The Microsoft-Google Antitrust Wars and Public Choice: There is Too An Argument Against Rival Involvement in Antitrust Enforcement

Josh Wright —  14 September 2010

How should an economist interpret the fact that Microsoft appears to be “behind” recent enforcement actions against Google in the United States and, especially, in Europe?

“With skepticism!”  Is the answer I suspect many readers will offer upon first glance.  There is a long public choice literature, and long history in antitrust itself, that suggests that one should be weary of private enforcement of the antitrust laws against rivals both in the form of litigation and attempts to delegate the enforcement effort (and costs) to the government.

In a recent post, economist (and blogger) Joshua Gans suggests that this conventional economic wisdom is wrong.  Gans discusses the Microsoft-Google Wars and claims that Microsoft’s involvement in the recent actions against Google in Europe, Texas and elsewhere are feature of an antitrust policy that is working, rather than a bug of an antitrust system that funnels competitive activity away on the margin from dimensions that benefit consumers, i.e. competition on the merits, and toward rent-seeking.

Gans characterizes Microsoft’s recent reported involvement in the antitrust activity launched against Google in Europe, and now Texas, as the result of some sort of epiphany at the company:

I think the narrative that is appropriate is that the antitrust action against Microsoft, while it didn’t end up breaking it up, actually worked. Microsoft has largely behaved itself since. It no longer aggressively bundles or bullies OEMs into exclusives. What is more, in its more competitive segments, it is actually a strong consumer performer. Think about video games, for one. And it is improving in its traditional monopoly areas too where it is forced to compete on products rather than with heavy handed contracting.

Lets hold aside the issue, for a moment, of whether Microsoft is as much of an antitrust enforcement success as Gans’ characterization suggests.  There remains significant debate on this issue, but I don’t want to re-hash that here, and do not need for the purposes of this post. There is also a lot of normative judgment in Gans’ post, e.g. “no longer aggressively bundles or bullies,” could be a good or bad thing from a consumer welfare perspective depending on whether the bundling or exclusive dealing with OEMs or IAPs provided consumer benefits.  But it is at least worth noting that the possibility that Microsoft has been chilled from plausibly pro-competitive conduct ought to be recognized.  But that is not the point.

The real question is what, if anything, Microsoft’s involvement tells us about how an economist should think about modern antitrust enforcement actions against Google?

Here is Gans’ answer:

Google’s new narrative in these actions is that this is a dynamic industry and they face lots of competition and potential competition — just look to Microsoft’s example! But if the correct story is that Microsoft faced real competition only because antitrust action tied its hands on anticompetitive acts, then Google’s line is incorrect and, what is worse, may lead to bad policy outcomes. Think to Google’s recent acquisitions in search in Japan that took it from a 70:30 duopoly to monopoly. This is not what we want.

In this regard, I can think of no better advocate for this narrative than Microsoft. Who better to tell the world that antitrust policy in high tech environments actually works. Yes, they are interested but it is not an argument against antitrust action to simply point to Microsoft involvement.

This answer did not move me from my initial skepticism.  At least, not in the direction of less skepticism.  There are some odd assumptions being made here.  First, I’m tempted to ask about who we know that a 70:30 market structure is “not what we want”?  Second, who is this “we” anyway?  Perhaps it is consumers.  Its unclear.  But it sounds essentially like a classic structure-conduct-performance argument.  The problems with such arguments in high-tech markets with rapid technological change (and even in more stable “brick and mortar” settings) are well known.  Is there any evidence that Google’s recent transactions in Japan generated consumer harms?  Did it generate benefits?  If it didn’t harm consumers — what is the problem?

From an economic perspective, assuming that Microsoft’s underlying conduct was clearly anticompetitive, that the costs of enforcement are less than the benefits created for consumers, and that anything around a 70-30 market share structure in search harms competition and reduces consumer welfare assumes away all of the interesting economic questions in order to reach a policy conclusion: Microsoft’s involvement tells us to favor antitrust enforcement against Google — or at the very least, is neutral.

