Anti-Antitrust

by Don Boudreaux on June 26, 2007

in Antitrust

Chicago Tribune columnist Steve Chapman is one of the very best at his craft.  He is consistently interesting and on-target correct.

Today he tackles the ludicrous antitrust action by Uncle Sam against the proposed merger of satellite radio suppliers XM and Sirius, and the similar action against the proposed merger of Whole Foods and Wild Oats.

Here are some snippets:

In both cases, the rationale is that fewer companies will mean fewer
choices and higher prices. But consumers who want what these firms
provide have more options than the Milky Way has stars.

Organic food consumers would not be the suffering captives of this new
company. Every grocery store has a raft of organic offerings, and
chains from Wal-Mart to Trader Joe’s are fighting to get their share of
sales. If the bigger Whole Foods tries price-gouging, customers can
easily find other sources for what they want – from farmers markets to
online suppliers.

The key government error is defining the market as a narrow sector
isolated from other sectors that provide reasonable substitutes. That
same mistake explains the FCC chairman’s aversion to the satellite
radio deal.

And another snippet from the same column, one that refers appropriately to the 1990s-era fear that Microsoft would "conquer" the market for computer software:

Meanwhile, other companies, notably Google, have trounced the Big
Meanie in other areas. Over the last decade, says Thomas Hazlett, a
professor of law and economics at George Mason University, "Microsoft
has seen its market position erode, and it has virtually nothing to do
with the antitrust case."

Antitrust was born in late 19th-century America as a devious means of protecting politically influential producers from the competition posed by new, entrepreneurial firms.  It was never economically sensible.  And it is not so today.

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{ 36 comments }

colson June 26, 2007 at 9:53 am

I've been following this ordeal to some degree and I agree with many of the author's points. Government has a very narrow view of the marketplace that often ends up in delivering the wrong solution at the wrong time.

This is partly why the FCC is such a terrible government body. They are essentially unelected lawmakers – lords by decree of government. But the larger problem is that the FCC is far more inept at understanding the marketplaces they rule than Congress. Phone de-regulation in the 90's forced open phone lines even in light of alternatives in the marketplace (cable companies and cellular companies). They finally had to reverse themselves after realizing how much damage it did.

Chris June 26, 2007 at 10:59 am

I find it odd that Don assets antitrust protects politically powerful producers from competition. I wonder how much political power Standard Oil, Alcoa and Microsoft had.

I particularly like the quote (from the link at the bottom): ". . .cartels can be an efficient way of preventing ruinous competition. . . ." What serious economist believes in "ruinous competition" any more? The cited example was the deregulation of airlines. But, I suggest that airlines are in trouble because they are constantly being reorganized and bailed out by the government, not because of "ruinous competition." Competition works, in part, by driving inefficient producers out of business. Yet, we continually prop up the inefficient airlines.

Whole Food's president sent a memo that said "Our targeted company is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever." Does that sound like a good thing for competition?

tarran June 26, 2007 at 11:14 am

Chris,

The first time Microsoft was sued for "violating" anti-trust laws, it did not have a single lobbyist on its payroll. Not one. It's competitors had many.

As for Standard Oil, Standard Oil did its banking with the Chase Manhattan Bank. If you look at the people bankrolling the movement that lobbied for anti-trust legislation in the period 1890 – 1925, they were all senior officers in the JP Morgan Banking empire. During the period of their control, not one JP Morgan customer was sued for anti-trust violations. The prosecutions seemed tailored to actually improve JP Morgan's bottom line by hurting the competition.

Don Boudreaux June 26, 2007 at 11:29 am

As research by Gary Libecap, and by Tom DiLorenzo and myself, back in the late 1980s and early 1990s showed, the principal spark for antitrust legislation was the remarkable rise and success of centralized butchering firms ("meatpackers") in Chicago, starting in the early 1880s.

As for serious economists who understand that competition can be ruinous in ways that lead to long-term harm to consumers, the late Donald Dewey understood that such competition was not only possible but likely in certain circumstances. More recently, George Bittlingmayer — whose 1982 paper, in the Journal of Law & Economics, on the Addyston Pipe case is a neglected gem — spells out how and when such ruinous competition can occur.

