Antitrust, Obsolescence and the "New Economy" (Again)

Josh Wright —  4 August 2009

Gordon Crovitz (WSJ) plays the new economy card on antitrust.  Its a familiar wrap for those in the antitrust community that hit its peak in the original Microsoft days with virtually every competition policy scholar and commentator chiming in with an opinion about whether the internet and network effects and so forth rendered antitrust obsolete.  Analyzing the Microsoft case is a bit of an antitrust Rorschach test nowadays with critics of antitrust in the modern economy viewing the Microsoft prosecution in the U.S. as disastrous and likely harmful to consumers, more moderate (but still skeptical) folks believing that the prosecution was a Quixotic and not likely to affect competition or consumers because antitrust was simply too slow to respond in dynamic markets, and proponents pointing to it as proof of antitrust’s modern relevance.  The best analysis I’ve read of the Microsoft saga, and one I recommend to anybody interested, is Page and Lopatka’s The Microsoft Case (Chicago Press).

That’s not to say there is nothing to the critique that antitrust is too slow to deal with innovative and dynamically changing markets.  There is certainly something there.  But there are at least two different criticisms one could level at the antitrust enterprise as applied to innovative markets.  One is institutional, i.e. conditional on believing that we can accurately and confidently identify anticompetitive behavior in these markets, competition enforcers cannot hope to prosecute it and install remedial measures before the market they were attacking is gone and the next big thing has arrived.  This is the angle Crovitz is pushing:

The bottom line is that by the time regulators can assess a technology market, the market has often moved on. Not long ago, Google was the upstart and the search leaders included names like AltaVista and Excite. “Regulatory intervention in the high-tech sector thwarts the natural evolution of the market,” argues Wayne Crews of the Competitive Enterprise Institute. “Worse, it distorts the response of competitors. Antitrust investigations steer the market in unnatural directions, creating instabilities in entire industry sectors.”  The antitrust laws are anachronisms when applied to industries of constant innovation. Even theories about the role of antitrust were designed for the industrial era.

For antitrust skeptics who make this institutional argument, the Microsoft case is exhibit 1:

Haven’t antitrust regulators learned from the experience battling Microsoft when its ubiquitous operating system seemed to give it unassailable power?  Microsoft is now the weakling, admitting it needs help competing with Google in search and also in areas from email to Web browsers. And while Google is “dominant” for now, what Google dominates is an open Internet where barriers to entry are low and falling.Indeed, regulators will have a hard time even defining the market they’re reviewing for competitiveness. Saying that Google has 65% of a market is misleading. The Web is about people finding what they want. This could mean searches for information, but increasingly it means looking to see what friends or colleagues think about a topic. Google, Yahoo and Microsoft are social-media laggards compared with Facebook and Twitter, which provide new organizing networks for information online.  Instead of more aggressive enforcement of a legal relic, the real question is when will technology’s ever faster cycles of creative destruction spell the end of antitrust law? Consumers benefit from competition, innovation and new technology, which regulation cannot provide but can suppress. Instead of using 19th-century tools for this century’s challenges, President Obama should tell his regulators to study the humility of technologists who understand that today’s leader can be tomorrow’s laggard.

While I’m a believer in cartel enforcement and would like to believe will go wherever the evidence in a particular merger case would take me, I am a skeptic about monopolization enforcement.  But not generally for these institutional reasons (which is not to say they don’t present real problems).  Rather, I’m not convinced that economics has generated the technology for enforcement agencies and judges to consistently and accurately identify instances of anticompetitive single firm conduct without substantial risk of false positives that might swamp any gains.  I admit, the existing evidence on single firm conduct is limited.  Its an area where a lot of work must be done.  But my view of that evidence is that the appropriate default presumption is that single firm conduct is pro-competitive until convincingly demonstrated to the contrary.  We simply are not that good at distinguishing between pro-competitive and anti-competitive single firm conduct and in the absence of strong evidence of consumer harm, given the risk of false positives, the right approach is humility and caution.  This is the essence of the error cost approach and the core of the problem with repudiating the Section 2 Report in favor of the “tried and true” old case law in this area.

Note that these problems are not limited to single firm conduct cases in the new economy.  But in my view, to the extent that the “new economy” requires recalibration of the scales, it tips in favor of more humility not less in these markets since (1) they involve innovation and errors are more likely to significantly hamper economic growth in those industries, and (2) cases involving rule of reason analysis in innovative industries is likely to require tradeoffs between multiple dimensions of competition (e.g. price and innovation) and translating them into predictions concerning consumer welfare.  I have some Demsetzian concerns about our ability to do the second of these which I’ve written up in a paper in an earlier GMU/Microsoft Conference on the Law and Economics of Innovation which I’ll be posting shortly.