But what about that policy argument?  It is the bolded sentence that got my attention.  Gans claims that Microsoft is the best advocate for antitrust enforcement in high-sectors because they know that enforcement “actually works.”  Somewhat more provocatively, Gans claims that the fact that Microsoft is self-interested is not an argument against antitrust action. Au contraire.

That investment in private antitrust enforcement against one’s rivals is, ceteris paribus, a negative signal about the economic merits of an antitrust action is indeed an argument.  And its a good one.  And one that has been around a long time.

Posner (Antitrust Law, 2d at 281) writes about influence of rivals on state enforcement:

I would like to see the states, which have been growing increasingly active in antitrust enforcement since the 1980s, stripped of their authority to bring antitrust suits, federal or state, except under circumstances in which a private firm would be able to sue … .  States are unwilling to devote the resources necessary to do more than free ride on federal antitrust litigation, complicating its resolution.  In addition, they are excessively influenced by interest groups that may represent a potential antitrust defendant’s competitors.  This is a particular concern when the defendant is located in one state and one of its competitors is located in another and that competitor, who is pressing his state’s attorney general to bring suit, is a major political force in that state.

Posner is not alone here in expressing concerns about the influence of rival firms on state and federal enforcement, as well as the use of private enforcement and the threat of treble damages to subvert competition.   Indeed, a classic in the antitrust economics literature is Baumol & Ordover, Use of Antitrust to Subvert Competition, in which the authors argue that courts should presumptively deny standing to competitors seeking to block mergers.  The idea that rivals can use the government agencies to do things to hinder rather than help competition is not new, and has deep roots in the public choice literature.

The argument appears in the Gavil, Kovacic and Baker Antitrust Law textbook (page 1088):

Despite their potential benefits, private enforcement schemes (including private antitrust enforcement) can have adverse consequences.  Private enforcement can generate questionable claims, and can enable firms to use the courts to impede efficient behavior by their rivals.  Although private enforcement reduces the need to enlarge public enforcement bodies, private suits can consume substantial social resources in the form of costs incurred to prosecute and defend such cases.  Perhaps recognizing these adverse possibilities, courts have established limits on the ability of private plaintiffs to obtain relief under the Clayton Act.

Of course, those limits apply to litigation in court.  No such limits apply when the rival knocks on the door at the FTC or DOJ or State AG’s office.

Fred McChesney writes, citing the Baumol & Ordover analysis and Salop & White (1986) on private antitrust litigation, that:

One of the most worrisome statistics in antitrust is that for every case brought by government, private plaintiffs bring ten. The majority of cases are filed to hinder, not help, competition. According to Steven Salop, formerly an antitrust official in the Carter administration, and Lawrence J. White, an economist at New York University, most private antitrust actions are filed by members of one of two groups. The most numerous private actions are brought by parties who are in a vertical arrangement with the defendant (e.g., dealers or franchisees) and who therefore are unlikely to have suffered from any truly anticompetitive offense. Usually, such cases are attempts to convert simple contract disputes (compensable by ordinary damages) into triple-damage payoffs under the Clayton Act.

The second most frequent private case is that brought by competitors. Because competitors are hurt only when a rival is acting procompetitively by increasing its sales and decreasing its price, the desire to hobble the defendant’s efficient practices must motivate at least some antitrust suits by competitors. Thus, case statistics suggest that the anticompetitive costs from “abuse of antitrust,” as New York University economists William Baumol and Janusz Ordover (1985) referred to it, may actually exceed any procompetitive benefits of antitrust laws.

Separately, McChesney provides an example:

Consider a case like that against Salton, Inc., for resale price maintenance of its George Foreman grills, provisionally settled in September 2002. The case is one in which the federal antitrust authorities would have no interest. Resale price maintenance is now understood to be an intrabrand practice that enhances interbrand competition. Economists almost unanimously applaud resale price maintenance as a way to enhance distributor efforts to market the product vis-à-vis competing brands in ways that almost never have any anticompetitive aspects. Resale price maintenance simply has no place in the modern, economics-based enforcement agenda.