Chris June 26, 2007 at 11:51 am

Colson –

Actually, the deregulation of the local market enabled VoIP services like those from Vonage and your cable company. Before deregulation (or, actually, forced de-monopolization), your local phone carrier was under no requirement to provide access to those providers. In 1995, for example, if Vonage had come along and said "We'd like a block of 10,000 phone numbers and access to your central office, please," they would have been laughed at. Now, that Vonage has that access, my phone service is less expensive, I have far more features and better customer service than I received from my previous phone company.

Lee Kelly June 26, 2007 at 11:54 am

Unfortunately, regulatory bodies rarely understand or care to appreciate the difference betwen maintaining a competitive environment and maintaining competitors.

The 100m sprint would not be more competitive if the fastest runners were weighed down, even if the competition would have better chance of winning.

Methinks June 26, 2007 at 1:05 pm

Chris,

I was a telecom analyst for a while right after the the deregulation (but really reregulation) of telecom services in 1996.

The new regulations attempted to de-monopolize the incumbent local exchange carriers (ILECS) by forcing them to rent out their local loops either on a component basis or as a whole to competitive local exchange carriers (CLECs). The FCC controlled the price at which these components may be rented and priced them probably too low. The CLECs would not build out their own local loops because the cost of running the "last mile" are prohibitive. I don't know enough specifics about the economics of running a local loop but phone service via copper loop (traditional phone service) may require enormous economies of scale. I didn't stick around in the industry long enough to decide if that’s true or not. The carrot for the ILECs was that if they showed enough compliance, the FCC would allow them to provide long distance service as well – more lucrative than local provision. Of course, the difference between long distance and local is nil and exists only because of an artificial distinction created by the FCC. Competition between CLECS and ILECS was supposed to reduce the price of local telephone service they way competition reduced the price of long distance provision. It didn't.

There are several reasons for this. For years, the ILECs fought desperately in the courts to prohibit the FCC's price setting, component rental and various other aspects of the requirements of the Telecom Act of 1996. The ILECs argued that forcing them to open up the local loop amounted to government “taking”. The FCC argued that the ILECs were the creation of government in the first place. It was ugly. The ILECs also sought and won the ability to charge assorted new fees and taxes to compensate for the infringement of CLECs. Meanwhile, the ILECs sabotaged the CLECs’ equipment (housed in the ILECs' central offices) and didn't honour service agreements. Aside from renting components from an ILEC, the CLECs could just buy some of their own local loop components and house them in the ILEC's CO. On one trip to a central office, I saw a CLEC's equipment in a heavy steal cage with locks that wouldn't be out of place in Fort Knox. That's how big the sabotage problem was. I tried several CLECs myslef and the service was so substandard that I switched back to the ILEC.

I got out of that industry while cable telephony was still in its infancy and VOIP was barely even on the radar and I stopped paying attention to both the court cases and the regulations (about which I used to write giant reports – ugh). So, I don't know how all this played out. I can guess that the ubiquity and improvements in cell phones, improvements in mostly cable telephony and, to a lesser extent, in VOIP, have eaten into the market and rendered much of the Telecom Act of 1996 moot. Few CLECs remain but competition is much improved and prices have finally declined.

However, the Telecom Act of 1996 did NOT provide an opening for cell phones, VOIP or cable telephony to provide local service. Neither VOIP nor cable telephony was regulated because neither existed. Only traditional phone service was regulated. New technology did not need the permission of the FCC to provide local service because it simply by-passed the regulated technology. To my knowledge, VOIP and cable telephony still doesn’t need FCC approval.

Yet another example of how you cannot centrally plan free markets and competition. Left to their own devices, people in a free market will come up with solutions no regulator could ever imagine. Unfortunately, billions of tax dollars were spent in the attempt to enforce and fight over the Telecom Act of 1996 – all for naught!

