This fuzziness gives those interested in expanding antitrust enforcement, including the enforcers, a lot of leverage. They argue that any power over price, however small, in any identifiable product market is illegal. Then they seek to define the market narrowly, making it easy to find a price effect. In a recent paper for the Cato Institute, University of Mississippi economist William F. Shughart II, one of the most relentless public choice critics of antitrust policy, lists some markets defined by the government: "high-priced, non-ethnic frozen entrees"; "noncarbonated, ready to serve, naturally or artificially flavored fruit drinks, fruit punches, or fruit ades which contain 50 percent or less fruit juice and are customarily sold under refrigeration to the consumer"; "direct contract front-loaded trash removal in Dallas." These market definitions do not have quite the same impact as "oil" or "steel."
The next step in expanding the realm of antitrust is to use static
economic models to predict an effect on price, often ignoring
strategic responses available to competitors that would erode any
monopoly power. In analyzing the Staples/Office Depot merger, for
example, the FTC noted that slightly higher prices prevail in some
areas where only one of the companies operates. It assumed this
pattern was immutable, ignoring the ability of superstores,
mail-order houses, and customers to observe it and react.
By the time these steps are taken, the result is ordained. Anyone playing by these rules who cannot find a monopoly on every corner isn't trying.
This game discourages efficiency-enhancing mergers. It also discourages arrangements among firms, such as joint ventures and strategic partnerships, that could create innovative products and reduce costs. Such deals always involve some agreements on price and territory because the partners must decide how to split the proceeds. Each also needs to ensure that its partner does not use it for a time, then muscle it out of the way and take over the whole business.
Banning these contracts outlaws many worthy projects. As Fred Smith, head of the Competitive Enterprise Institute, explains: "Any company wants to do many different things. But it can be only one size, which means it cannot be exactly the right size and have exactly the right mix of skills and resources for each of the things it wants to do. For some it is too big, for others too small." If different and possibly competing businesses can integrate some of their operations without merging entirely, they can form entities that are the right size for the venture at hand. The size that is appropriate for inventing a software product, for example, may be different from the size needed to make it commercially viable. Manufacturing and marketing require still different sizes, talents, and structures. The industry is filled with people patching together the temporary alliances needed to fill the gaps in their own organizations. The result, in software and elsewhere, is a flexible and adaptive economy, which serves consumers well.
For a century, antitrust enforcement has been hostile to such partial integrations among businesses. Ironically, this hostility creates pressure for firms to merge completely. Due to oddities of antitrust law, merger may be allowable under circumstances where partial integrations by contract would be blocked.
In the 1960s, scholars with a public choice perspective began analyzing whether past antitrust actions had actually benefited consumers. It is not an easy question to research, but a variety of ingenious studies have looked at stock prices, scholarly opinions, competitors' reactions, and other indicators. The results are strikingly consistent: Antitrust actions do not help the public, though they may help the special interests that trigger them (while providing well-paid employment for antitrust professionals). CEI's 1997 Antitrust Reader and the 1995 book The Causes and Consequences of Antitrust: A Public Choice Perspective (University of Chicago Press), edited by Shughart and Emory University economist Fred McChesney, are good introductions to this literature.
This research, combined with the dearth of empirical work on the other side, was an important factor in the reforms of the 1980s. Proponents of interventionist antitrust had an embarrassing lack of good examples. As McChesney and Shughart point out, when you have a century of experience with a program and virtually every landmark case looks to have been a mistake, perhaps it is time to stop saying, "well, we'll get it right next time," and start rethinking the basic premises.
The current activists are having none of this. Quite the opposite. The seminar sessions at antitrust conferences--the serious part, where the participants do not joke about Gore-Techs--operate as if none of this rethinking happened. The governing assumption is that basic antitrust policy and doctrine was and is sound. The question is whether this tool that has served us so well can be applied to the growing high-tech economy as it stands, or whether it needs to be adapted and extended to reflect new realities. The possibility that the antitrust emperor might be stark naked is ignored.
This should not really be surprising. More than 20 years ago, when I was a middle manager in the FTC, an exasperating commission action prompted me to say to another staffer: "They tell the story of `The Emperor's New Clothes' a little differently around here. It goes along as usual until the little boy pipes up, `That man is naked!' Then, in the government version, the emperor turns and says, `Kill that kid.' And they do." Public choice analysts know that an agency-emperor will seize any opportunity to off the uppity kid and re-impose the myth of the beautiful robes. It will be assisted enthusiastically by private interests who want to turn the myth to their own advantage.
As a result, there is now a gusher of amorphous theories justifying renewed antitrust activism. For example, theories of "path dependence" and "lock-in" hold that society can become committed to an inferior technology, unable to break free when a superior one comes along. It is an interesting idea with little empirical support, as has been demonstrated by economists Stan Liebowitz and Stephen Margolis in the pages of REASON ("Typing Errors," June 1996) and at greater length in the academic literature. The Dvorak typewriter keyboard was not really significantly better than the old QWERTY version, and now that anyone can go Dvorak with a computer keystroke, almost no one does. The other standard example, the triumph of VHS over Beta in videotape, is also wrong. VHS, with its longer recording time, was regarded by consumers as a better product.
It's true that once companies or consumers buy into a technology they will incur costs if they want to change later. But this is hardly a new development; the same is true for purchases of equipment, constructing buildings, or any other investment. Change occurs only when a new technology is sufficiently superior to justify the switching costs, or when investment is turning over anyway. So what? The fact that a company that introduces a good product gets some first-mover advantages is one of the mainsprings of innovation. Is the government now saying this should be foreclosed?
Another phrase popular among antitrust activists is "network effects." Some things become more valuable as more people sign up, and the company that gains an initial advantage may then sweep the field. The classic example is the telephone, where everyone wants to be on the same network.
Again, an interesting idea, and one with clear merit. But again, not new, and not unique to high-tech industries. Timothy Muris, now a professor at George Mason University law school and, as head of the FTC's Bureau of Competition, an architect of the antitrust reforms of the 1980s, notes: "The fact that network effects are everywhere should give us pause about the utility of the concept [for antitrust]. Many products, not just high-tech ones, have the characteristic [that] the benefits of use increase as the number of users grows. Thus, consumers of products that require post-sale service, such as automobiles and appliances, produce network effects from the growth of service outlets when more consumers purchase the product. Coke and Pepsi drinkers benefit from the network of their fellow consumers in that their drinks are widely available in restaurants and from vending machines. Sports fans benefit when they live in an area with enough other fans that teams find it profitable to locate there."
During the formal presentations at antitrust conferences, the audience listens raptly as phrases such as "path dependence" and "network effects" roll off speakers' tongues. During the receptions the respect drops off, especially because the speakers seem more interested in explaining why the concepts justify an increase in their power than in any real analysis. A typical corridor reaction to the new concepts is "buzzwords and bullshit."
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