High Stakes Antitrust by Robert W. Hahn (Editor)

From the Publisher

After nearly twenty years of a "less is more" approach to antitrust, the Department of Justice under the Clinton administration took action against several major corporations that rely on financial, transportation, and electronic networks to support their business—Visa/MasterCard, American Airlines, and Microsoft.

In High Stakes Antitrust, noted scholars with divergent opinions examine the impact and validity of the Justice Department’s actions. Some believe that it was well within the law to pursue these companies, while others argue that the administration exceeded its authority. They all agree, however, that the impact of the Clinton administration’s antitrust policies will be felt for quite some time.

About the Editor:
Robert W. Hahn is director of the AEI-Brookings Joint Center for Regulatory Studies and a resident scholar at the American Enterprise Institute.

Product Details

• Table of Contents
• Read an Excerpt

Table of Contents

Read an Excerpt

High-Stakes Antitrust

American Enterprise Institute Press

Chapter One

After almost two decades in which antitrust policy veered sharply toward the philosophy that less is more, the policy changed in the late 1990s when the U.S. Department of Justice mounted challenges to the practices of successful service enterprises dealing in software (Microsoft), consumer payment cards (Visa and MasterCard), and air travel (American Airlines).

All three antitrust suits involved industries in which networks were crucial. Microsoft supports a network of hardware manufacturers, personal computer vendors, computer users, and software developers that depend on the company's Windows operating system. Visa and MasterCard have created vast networks of merchants who accept credit, charge, and debit cards that are issued to consumers by thousands of financial institutions. American Airlines operates an air carrier network connecting hundreds of cities worldwide.

Do challenges to the practices of these network industries signal a return to an era in which Washington second-guessed market outcomes instead of simply setting ground rules for competition and allowing markets to respond on their own? Or were antitrust activities of the later Clinton years an aberration-a last hurrah for hard-line trustbusting? In October 2002 the AEI-Brookings Joint Center for Regulatory Studies invited experts with a variety of perspectives on those questions to discuss them and to assess the future of antitrust policy. This book presents a compendium of their thinking.

The panelists agreed on two basic facts: that the approach of the Department of Justice to enforcement of antitrust legislation in the late 1990s was aggressive and that the impact of the cases filed then will be felt for many years to come. Agreement, for the most part, ended there. Two of the panelists argued, albeit for different reasons, that the Justice Department had lost its way. The other two argued that while the department missed some opportunities and made some missteps, its aggressive stance was largely justified by changing technology and market conditions.

This introduction offers a summary of the four viewpoints, noting both differences and common themes. Lawrence J. White, of the Stern School of Business at New York University, presents the most comprehensive discussion of Clinton-era antitrust policy, so I begin with his chapter. Robert Bork, with the American Enterprise Institute, is narrower in focus, but he agrees with White that the Clinton administration's antitrust policy was based on sound law and economic theory. The final two chapters take a very different stance, arguing that the antitrust policy of the Clinton administration was ill conceived. Howard H. Chang, David S. Evans (both with NERA Economic Consulting), and Richard Schmalensee (at the Massachusetts Institute of Technology) argue that the Justice Department ignored consumer harm as a criterion for pursuing two of the three high-stakes suits of the 1990s. George L. Priest, at the Yale Law School, agrees, but he contends that the lack of focus on consumers stemmed from a fundamental misunderstanding of network industries.

In "Antitrust Activities during the Clinton Administration: An Assessment," Lawrence White offers a relatively sanguine assessment of antitrust actions during the 1990s. In his review, covering far more than just the Microsoft, Visa/MasterCard, and American Airlines cases, he concedes that the decade did bring a "new activism" to antitrust enforcement efforts. But White maintains that continuity remained strong, that the basic approach of earlier regimes was not changed. For example, the Justice Department stood by the Horizontal Merger Guidelines promulgated in the 1980s. And despite the wave of mergers in the late 1990s, neither the Justice Department nor the Federal Trade Commission succumbed to what he labels "populist temptations" to block conglomerate mergers.