Chris June 26, 2007 at 2:00 pm

MeThinks –

I used to be in telecom, too. You're right that VoIP is lightly regulated, but you're missing the function of a gateway — the box that connects a VoIP service to a traditional phone service. It's the box that lets Skype call a traditional phone number. Without the '96 Act and the FCC's regulations, the ILECs never would have allowed gateways to connect to their networks. Without the gateways, VoIP would be limited to computer-to-computer calls.

Don –

I'd be interested in a soft copy of that paper, if you could point me to one. While I suppose honest-to-goodness consumer-injuring "ruinous competition" might exist, my experience has been that it's an excuse made up by defendants who just can't compete.

The Dirty Mac June 26, 2007 at 2:23 pm

"Does that sound like a good thing for competition?"

Having the desire to eliminate competition and having the ability to do so are two different things. I can get pretty much all the organic foods that I want even though I have never set foot into a Whole Foods Market. It is inconceivable that Whole Foods could make enough acquisitions to limit my access to organic foods. OTOH, my local grocery market is definitely affected by barriers to entry related to the planning and zoning process.

Chris June 26, 2007 at 2:57 pm

Dirty Mac –

Agreed. But, the view of the company's President has to count for something, unless you just assume that he's a complete idiot — he presumably has some reason to believe that his strategy would succeed. Besides, the Sherman Act (rightly or wrongly) forbids attempts to monopolize, not just actual success.

Will June 26, 2007 at 3:08 pm

Very good piece. GM having a policy to to reach 2/3 market share never served the consumer, nor does it serve the consumer to have the government force people to choose between baseball and football on their satellite radio.

Sam Grove June 26, 2007 at 5:29 pm

There are many versions of history:
What people believe happened.
What historians say happened.
what many assumed happened.
Then there is what actually happened.

Historical facts often verge on useless in evaluating policy.
That's why we need to understand relationships, incentives, and motivations and assume that human self-interest applies at all levels.

When political power intervenes in the market, it goes on the market.

Methinks June 26, 2007 at 5:38 pm

"Without the '96 Act and the FCC's regulations, the ILECs never would have allowed gateways to connect to their networks."

Sir, I stand corrected. VOIP was not really a viable option when I left telecom and I haven't kept up. Thanks!

Sam Grove,

I don't know if you realize this, but your posts are highly quotable.

John Pertz June 26, 2007 at 8:55 pm

Go read the first half of Gabriel Kolko's "Triumph of Conservatism". There is ample evidence from this Marxist historian about how anti-trust was nothing more than a premeditated plan by the entrenched corporate interests to ward off competition.

The Dirty Mac June 26, 2007 at 10:46 pm

Chris:

I don't think Mackey is an idiot, but his stock price is off nearly 40% in the past year. If he really thinks that knocking off one competitor will give his company monopoly power, then I wouldn't be too optimistic about the future of the company.

Chris June 27, 2007 at 12:17 am

Dirty Mac –

True. I'm not particularly concerned that Whole Foods will succeed — the idea that the grocery market is somehow uncompetitive seems ludicrous. There just aren't any real barriers to entry which would allow that strategy to work and a lot of existing competitors.

Nevertheless, I don't have much sympathy for Whole Foods — they brought it on themselves. Anytime you go around saying "We want to do this because it will give us a monopoly," the FTC, at minimum, has to check it out.

pro-trust? June 27, 2007 at 1:15 am

antitrust laws are pure tyranny. no different from Hugo Chavez nationalizing oil co's. unfortunately, this doesn't help XM/Sirius with their awful business models

Matt June 27, 2007 at 11:44 am

By this reasoning, then by all means, the FCC should modernize its ownership rules to permit cross-ownership combinations in local markets so local TV and radio stations can fairly compete.

Given Sirius and XM's poor track record with the FCC, consumers should be weary of how a single company will control monopolistic impulses. As history has shown, monopolies lead to higher prices, rates, reduced consumer choice and less innovation.

I work with the NAB on this issue. More info is available at http://xmsiriusmonopoly.org/

Jon June 27, 2007 at 1:10 pm

True monopolies can only exist when legitimized by the gov't.

