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The Antitrust Monster
In theory it works fine; in practice it has often made situations much worse
May/June 1998 | Volume 49, Issue 3
Like Freddy Krueger in the Nightmare on Elm Street movies, antitrust keeps coming back. The latest company to find itself in the sights of the Antitrust Division of the Justice Department is Microsoft. It was recently ordered by a judge to make available copies of its operating system, Windows 95, without the Internet browser. Why was Microsoft forced to do this? What was its “crime”? Well, the crime, believe it or not, was making its browser available to the public for free.
Now the average consumer might be forgiven for thinking that free is a pretty satisfactory price to pay for something useful. But to the theoreticians of antitrust, this was a classic case of “predatory pricing.” With predatory pricing, a rich and powerful company, such as Microsoft, charges a low price, or no price, to force weaker competitors (in this case Netscape) out of the market and thus gain a monopoly. But once Microsoft rules the browser marketplace, according to theory, the company will jack up prices and drain America’s wealth into Bill Gates’s already amply filled pockets.
But if the people at Justice who don’t want you and me to have a good computer program for free would lift their noses out of the theory books and take a peek at history, they might be surprised. To be sure, there have been any number of instances in which a local or temporary monopoly has been used to gouge (a hardware store tripling the price of snow shovels after a blizzard, for instance). But there has never been a case in which a company with a dominant position in a free market has used that power to fleece the public with high prices over the long term.
Just consider. Perhaps the nearest thing to a true monopoly of a vital commodity ever known in this country was Standard Oil’s control of the petroleum market in the years before the company was broken up in 1911. It was certainly true that Standard Oil would regularly underprice competitors that it wanted to buy until they either went bankrupt or agreed to be taken over. But even when Standard Oil controlled 85 percent of the domestic oil market, it did not raise prices. In fact, between 1870, when Standard Oil was formed, and 1911, the price of petroleum products fell, almost continuously, until they were on average only one-third what they had been in the late 1860s.
Likewise, the Ford Motor Company had 55 percent of the American car market in the early 1920s (and a far higher percentage of the low-priced car market). But Henry Ford nearly brought the company to ruin by his obsession with improving manufacturing processes so that he could sell the Model T at ever lower prices. The first Model T’s, in 1909, sold for $850. The last ones, in 1927, even after the inflation caused by World War I, sold for as little as $260.
The reason companies in dominant positions in their industries do not maximize prices is simple: They would rather maximize profits. The economics could hardly be clearer (except, apparently, to those whose job is to protect the public from predatory pricing). There are only two ways to increase profits: Raise prices or lower costs. Raising prices, however, inevitably cuts demand, so an increase of, say, 10 percent in the price over and above costs will not result in a 10 percent increase in profit. Rather it will be some lesser percentage as some people decide do without or to conserve.
Lowering costs while keeping prices steady, however, does not affect demand, so a 10 percent cut in costs translates into a 10 percent increase in profit. Even better, using part of the lower cost to lower prices results in increased demand and thus yet higher total profits, which, after all, is the only thing that counts.
Still, it’s an old saying that to someone in charge of a hammer, everything begins to look like a nail. And those with the hammer of antitrust in their hands have had a record of doing at least as much harm as good. Often their timing has been nearly surreal. Standard Oil was broken up just as Royal Dutch Shell was beginning to provide true competition. In 1948, the very year that television really took off in this country with the debut of the “Texaco Star Theater,” with Milton Berle, Hollywood studios were forced to change several practices. The purpose was to lessen their stranglehold on popular visual entertainment; the result was to move power in Hollywood from the Samuel Goldwyns to the Barbra Streisands. I am not sure that is progress.
In 1969, on the last day of the Johnson administration, the Antitrust Division sued IBM. With 65 percent of the market at that time, IBM was the eight-hundred-pound gorilla of the computer industry. But by the time the case was finally abandoned as unwinnable, in 1982, the next oversize anthropoid of computing, Microsoft, was already shipping its software and IBM was headed into the worst decade of its existence.
But perhaps the best example of the harm antitrust has sometimes done to our economy is RCA. The company was founded in 1919 as a patent consortium to exploit the nascent industry of radio broadcasting in this country. Its major owners were originally General Electric (30.1 percent), Westinghouse (20.6 percent), AT&T (10.3 percent), and, of all companies, United Fruit (4.1 percent). These four companies contributed no fewer than two thousand patents to the new enterprise, and it soon achieved dominance as the broadcasting industry expanded explosively in the 1920s.