To put antitrust enforcement during the decade into perspective, White refers to a variety of cases. With regard to Microsoft, he describes the software maker as a dominant firm operating in a market in which entry is difficult and contends that the company went out of its way to raise its rivals' costs and to increase its market power. White argues that while the Justice Department's challenge of Microsoft was not entirely coherent, it was justified. Similarly, the debates about overlapping governance of the payment card system and of card issuance in Visa/MasterCard were worth raising and the case itself worth pursuing.

White argues that the case against American Airlines was not as clear cut as either Microsoft or Visa/MasterCard but the situation still justified the intervention. In the more than two decades following airline deregulation, he observes, few new carriers have been able to survive competition from the large incumbent airlines. Certainly, the hub-and-spoke design of the incumbents is an effective means for taking advantage of network economies. But White argues that the incumbents abused their market position by expanding the frequency of flights in response to their rivals' entry, even as they matched their fares.

White acknowledges that it is difficult to differentiate aggressive competition from predatory behavior, especially when nonprice predation, such as an increase in passenger capacity, is at issue. Nonetheless, it is important to try to make the distinction in situations that include a dominant firm, strong market concentration, and difficult market entry-and where it is realistic to expect that losses from predatory behavior can be recouped. American Airlines fit those criteria, White says; therefore, despite the fact that the government lost, the suit was justified and pushed predation theory forward.

After discussing these three, White touches on other cases brought during the latter half of the 1990s. Intel and Dentsply focused on the problems of raising rivals' costs; Toys "R" Us came to grips with important issues of vertical restraints on trade; Staples, MCI WorldCom-Sprint, and Heinz-Beech-Nut raised significant merger issues, including the question of when company promises of postmerger efficiencies should outweigh concerns over postmerger industry concentration. Whether the government won or lost, he argues, the pursuit of those cases advanced antitrust jurisprudence.

White does contend, however, that the antitrust agencies made some missteps and missed some opportunities altogether during the 1990s. For example, he argues that the Federal Trade Commission miscalculated when it chose not to present empirical evidence in California Dental, which led the court of appeals to recommend that the case be dropped. Regarding missed opportunities, he would have liked either the FTC or the Justice Department to challenge the Bell Atlantic-NYNEX merger on grounds that the match would eliminate potential competition. Moreover, he argues that the failure to develop vertical-restraint guidelines left a significant hole in antitrust policy.

Taken as whole, White concludes, the antitrust enforcers of the late 1990s followed in the footsteps of their predecessors. Several cases filed during that time were controversial, but they had a "solid analytical foundation." In the end, he says, the Clinton antitrust legacy is a mix of important initiatives leavened with some missed opportunities.

Robert Bork, whose chapter, "High-Stakes Antitrust: The Last Hurrah?," focuses on the three high-profile cases, agrees with White concerning the overall direction of Clinton antitrust policy. Bork comments that although the current Bush administration has "less appetite" for path-breaking antitrust suits than its predecessor, enthusiasm for enforcement of antitrust law has always tended to cycle. High-stakes antitrust actions are sure to return. Bork also agrees that of the prominent cases of the 1990s, Microsoft and Visa/MasterCard were clearly justified, pointing out that both involved organizations with market power whose executives viewed network effects as insufficient protection for their monopoly status.

Microsoft, Bork argues, was one of the few cases in which a court of appeals sitting en banc unanimously upheld a finding of predation by a monopolist. He presents several examples of Microsoft's predatory behavior, defining predation as employing tactics other than efficiency to eliminate competitors. Although he acknowledges that internal company communications can be very misleading, couched as they often are in the language of war, he nonetheless argues that Microsoft's e-mails exposed its predatory intent. When it became apparent to the company that network effects and the "applications barrier to entry" were insufficient to protect its monopoly profits, it turned to a predatory campaign. The e-mails laid out the means by which it would attack its rivals, and the company's actions matched those plans.

In Bork's view it is unfortunate that the negotiated Microsoft settlement did not capitalize on the government's resounding victory in the courts. The consent decree, he observes, did not even prohibit the behavior the district court and the en banc court of appeals held illegal. Of most concern is the lack of a prohibition on "commingling" the software code for the Windows operating system with other software codes, such as that for Microsoft's Internet Explorer browser.