Matt June 27, 2007 at 1:34 pm

Jon, that's true. And the FCC will rule on whether or not legitimize this merger. Don't forget, XM and Sirius promised the government they wouldn't ask to merge, back when they got their charters approved in the first place.

Henri Hein June 27, 2007 at 2:42 pm

"As history has shown, monopolies lead to higher prices, rates, reduced consumer choice and less innovation."

Can you give an example of this, excepting government-licensed monopolies?

Henri Hein June 27, 2007 at 2:52 pm

"Anytime you go around saying "We want to do this because it will give us a monopoly," the FTC, at minimum, has to check it out."

What business would *not* want to become a monopoly? From the business' perspective, isn't that ostensibly the goal of competition?

"the Sherman Act (rightly or wrongly) forbids attempts to monopolize, not just actual success"

That's incorrect. The Sherman Act forbids "monopolization in restraint of trade." How can a desire to monopolize restrain trade if it's not successful? (It doesn't restrain trade even if it does succeed, but that's another issue).

It's true that the courts have accepted motivation, or appearent motivation, as circumstantial evidence to convict defendants. This is because it's impossible to prove whether trade was actually restrained or not. The act itself does not speak of motivation at all.

Python June 27, 2007 at 4:32 pm

Maybe I'm dense but I don't consider a single company controlling all of satellite radio to be a monopoly. There are very many alternatives to the service that satellite radio provides – broadcast radio, CDs, MP3 players, internet music, etc.

And even if there were no other alternatives, I would need to see proof that the barriers to entry were so high that it was nearly impossible to see successful start-ups.

And finally, why is satellite radio even regulated in the first place? Is there finite bandwidth that needs to be shared by society? Is there limited room in the earth's orbit for satellites? I don't see the federal side at all. Sat Radio is at-will, and doesn't infringe upon a finite shared public space.

Somebody please share with me how the FCC provides a real service in regulating satellite radio.

Chris June 27, 2007 at 5:46 pm

Henri –

I'm not sure where your quote came from. Here's one from Section 2 of the Sherman Act: "Every person who shall . . . attempt to monopolize . . . any part of the trade or commerce among the several States. . . shall be deemed guilty of a felony" At least some attempts to monopolize are illegal — there's a significant body of case law trying to figure out where that line is.

You asked for examples of unlicensed monopolies with negative results. That's a bit hard because the government tends to regulate natural monopolies to offset the negative effects. However, there are a few that are not regulated, or who are regulated, but not for anti-trust reasons:
* Labor unions, which drive up labor prices.
* When a certain airline owns all the gates or landing slots at an airport, ticket prices have been shown to be higher than they otherwise would be.
* Telephone service (before the breakup of AT&T and the forced opening of the network in '96) was priced much higher than today.
* Microsoft's virtual monopoly on desktop operating systems (which resulted from network effects) allowed it to force competitors off its desktop.

For brevity, I won't go into more detail about those, but can if you'd like.

Python –

The FCC regulates satellite radio because it uses parts of the EM spectrum, which the FCC licenses. Because there is finite bandwidth in the portion of the spectrum used for satellite communications, there can only be a small number of satellite radio providers.

Sam Grove June 27, 2007 at 6:33 pm

Methinks
Thank you.

python June 27, 2007 at 8:18 pm

Chris,

Let me summarize this into 3 points, and if you agree with them, I can proceed down a line of argument.

A. There are only something like 500 possible Satellite Radio stations (due to the nature of the signal, and the slice of the EM Spectrum set aside by the FCC). (Please provide a closer number if you know it.)
B. The FCC, when considering the licensing of Satellite Radio players, understood the technology well enough to estimate a maximum number of channels available.
C. The FCC chose to allow 2 players to occupy a majority of that EM space – roughly 150-170 channels each.

raja r June 27, 2007 at 8:26 pm

* Microsoft's virtual monopoly on desktop operating systems (which resulted from network effects) allowed it to force competitors off its desktop.

Before Microsoft, the OS came with the hardware. You could not buy an OS and some hardware components from the store and get a useful computer.

