The New Trustbusters

What's behind the resurgence of antitrust activism--and why it's bad news for consumers.

Joel Klein is a famous man. The head of the Antitrust Division at the U.S. Department of Justice usually toils in anonymity, known only to the in-groups of the bar. Not Klein. He has sued Microsoft, the most prominent company in America's jazziest industry, and demonized the world's richest human, Bill Gates. He has assaulted the ubiquitous credit card franchises of Visa and MasterCard and blocked important aerospace industry consolidations. He makes speeches extolling the pivotal role of the Antitrust Division in the "new economy" of globalization and information. These acts have earned him serious attention in the national press.

Not to be left behind, Klein's fellow antitrusters at the Federal Trade Commission are equally active. They have beaten up on superstores by stopping the merger of Staples and Office Depot and by knocking down important marketing practices of Toys "R" Us. Like the DOJ Antitrust Division, the FTC has gone high tech. It is challenging Intel, the grandee of computer chips, and probing Cisco Systems, the dominant company in Internet switching hardware. In a recent suit against a drug company, the FTC asserted a heretofore unknown authority to force an alleged monopolist to refund to consumers $120 million in allegedly ill-gotten profits.

Professional discussion of this surge in antitrust activism is proceeding at two levels. One is the highfalutin language of bar association meetings and academic conferences, where sessions are given titles like "Antitrust Enforcement and High Technology Markets," "Networks, Lock-In Effects, and the New Economy," and "New Approaches to Reviewing Horizontal Agreements." In this world, Platonic guardians mull over the implications of technological change and devise optimal policies to safeguard American enterprise. They "open up a dialogue with the bar and the academic community about antitrust doctrine," as Klein put it in one of his speeches, on topics such as "the relationship between antitrust and intellectual property, the significance effects and tipping points... the impact of differentiated products theory, the role of potential competition and innovation markets, and [the meaning of] `agreement.'"

The second level of analysis is more skeptical, grounded in the public choice school of economics. Public choice theory holds that exercises of government power are driven by the material and ideological interests of the people who wield it and by the private parties who can reward them with campaign contributions, money, job security, or whatever else they value. Viewed through the lens of public choice theory, the recent burst of antitrust activity is not primarily about consumers or competition. It is about four kinds of interests: 1) competitors of successful firms who want to hamstring their rivals, appropriate part of their businesses, or turn the clock back so they can re-run the race; 2) companies blown by the winds of technological change and looking for ways to nullify their disadvantage; 3) the personal ambitions of antitrust enforcers, who do not prosper in quiet times; and 4) the class interests of the legal profession, which are served by a combination of activist bias and mushy theories.

Only a taste of this view creeps into the formal talks at antitrust conferences. To get the full flavor, you must hang out in the corridors and hotel bars, and stick around for the after-conference receptions. There you hear jokes like this one: "What is the government's theory in the Microsoft case? That the state of California has more computer companies than the state of Washington, and a hell of a lot more electoral votes." Or this one, about "Gore-Techs," the high-tech entrepreneurs who confer with Vice President Al Gore: "What is Gore-Techs? A new fabric made by combining silicon and money, used for wrapping up politicians."

In these less formal settings, last summer's Senate Judiciary Committee hearings on Microsoft, in which Chairman Orrin Hatch (R-Utah) laid into Bill Gates, are dismissed with, "What else would you expect from a senator who has Novell in his state?" Testimony in the ongoing Microsoft trial about the frequency with which the head of Netscape, the moving force behind the lawsuit, met with Klein and other Antitrust Division representatives is greeted with blasé yawns. So are testimony and e-mail messages showing that high-tech companies regard government antitrust action as simply one more tool in their competitive arsenal, an alternative to price cuts or new products. And as the head of Netscape said when asked why he did not file his own suit, it is much cheaper to use the government's lawyers.

Behind the scenes at the conferences, you hear snickers about the innocence of Microsoft, which thought it could sit out there in Redmond writing software and ignoring Washington, D.C.--as if such a big pot of wealth could go unnoticed by a rapacious imperial capital. The idea that perhaps a company should be able to do its business and ignore Washington is regarded as hopelessly naive. Microsoft is now playing catch-up, adding former congressional aides to its staff and boosting its budget for political contributions.