Visa/MasterCard, Bork contends, was similar to Microsoft in that it involved the abuse of monopoly power. He argues, moreover, that the government's case was "if not quite a slam dunk, close to it." The two cooperatives had a selective view of competition. They deemed American Express and Discover to be direct competitors that had to be excluded from Visa and MasterCard's systems but allowed member banks to issue one another's cards-and allowed one member, Citibank, to issue Diners Club cards as well. The result of Visa and MasterCard's card issuance rules was thus to narrow consumers' choice in credit and charge cards and to limit new offerings in debit and multifunction, chip-enabled "smart" cards.

As for the two cooperatives' counterargument that opening the system to American Express would give that company the opportunity to skim off the best banks, Bork asserts that both Visa and MasterCard already do that themselves, that indeed such "cherry-picking" is what competition is about. Thus he agrees with the district court decision that the bank associations' card-issuing rules were in violation of section 1 of the Sherman Anti-Trust Act.

In contrast, Bork contends that the government's case against American Airlines was off target. Here, he distances himself from White, arguing that the Justice Department's lack of a clear remedy emphasizes the faulty logic behind the case. Although this action, like Microsoft and Visa/MasterCard, involved network industries, unlike computer operating systems and payment cards, networks in the airline industry facilitate competition. Multiple networks currently exist and compete against each other, Bork contends, and competition is strong among hubs and among airlines. He points out that American never priced below the low-cost carrier entrants; indeed, at the low prices met by American, demand was sure to be greater. Thus the airline's fares and flight expansions on the contested routes fall under the defense of "meeting competition," which should apply to the Sherman Act as well as to the Robinson-Patman Act.

If lowering prices to competitors' levels and increasing output were anticompetitive, what remedy could the courts reasonably impose? Should American have to maintain its relatively high prices and relatively less frequent flights in the face of competition? If not, should the courts put themselves in the position of dictating American's legal minimum fares, which would be somewhere between the old American price and the low-cost carriers' price? Bork argues that because none of these options makes economic or legal sense, they expose the shaky foundation of the government's case against the airline.

In "Has the Consumer Harm Standard Lost Its Teeth?" Howard Chang, David Evans, and Richard Schmalensee argue that the foundations for the government's cases against both Microsoft and Visa/MasterCard were shaky as well. They point to a lack of focus on consumers in the Justice Department's antitrust efforts during the 1990s. In particular, they contend that the Clinton Justice Department relied on the assumption that harm to competitors automatically led to harm to consumers. In both Microsoft and Visa/MasterCard, as well as in Intel, a contemporary case that was settled before going to trial, the government confounded two distinct concepts. Harm to a competitor does not inevitably imply harm to the competitive process and thus harm to consumers, the prevention of which is the ultimate goal of antitrust laws. To link the two concepts, the Department of Justice should have presented direct evidence that the challenged practices had raised prices, lowered output, reduced quality, or otherwise harmed consumers.

At the heart of any standard of consumer harm adopted by the courts is the tension between the risk of being too lenient and the risk of being too strict. If a standard is too lenient, companies come to believe that they can behave anticompetitively without risk of government intervention. If a standard is too strict, courts will condemn practices that help consumers, undermining competition instead of spurring it. Because the courts cannot eliminate both risks at once, the goal is to set the standard to minimize the expected costs of the inevitable errors. The authors contend that the consumer harm standard espoused by the Clinton Justice Department risked discouraging procompetitive practices. Rather than demonstrating actual or likely consumer harm, the government presented evidence that competitors were harmed and that those competitors were important to the industry. The department, they point out, did not show that harm to those important competitors actually harmed the competitive process and thereby harmed consumers.

In Microsoft the Justice Department claimed that Netscape had the potential to create competition for Microsoft's Windows platform and that Microsoft's actions undermined Netscape's potential to challenge Windows. Determining whether Netscape was in fact a nascent threat is not easy, but the authors argue that the government could have attempted to buttress its case with empirical analysis.

Continues...

Continues...

---

Excerpted from High-Stakes Antitrust by Robert W. Hahn Copyright © 2003 by Robert W. Hahn.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

---