Of Public Interest

Volume 1, Number 5
December 1999

Antitrust Zeal Over High Tech Hurts Consumers
by Richard E. Wagner

The first stage of the federal government’s war on Microsoft is now over. The conclusion of this war, however, lies some time in the future. Now the case is being mediated through the offices of Richard Posner, the Chief Judge of the Seventh Circuit Court of Appeals and a distinguished legal scholar. If the mediation fails to bring a settlement of the case, a lengthy process of appeals will no doubt ensue.

The Microsoft case illustrates in brilliant relief the worst features of the antitrust zealotry that has been cultivated by the Clinton Administration. There is a huge but vital distinction to make between protecting competition and protecting competitors. If antitrust does the former, we all gain from the innovation and efficiency that rigorous competition generates.

The danger, though, is that antitrust will do the latter. And it is easy for this to happen. For starters, most antitrust actions are initiated by complaints from losing competitors. IBM complains about Microsoft. Sun complains about Microsoft. And so it goes; one losing competitor after another complains about a more successful company.

A competitive economy is like an open track meet. Anyone can enter the competition by investing capital and marketing products. Just as athletes differ in their raw talents, the amount of effort they devote to training, and their strategies for becoming competitively dominant, so do companies. In athletic competition we hail the winners, so much so that we even wear their likenesses on our T-shirts and hang their posters on our walls.

It is different with commercial competition. A successful competitor quickly becomes an object of complaint. Our antitrust laws, which were fashioned for a manufacturing economy and not for a service economy, provide the forum for these complaints. What are losing competitors going to do? They can take their losses as a sign that they need to do better in the future. But this wouldn’t set well with shareholders and directors. The officers of losing competitors might lose some of their bonuses.

It’s far better to file an antitrust complaint than to admit to competitive shortcomings. IBM came up with an alternative operating system, OS/2, which few people wanted to use. Sun has been touting Java. And there are many other competitors out there who have also come up short against Microsoft products.

There are two primary indictments against monopolies. One is that they raise their prices. The other is that they stand pat and do not innovate. How does Microsoft stack up against these indictments?

With respect to prices, Microsoft has been a leading force in propelling prices downward. In Winners, Losers, & Microsoft, Stan Liebowitz and Stephen Margolis examined prices from 1988 to 1995 in 15 software categories. In the five categories where Microsoft did not have a product, prices fell by 15 percent during this period. By contrast, in the ten categories where Microsoft was a competitor prices fell by a whopping 65 percent. Who would complain about Microsoft’s strong promotion of lower prices, if not inferior competitors who could not keep pace?

As for standing pat and enjoying a monopolistically leisurely life, Microsoft has done exactly the opposite. Microsoft has been in the forefront of developing new products and improved versions of existing products. There is an old adage that the problem with army generals is they are better prepared to fight the last war than the next war. Like all adages, this one is partly, but not wholly, correct. What is correct, is that Microsoft has been continually exploring the frontiers of commercial competition.

We should ask ourselves a simple question: would we be better off if more companies copied Microsoft’s commercial example, or if they copied the examples of Microsoft’s losing competitors? It is the examples set by losing competitors that bring the parade of corporate executives to Washington, D.C. There is no good and genuine business reason for such valuable talent to travel continually between their homes and the nation’s capital. A study of the top 200 Fortune 500 firms found that 65 percent of the chief executive officers were in Washington on business at least once every two weeks.

In a world where the fortunes of commercial enterprises can be affected significantly by the conferral of political favors, or by political hostility, such travel arrangements are perhaps understandable. Yet as a nation we would surely be better off if our commercial leaders devoted their full energies to their enterprises. In the global marketplace that is emerging, competitive forces will surely operate more furiously than ever. We need more enterprises that follow the rigorously competitive example of Microsoft. To reward whiners and losing competitors will not cut it in the coming world.

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