The suit against Visa and MasterCard, announced in October 1998, also evokes grins. (See "Credit Where It's Due," January.) The Antitrust Division's press release speaks of harm to consumers and of an industry that is "competitively impaired." But the arrangement that the government just attacked has been around a long time and was created in part due to antitrust concerns expressed by the DOJ almost 20 years ago. Prior administrations investigated and declined to take action. The corridor talk notes the close relationship between the Clinton administration and American Express, which has been complaining about its rivals for years. Presidential friend Vernon Jordan is an AmEx director. According to news accounts, AmEx has other ties to the White House: It bought heavy advertising from the 1993 inaugural committee, it won the White House Travel Office account, and it has replaced Diner's Club as the government-issued credit card for federal workers.

In the 1997 Office Depot/Staples merger case, the FTC defined the relevant market as "office supplies sold by superstores," even though the two chains together sell only about 5 percent of all office supplies. Wal-Mart alone sells more than this, and bulk mail-order firms sell another huge chunk. Everyone, except the FTC and the federal district judge who upheld its decision, regards the commission's market definition as a laugher. (See "Pricing Pencils," August/September 1997.) But no one can figure out who had the political clout to persuade the FTC to adopt such a silly position. The Wall Street arbitragers who lost a bundle when the deal cratered think the FTC's action was triggered by complaints from Office Max, the third major superstore chain, which stood to get some assets on the cheap if the government forced the merged entity to spin them off in the name of protecting competition.

Last March, when the DOJ Antitrust Division nixed Lockheed Martin's effort to acquire Northrop Grumman, the formal reasons involved concentration in the defense industry. The corridor talk this time actually made it into The Wall Street Journal. Lockheed had been blindsided by rival Raytheon, which gave the government mountains of negative information. In its June 1998 story, the Journal noted that Lockheed, not expecting trouble, had failed to adopt the usual techniques of the merger game: "lobbying Capitol Hill, working the executive branch and creating a drumbeat of support in the media."

The interests of selected businesses and political figures are not the only ones served by the trend toward antitrust activism. The corridor lounger also notes a certain incestuousness among the conference participants. Almost all the private lawyers and economists on the panels used to work for the government, while the government reps used to work in the private sector, and most will return there at some point. Even the career employees turn free agent if the stars are right. The FTC litigator who led the Staples case left a few months later for a well-paid partnership in a major law firm. In the condottiere world of lawyering, his victory in a case that looked like a dog greatly increased his market value. The arbs who lost big as a result want him on their side next time.

It is a new springtime for antitrust lawyers and economists, promising a return to the good old days of three decades ago. Their memories of that era are bathed in a golden glow. It was a time when antitrust regulators were hyperactive, inhibited only by the need to invent a plausible scenario under which a business arrangement might be regarded as "anti-competitive," and this concept could be given any of several not necessarily consistent meanings. Given such a nonstandard, the government won almost every time it challenged a business arrangement. But the charade required a lot of lawyers and economists.

This era ended in the 1970s. Two disastrous pieces of monster litigation--one against IBM by the DOJ Antitrust Division, the other against the oil companies by the FTC--ground on for years. Each went long past the point where it became obvious that the government lacked a coherent theory of the supposed offenses and long past the point where changes in the industry and in the world turned the case into a joke.

During the same period, the University of Chicago school of antitrust analysis began to convince judges and law students, and eventually even the bar, that many of the government's anti-competitive scenarios were not plausible at all and that arrangements which were valuable to consumers were being outlawed. Antitrust law was suppressing rather than nurturing competition.

This revolution in antitrust thinking was consolidated in the 1980s, when the Reagan administration pared enforcement back to the hard core of attacking agreements to fix prices or divide markets, which almost all antitrust analysts regard as beyond the pale, and preventing mergers among direct competitors in highly concentrated industries. The number of cases dropped off as enforcers ceased to invent new theories, and businesses, with a fairly clear idea of the line between legal and the illegal, could adjust their conduct with little reference to the high priests of antitrust.

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