Counting the cost of antitrust actions

By Christopher Lingle

SYDNEY (JP); Antitrust lawyers working for the U.S. Justice Department must be happy with the recent ruling that found that Microsoft had misused its market power, branding it a monopoly. While government lawyers may be rejoicing, consumers of computer software have less reason to celebrate.

Whatever the legal or political logic behind the assault on Microsoft, economic theories offer little support. Monopolies are literally the sole seller in a market.

Such circumstances are quite rare and most have short lives, unless government intervention restricts the entry of competitors.

Most economists understand that monopolies often arise from government interventions in the first place and that their long run survival also depends upon government support.

The long-run market destruction of monopolies is so certain that I offer my students an A grade without taking any examinations if they can contradict this assertion.

The requirement is to identify a monopoly producer whose actions injure the community (due to overpricing and producing) and that survives without government restrictions on competitors entry or subsidies.

This offer has been made for over 25 years without having to deliver on the deal. Under competitive conditions and without government interference to protect them, monopolists simply cannot survive for long.

In the 1960s, AT&T, GM and IBM were considered to be dangerous monopolists. However, their market positions were undone by the dynamics of time. Consumers and other producers react to their high prices and profits and make adjustments accordingly.

This is due to the force of changing relative prices that induce consumers to seek substitutes or for producers to produce them. Changing tastes and preferences result from new information about other goods. Changing technologies reduce the value and community impact of a monopoly.

In sum, industries undergoing a fast pace of technological change will dispose of monopolists most rapidly. Microsoft will be forced to reengineer itself or become a nonviable competitor.

If monopolies are so rare and have a poor survival rate on their own, it might seem strange that so many defenders of antitrust actions hold such self-righteous convictions.

A partial answer is found in political and personal impulses rather than economic necessity. From the political point of view, it appears that some voters support attacking deep- pocket corporations.

Generally, citizens and consumers tend to be more in awe of private corporations than they are of the power of their governments. This is surprising since there are many more mechanisms to punish private sector actors than there are for removing public employees.

The motivation of the Justice Department lawyers is also suspect. Successful prosecution of the richest and most successful corporation in the world enhances the market value of lawyers with experience in the antitrust division.

Those with hands-on knowledge of the inner working of the Justice Department and contacts with those who remain there can charge large fees for defending corporate clients from this government agency.

And of course Microsoft's competitors are delighted by the threats of legal action by legal bureaucrats. It must be remembered that many software producers and Apple Computers will benefit by hobbling Microsoft.

In fact, antitrust action might do more harm than good. There is often a wide gulf between the intentions of public officials and the outcome of public policy.

It may be true that government officials do not wish to inflict the pain upon their citizens arising from recessions or inflation. Yet, ill-timed or ill-conceived government policy actions are the basis of every economic downturn or price upsurge in history.

In a global economy, nimbleness and rapid responses will become increasingly necessary. Therefore, becoming large may be its own punishment. If Microsoft is too large and does not respond to world competitive pressures, the market will inflict far greater punishment than Janet Reno and Joel Klein might wish to do.

However, if a large size is an advantage in the global setting, it would be imprudent to impose a sort of downsizing of Microsoft or any other industrial behemoth.

While downsizing on the basis of corporate logic has led to its share of mistakes, it is likely that political logic will be even more short-sighted.

In sum, judicial rulings based upon antitrust legislation can be credited with unnecessary interference with corporate growth, including the obstruction of mergers.

In so doing, it is likely to impose costs on the community in the form of lower quality products, fewer choices, less R&D and higher prices.

The writer is an independent corporate consultant and adjunct scholar of the Center for Independent Studies in Sydney.