MS changed that. Now, you could buy an OS for a few hundred dollars, some components from the open market (thanks to IBM) and voila – a usable PC.

Without MS, PC penetration would be much lower – this means that the cost of hardware, software and other services would be much higher. And without MS, you'd still be paying Apple a few thousand for their machines.

BTW, there were always alternatives to MS if you had the $$$ to buy Sun/Apple or if you had the knowhow to use Linux/BSD. I have avoided using MS junk since 1998.

So, when you claim that MS has a monopoly, consider what the industry would look like if they had not sold their software at rock bottom prices.

Chris June 27, 2007 at 9:38 pm

python –

I agree with your statements. Please recognize that I don't think the Feds are right on the merger — I was just pointing out why the FCC regulates this.

Raja r –

I agree that there are alternatives to Windows–it's not a perfect monopoly–and that Windows has been a net benefit for consumers. But, MS does have something like 93% of the desktop OS market, which is close enough to exert monopoly power, if there are barriers to entry. I suggest that network effects are that barrier. (If you want that discussion, let me know…)

The issue was that MS was using that monopoly in operating systems (which they acquired legally) to try to take over a different market — the market for web browsers. And, that's a detriment to consumers.

The "rock-bottom" prices argument is a red herring, because you're comparing them to the prices of mainframe OSs, not to what they would have been in a competitive market.

(The Dr. Dos debacle is another example of consumer harm.)

raja r June 27, 2007 at 10:11 pm

try to take over a different market — the market for web browsers.

What about the memory management market? How about the text editor market? They tried to take that over as well. What about FTP clients? Gopher? Ping? How do you decide what constitutes a market?

Apple bundles their software with their hardware (or vice versa) – how is that fair and bundling a web browser unfair?

And, that's a detriment to consumers.

Ah yes. By giving away free browsers, they harmed the consumers.
But even if that were true, would you say that the negative effects of MS are greater than the positives?

you're comparing them to the prices of mainframe OSs, not to what they would have been in a competitive market.

I was comparing them with Apple, primarily. AFAIK, there wasn't anyone who was willing to sell consumer OS for generic systems.

As as for the 'competitive market' – there was no competitive market because nobody chose to enter the market that MS entered.

The Dr. Dos debacle is another example of consumer harm.

There are plenty of examples of MS screwing its competitors. And there are plenty of examples of Apple, Sun and IBM doing the same. One reason why I'm typing this message on a Linux system.

Chris June 28, 2007 at 10:19 am

Raja_r –

The primary anticompetitive conduct was in Microsoft's strong-arm tactics to keep OEMs from pre-installing Netscape. The bundling of the browser into the OS was more of a secondary concern.

Window's net benefit to consumers has been several orders of magnitude more positive than the harm caused by Microsoft's anti-competitive conduct. But, that doesn't justify the conduct. A man who saves a million people is still not allowed to murder even just one.

nobody chose to enter the market that MS entered

What about Linux or Dr. DOS or OS/2? There is not a competitive market for desktop operating systems because of network effects: the copy of Windows that I have sitting on my desk is more valuable to me the more that other people have it. Until the OS becomes a commodity (which will take many years), Windows is an effective monopoly.

tarran June 28, 2007 at 10:45 am

Chris,

Microsoft did not injure a single person. They have a perfect right to offer their product to whom they want at whatever price they want.

Just because you don't like the deal they offer does not mean that somehow you are harmed.

Netscape was perfectly free to produce their own OS and bundle it with their browser, and to try and get OEM's to refuse to offer Windows. The fact that they didn't, and that OEM's decided Microsoft's business was worth more to them then Netscape's business isn't some crime of Microsoft.

As far as I know, no OEM has ever offered the option to preload a browser like links orlynx. Is this a crime? Or is it merely a reflection of the right of OEM's to decide, for whatever reason what software they will install on their computers?

Again, Microsoft didn't injure anybody with their "anticompetitive" practices. Well, that stunt they pulled on Novell which delayed the release of the first version of Wordperfect to take advantage of Windows 95 features was pretty scummy. But so long as they didn't violate their contract with Novell, they did nothing legally actionable.

