Government Missteps: Let Me Count the Ways
By the mid-twentieth century, antitrust enforcement in the United States had become far more sophisticated than it had been for the first six decades after the Sherman Act was passed in 1890. Unfortunately, the ratio of success-to-fiasco remained roughly constant.
Previously in this series: “The Weird Inconsistencies of Trust Busting: Antitrust Is More Interesting Than You Think, Part VII”
Consider the IBM case. As I mentioned earlier, the New York law firm of Cravath, Swaine & Moore defended both IBM and AT&T against government antitrust prosecutions. In the IBM case, the government filed its action in the waning days of the Johnson Administration — 1969 — and the case, a modern counterpart of Jarndyce v. Jarndyce (cf., Bleak House), dragged on for 13 long years until the government finally threw in the towel in 1982.
Thirty million documents were produced during that litigation and the legal and court costs and expenses mounted into millions and millions of dollars. 974 witnesses testified. Finally, Cravath wrote a letter to the Antitrust Division of the Justice Department beseeching it to “stop this unprecedented waste of public and private resources.”
The IBM fiasco demonstrated several profound problems with the government’s approach to antitrust enforcement:
- Prosecuting a firm that got big only because it outcompeted other firms is a really bad idea.
- In a complicated sector of the economy like technology, the government is a really bad prognosticator of where the sector is headed. By the time the antitrust case against IBM was in mid-stride, IBM was already being outcompeted by nimble new competitors like Microsoft.
It’s true that the government won its case against AT&T, which was broken up into the “Baby Bells.” But, hello, the government set up that monopoly itself.
Under the so-called Kingsbury Commitment in 1913, AT&T agreed to divest itself of Western Union (but not Western Electric) and allow local telephone companies to connect to its long distance lines — after buying the connecting equipment from Western Electric. But AT&T didn’t agree to connect its local services with other local phone companies, nor did it agree to connect its long distance lines with those of other long distance carriers.
Pretty thin soup, but in return for these minor concessions, the U.S. government gave AT&T a monopoly it didn’t relinquish until 1982. To make matters worse, AT&T quickly regained its dominance after it lost the Baby Bells.
Or consider the antitrust case against Microsoft. The main thrust of the government’s case was that Microsoft was incorporating the Internet Explorer browser into its Windows operating system, giving Explorer an unfair advantage over other browsers. “So what?” you may well ask, and I would agree. (So did the government, after a massive expenditure of time and money.)
Because Explorer was incorporated into Windows, buyers had a free and easy way to browse the Internet, then a very new and confusing world. Any Windows user could also use any other browser, simply by downloading it and paying $39. So the government’s lawsuit effectively argued that consumers were lazy and stupid and should pay more and therefore Microsoft was engaging in monopolistic practices.
By the time the government surrendered in 2001, the Explorer browser had a 90 percent market share. But where government action failed, simple competition in the marketplace succeeded. By 2010, Explorer’s share of the market was just over 50 percent. By 2013, Google Chrome had surpassed Explorer as the market leader. In 2016 Explorer had fallen to third place, and just a few weeks ago, Microsoft abandoned the product.
And what should we think about the government’s antitrust suit against Apple and the country’s largest book publishers (HarperCollins, Simon & Schuster, etc.)? Practically forever, the publishers had insisted on their right to charge whatever they wanted for books, just like any other vendor. But Amazon decided, against the publishers’ wishes, to charge $9.95 for every e-book.
Apple met with the publishers and offered to sell e-books at the publishers’ prices on Apple’s iPad platform. The Antitrust Division claimed this was straightforward price-fixing and forced the players to halt the conduct and pay serious fines.
Uh, hello, Antitrust Division: Before the “conspiracy” between Apple and the publishers, Amazon had a 90 percent market share in e-books and was on the way to almost 100 percent. Yes, Apple and the publishers did in fact commit a technical black-letter-law violation, but only as a means of defending themselves against the vast monopoly power of Amazon, which the government casually ignored.
And, finally, what about the fiasco of the government’s actions to block a merger between Staples and Office Depot (twice)? The government, apparently as myopic as ever, claimed the merger would result in a monopoly in big box office supply stores. But for years Amazon had been utterly dominant in office supply products, and weakening the big boxes only played into Amazon’s hands.
We could even look at the private antitrust case of Big Steel v. Bigger Steel, mentioned earlier in this series. Thanks to the Sherman Act, the plaintiff was able to take a run-of-the-mill breach of contract case and turn it into a massive antitrust case that, had the plaintiff won, would surely have bankrupted our client. Thousands of jobs would have been lost. It was pure folly.
The issue of the government’s competence in controlling anticompetitive behavior has taken on increased urgency for two reasons. First, the United States, the EU, and many American states have already launched antitrust actions against the major tech companies. If those actions fail, or if they succeed in typically myopic fashion, the consequences will be very significant.
Second, serious attempts are being made in the U.S. Congress to modify or even completely rewrite the country’s antitrust laws (the Sherman Act, the Clayton Act, and so on.) Getting that effort wrong will have consequences that will haunt us for decades.
But before we grapple with those issues, it’s important to point out that one very profound reason why antitrust enforcement has been such a mess from the beginning is that there has never been any widely accepted underlying theory about monopolistic behavior. We’ll take a quick look at that issue next week.