All Commentary
Monday, January 1, 2001

Antitrust Benefits Consumers? It Just Aint So!

Robert Litan, vice president and director of economic studies at the Brookings Institution and a former adviser to Janet Reno on the Microsoft antitrust case, recently authored the stereotypical Washington Post economic policy op-ed: virtually void of elementary economic analysis while uncritically promoting more and more government intervention (“Fair Use of Antitrust,” September 13, 2000).

Mr. Litan claims that the antitrust laws allow companies to “gain dominant positions in their markets” only “if they do so fairly.” But the word “fairness” appears nowhere in the antitrust laws; this is a recent invention of socialist-minded policy wonks like Mr. Litan. Moreover, it is extraordinarily naïve of anyone calling himself an economist to believe that such a charge would even be a desirable part of the antitrust laws: Competitors will always whine and cry about how the price-cutting, product-improving, and customer-satisfying practices of their more successful rivals are “unfair.” This in fact is the modus operandi of antitrust: The antitrust laws provide a means by which sour-grapes competitors can achieve through politics what they fail to achieve in the marketplace.

Mr. Litan commits what Hayek called the “fatal conceit” of believing that government bureaucrats, rather than entrepreneurs and consumers, are in the best position to decide what constitutes a “legitimate business purpose.” Microsoft got into trouble, he argues, because it “ran afoul of this simple maxim.” The maxim is indeed simple, but it is unequivocally false. Neither economists nor politicians nor policy wonks are capable of deciding the most “efficient” size or configuration of any business enterprise. As Ludwig von Mises once explained, “The question to be decided is: Who should determine the size of the enterprises, the consumers by their striving to buy what suits them best or the politicians who know only how to tax away and to spend?”*

* Ludwig von Mises, “Small and Big Business,” Economic Freedom and Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1990), p. 221.

By adhering to this false “maxim” antitrust regulators are attempting to supersede the informed judgment of millions of consumers with the opinions Janet Reno and her former antitrust sidekick Joel Klein. Just how damaging this has been to consumers is revealed by several plain facts. First, in a poll of adult computer users taken by USA Today, only 6 percent said that “reducing Microsoft’s influence” was a “major issue” to them. Most consumers love Microsoft’s products.

Second, as Stan Leibowitz and Steve Margolis have shown in their book, Winners, Losers and Microsoft, in virtually any market that Microsoft has entered (financial software, spreadsheets, etc.), the effect has been a dramatic reduction in prices and an expansion of output and innovation. Software products that do not compete with Microsoft’s products fell in price by 12 percent from 1988 to 1995, but by 60 percent where there was competition from Microsoft.

Third, the government is clearly unconcerned about consumer welfare in its prosecution of Microsoft: In Judge Thomas Penfield Jackson’s November 1999 “Statement of Fact” he devoted a mere five out of 412 paragraphs to the issue of consumer welfare.

Mr. Litan, like his former employer Janet Reno, simply ignores that Microsoft has provided incredible benefits to consumers. He rests his case on the lame notion that, in his opinion, the company’s management had “anticompetitive motives.” Economic analysis may not be Mr. Litan’s strong point, but mind-reading apparently is. He claims that such a malevolent “intent” has harmed Microsoft’s competitor Netscape by keeping it from competing in the Web browser market. In fact, Netscape has distributed more than 150 million copies of its browser since 1995.

It is typical of government, and its intellectual apologists like Mr. Litan, to assume that business practices they are incapable of understanding—such as exclusive-dealing contracts—should be outlawed in the name of “fairness” or because of presumed bad motives.

Intel Doing Well?

As alleged “proof” that antitrust regulation is not harmful, Mr. Litan notes that Intel, which recently settled an antitrust complaint, seems to be doing well. This kind of statement ignores the important but unseen effects of such regulation. What is the opportunity cost of having to spend millions of dollars in legal fees and diverting management talent away from striving to produce better and cheaper products to deal with the blizzard of paperwork typically imposed on a company that is the victim of an antitrust “complaint”? Mr. Litan ignores such important questions even though it is well known to antitrust scholars that one effect of antitrust is to induce companies to be less successful than they could be out of fear of attracting the attention of antitrust regulators. It was the official policy of General Motors for many years to never let its market share top 45 percent for this very reason.

It has been standard knowledge in the field of industrial organization for at least 35 years (more than 100 years to Austrian economists) that the mere number of firms in an industry does not necessarily have anything to do with how competitive that industry is. Industrial concentration is usually caused by the fact that one or a few firms in an industry are simply more efficient and/or have a superior product than their rivals do—at least temporarily. Mr. Litan ignores this mainstream thinking by issuing a 1950s-era call for splitting Microsoft into three companies. The free market, guided by the preferences of consumers, has given us the current configuration of the computer industry; Mr. Litan’s proposed tinkering can only be destructive to consumer welfare and an affront to the principle of private property.

He also ignores decades of research by Chicago school scholars such as the late Yale Brozen and Harold Demsetz, and Austrian school scholars such as Dominick Armentano, who have compiled thousands of pages of published, documented evidence of how antitrust regulation has been harmful to consumers and has impaired economic efficiency and reduced productivity. “Our economy has profited greatly from sound antitrust enforcement,” Litan declares, without offering a shred of evidence.

Perhaps the biggest absurdity of all is Mr. Litan’s dire warning that “If you have monopoly power in our economy, don’t abuse it.” I’ll take him seriously on this point whenever he starts criticizing the government’s own monopoly power, such as the government school monopoly, the old-age insurance monopoly, the occupational licensure monopoly, the postal express statutes, cable television franchising, and myriad other monopolistic enterprises operated by federal, state, and local governments.

—Thomas J. DiLorenzo
Loyola College in Maryland