I say this as someone who detests the "Microsoft Tax" and have been using Linux for 5 years now.

Chris June 28, 2007 at 5:56 pm

Tarran –

Actually, it was a crime of Microsoft's. That's what the entire Microsoft antitrust trial was about.

Here's how they injured consumers. Consider two scenarios:

1. Consumers can choose between (A) a computer with netscape on it, (B) a computer without netscape on it, or (C) no computer.

2. Consumers can choose between (A) a computer without netscape on it, or (B) no computer.

The difference between 1 and 2 is where consumers lost.

Don't confuse that with the anticompetitive conduct — if MS had just force Netscape out of business by making a better browser (i.e. by competing), that would have been fine. But, instead, they tried to force them out of business by leveraging its monopoly in Windows. And, that was found to be an antitrust violation (I think the claim itself was based on tying.)

raja r June 28, 2007 at 9:47 pm

The primary anticompetitive conduct was in Microsoft's strong-arm tactics to keep OEMs from pre-installing Netscape.

MS is free to get into any contract with OEMs just like Netscape was. And the OEM is free to accept or reject the offer. Unless MS held a gun to the OEM, I do not see what the "strong arm tactics" were.

1. Consumers can choose between (A) a computer with netscape on it, (B) a computer without netscape on it, or (C) no computer.

2. Consumers can choose between (A) a computer without netscape on it, or (B) no computer.

As a consumer, you do not have a God-given right to purchase whatever your mind wishes for. You can only buy what another (free) man is willing to produce and sell.
If you don't like the choice, you are always free to go out and build your own (like many of us did).

What about Linux or Dr. DOS or OS/2?

They came a long time after MS created the desktop OS market. Keep in mind, Apple could've decided to standardize their arch and allow 3rd parties to sell. Or any of the workstation vendors could've decided to make a stripped down version of their machine and sell.
They chose not to. MS sold for $300 (or whatever it was then) that Apple was unwilling to sell at any price and what Sun/SGI were charging hundreds of thousands for.

If it wasn't for MS, I couldn't have afforded a PC in 1990 in India – they standardized the arch and drastically cut the price for the OS. *That* is why they are enjoying the defacto monopoly.

the copy of Windows that I have sitting on my desk is more valuable to me the more that other people have it.

So what you are saying is that using Windows makes your life easier and hence you are using it. I was under the impression that MS somehow forced you at gun point to use their wares.

And btw, I have got by without having to touch MS junk for about 8 years now. The few things I cannot do are because of govt enforced protection for MS. Try http://www.ubuntu.com sometime – that is how you break the monopoly.

Chris June 29, 2007 at 12:51 am

Raja –

We're getting far off the original anti-trust point, so this will be my last post.

As a consumer, you do not have a God-given right to purchase whatever your mind wishes for.

You asked what the harm was. In general, a competitive market will give consumers what they want. Dell, and others, were willing to provide that. The harm was that Microsoft used its monopoly power to stop that. (If there had been a competitive market in OSs, Dell would have been able to say "Fine. We'll go with XXX instead of you.")

So what you are saying is that using Windows makes your life easier and hence you are using it. I was under the impression that MS somehow forced you at gun point to use their wares.

No. I only pointed that out to show where Microsoft's monopoly power comes from. Sure, nobody's forcing me. But, so what? Nobody's forcing me to buy electricity; does that mean that the electric company should be able to force me to only buy their appliances? If I live in a subdivision with private roads, should the homeowners' association be able to dictate what car I drive? After all, nobody's forcing me to buy electricity or drive.

raja r June 29, 2007 at 7:56 am

In general, a competitive market will give consumers what they want.

Where can I get my LISP machine please? Since I cannot, who is the monopolist who altered the market here?

I cannot get a LISP machine because most of the people in my industry prefer UNIX/Windows machines. It sucks, but I have to live with it.

You are stuck with a Windows machine because that is what most people prefer.

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