However, resale price maintenance cases like that against Salton are a natural for the state attorneys general. First, anomalously, resale price maintenance remains per se illegal under the Sherman Act and thus is illegal under states’ antitrust acts. Therefore, victory is automatic — and cheap. All that need be shown is a contract to set resale prices, or something that a jury might so construe as such a contract.
Victory is even easier when the states sue for hundreds of millions of dollars (as in the Salton case) and then offer a settlement for cents on the dollar ($8 million in the Salton case).  No company, particularly one with public shareholders, could refuse an offer to settle for so little. To do so would invite a shareholder suit. Salton’s George Foreman grill is one of the great success stories in kitchen appliance sales. With unit sales in the millions, its high profile is guaranteed by George Foreman’s name and
ability to promote it. Hanging the scalp of a brand-name retailer and a phenomenally successful product on an attorney general’s wall was not likely to discourage the two lead attorneys general in the Salton case, New York’s Eliot Spitzer and Illinois’s
James Ryan. The former has shown himself not averse to publicity; the latter was running for governor at the time the suit’s settlement was announced.

The suit certainly was valuable to the attorneys general. But what was in it for consumers, the supposed beneficiaries of antitrust? Nothing, apparently. Not only is resale price maintenance generally a beneficial practice socially, but the settlement
amount was laughable in terms of redressing any supposed consumer injury. The settlement amounted to just pennies per grill sold. The attorneys general did not even try to get the money to the actual sufferers of any higher prices. Instead — attorneys general are politicians and 2002 was an election year — the money was destined elsewhere, as the attorneys general announced:

“In view of the difficulty in identifying the millions of purchasers of the Salton grills covered by the settlement and relatively small alleged overcharge per grill purchased, the states propose to use the $8 million settlement
in the following manner: Each state shall direct that its share of the $8 million be distributed to the state, its political subdivisions, municipalities, not-for-profit
corporations, and/or charitable organizations for health or nutrition-related causes. In this manner, the purchasers covered by the lawsuits (persons who bought Salton George Foreman Grills) will benefit from the settlement.”

This statement is commendably candid. Not only will supposedly wronged consumers not get any money, but the supposed overcharge was “relatively small” to begin with. If the overcharge was “relatively small,” Salton could not have had
much market power. Thus, the case flunks one of the principal filter tests that Judge Easterbrook rightly would impose to evaluate the worth of a standard antitrust case.

Judge Easterbrook himself, as McChesney notes, was one of the earliest to note the potential for consumer welfare-reducing abuse of the antitrust laws, arguing in the Limits of Antitrust that rival enforcement actions:

Antitrust litigation is attractive as a method of raising rivals’ costs because of the asymmetrical structure of incentives. The plaintiffs costs of litigation will be smaller than the defendant’s. The plaintiff need only file the complaint and serve demands for discovery. If the plaintiff wins, the defendant will bear these legal costs. The defendant, on the other hand, faces treble damages and injunction, as well as its own (and even its rival’s) costs of litigation. The principal burden of discovery falls on the defendant. The defendant is apt to be larger, with more files to search, and to have control of more pertinent documents than the plaintiff. … The books are full of suits by rivals for the purpose, or with the effect, of reducing competition and increasing
price.

Of course, these points apply just as well (and sometimes doubly) to the actions of rivals that do not even require them to go to court, and instead knock on the door of the government enforcement agency.  Easterbrook proposed significant restrictions on such suits.

The idea that Microsoft is an especially qualified party to “tell the world that antitrust policy in high tech environments actually works” is dubious even holding aside the debate over whether one can identify palpable consumer benefits from the enforcement action and demonstrate that they outweigh the costs.  Given the long history in antitrust of abuse of the private action to impose costs on rivals engaging in efficient business practices — a piece of history that is central to any narrative of the history of modern antitrust — and the longstanding concern about this idea in the economics literature, the argument that identity of the plaintiff or interloper is irrelevant to the economic merits of the underlying claim in the Microsoft-Google context seems especially wrongheaded.   If anything, the proliferation of national antitrust laws and availability of EU enforcement make the problems emphasized in that literature more important, not less.

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