which is crucial for firms that compete with it in other product markets, cannot be allowed to deny access in order to force potential competitors to agree to cede other markets to it.

Surely, nothing in the nature of high-tech industries obviates these simple policy truths. Indeed, they seem more compelling in the case of industries in which waves of creatively destructive innovation are to be relied on as the principal engines of progress. In many of these industries, newcomers – the pizza-eating graduate student with a bright idea and a zero bank balance – rely on venture capitalists for the seed capital needed to take their idea from concept to marketable product. These venture capitalists are notably hard-headed realists. If they believe that an entrenched incumbent will be allowed to snuff out incipient competition by inducing manufacturers to boycott the new product, or by using technological legerdemain to tie its own competing product to its monopoly product, venture capitalists will suggest to the newcomer that completion of his doctoral dissertation or a job with the entrenched incumbent is his best option.

So we should think long and hard before jumping to the conclusion that we must abandon the competition policy that has contributed so much to the growth of the American economy, and conferred on us the socially stabilizing consequences of a policy that promises the upwardly mobile a fair field with no favors. Of course, antitrust policy will have to be applied with the economic sense that has enabled it to remain a viable tool for the preservation of competition for over a century. That will require that at least two areas of application be applied with sensitivity.

• If it is indeed the case that high-tech products have short economic lives (and that is not at all certain), that fact will have to be factored into any appraisal and measurement of market power. Antitrust policy has never been aimed at demonstrably transient market power, and there is no reason to fear that it will be in the future, especially since enforcement agencies have learned what some take to be the generalizable lesson of the protracted IBM case.
• The question of relief will have to be given even greater consideration in the future than in the past. It has always been true that cases should be brought only when the enforcement agency has an effective remedy to propose. In new-economy cases it is especially important that any proposed remedy not require ongoing judicial supervision of the practices of a company specializing in the creation of intellectual property, for the obvious reason that we do not want to slow the pace of innovation to accommodate the more leisurely one of the judicial process. In short, to use Judge Posner's formulation, we must somehow recognize "the mismatch between law time and new-economy time."

This may well mean that relief will have to be more radical in the case of high-tech violators of the antitrust laws than in the case of lower-tech ones, with divestiture and structural solutions playing a larger role relative to the prohibition of specific practices. To return to the Microsoft case, if the company has done what it is accused of having done, it would be better to force it to spin off its operating system than to have judges burdened with deciding which products are intrinsic parts of that system, and which are separate products being entangled in the operating system merely or primarily to stifle competition.

In sum, new economy or old, there is much to be said for applying the antitrust laws with equal, or even greater vigor, than we have in the past.

Irwin M. Stelzer is the Director of Regulatory Studies at The Hudson Institute.