Antitrust laws have a negative effect on hypercompetition

Traditional antitrust laws chill and dampen the aggressive competition necessary to achieve the four types of dynamic efficiency in hypercompeti­tion. When firms are very successful at racing up the escalation ladders, they are, ironically, vulnerable to allegations of being anticompetitive.

In hypercompetition companies often do things that might be interpre­ted as anticompetitive under antitrust regulations. Hypercompetitive firms create new and better quality products, a result that in turn looks like an attempt to monopolize a market when it leads to high market share and big profits. These profits are a reward for effective competition and must be used to develop the next temporary advantage, or they will be lost to a competitor. As discussed in the previous chapter, companies may make hypercompetitive use of cooperation, generating profits in one market to fund hypercompetitive behavior in another.

Dominant firms may also stay dominant by consistently staying ahead of their competitors on the escalation ladders. However, this dominance is not an attempt to monopolize a market. It is the natural outcome of hypercompetitive pressures that force firms to move up the escalation lad­ders faster than their competitors. If they do not do so, they fall behind and lose position. Yet when the law encourages firms to slow down their move­ment up the ladders to protect fair play and create competitive parity, the law destroys the natural function of the market and the dynamic efficien­cies that this market process creates.

William F. Baxter, former head of the Justice Department’s Antitrust Division, once commented that the purpose of the Robinson-Patman Act on price discrimination is to put lead weights in the saddlebags of the fast­est riders.34 He said, “It led companies like IBM to compete with kid gloves and often almost to preserve competitors and to raise their own prices so that their market shares didn’t get too big. So in this perverse way, a sec­tion [of the law] that was ostensibly supposed to limit monopolies was causing large successful companies to engage in monopolistic behavior in order to hold their market share down.”35 He also credits restrictions on horizontal and vertical mergers in the 1960s and 1970s with the rise of conglomerates that later had to be disassembled in the 1980s and 1990s.36 Thus, antitrust laws may have encouraged major strategic mistakes by cor­porate management seeking to avoid becoming too dominant and too hypercompetitive.

1. Does Antitrust Really Reduce Hypercompetitiveness?

Many antitrust cases against large competitors have been filed by the gov­ernment. Many more private “nuisance” suits have been filed by smaller competitors. Yet the courts are becoming more permissive, and at least during the Reagan Administration, the policy of the executive branch was more laissez-faire. More and more practices previously outlawed as preda­tory are now accepted, and the private lawsuits are rarely won by the plaintiff. So some might ask, Where is the harm?

Even though the plaintiff is unlikely to prevail in court, these suits and investigations have an effect. The effect, however, is not to increase the competitiveness of U.S. industries. Rather, antitrust laws and enforcement have a variety of negative effects in hypercompetitive environments that harm individual competitors and U.S. competitiveness.

Antitrust laws were originally designed to promote competition. But, as discussed below, these laws have the ironic opposite effect: dampening the aggressiveness of large companies, limiting competitive actions, and creat­ing chilling ambiguity.

Even though the intent is to protect consumers from monopolistic prac­tices such as excessive prices and intentional production shortages, the effect of antitrust laws is often to support small competitors over large ones, sometimes even failing to recognize the damaging effect on consum­ers and the competitiveness of large firms. The laws tend to threaten to break up powerful, successful U.S. companies and alliances that could be used to compete head-to-head with even more powerful foreign alliances.

Antitrust laws create a series of chilling effects that tend to increase the caution of American managers, sometimes even paralyzing them. These chilling effects are caused by

  • fear of nuisance suits filed by competitors
  • uncertainty produced by ambiguity of the enforcement of laws
  • direct and indirect costs of such suits
  • removal of incentives for innovation

Each of these is discussed below.

CHILLING EFFECT 1: FEAR OF NUISANCE SUITS

Antitrust laws are a problem not only for the companies that are hauled into court but also for those that live under the threat of being hauled into court. Laws that authorize liberal antitrust suits by private competitors tend to create docile and less aggressive American competitors, weakening the position of the United States in world markets.

Lawsuits and the threat of lawsuits dampen the ability of some firms to move aggressively against competitors, to expand into new markets, and even to speak aggressively. Chief Judge Bauer notes in his opinion on In­diana Grocery’s appeal of its antitrust case against the Kroger Company, that the Supreme Court has emphasized “that summary judgment may be especially appropriate in an antitrust case because of the chill antitrust litigation can have on legitimate price competition.”37

Although recent government enforcement and court decisions are eliminating the prohibition of many pricing strategies, private lawsuits have tended to focus an inordinate amount of attention on predatory pric­ing, thus chilling the use of price as a weapon. Focusing primarily on static price comparisons to ensure that price is “competitively” set at marginal cost ignores the dynamic nature of markets in the cost-quality arena as well as the importance of actions in other arenas of competition.

CHILLING EFFECT 2: LEGAL AMBIGUITY AND INDECENT BEHAVIOR

Like obscenity laws, antitrust laws are so ambiguous that there is a chilling effect created by their uncertainty. As Jeffrey Harris, an economist at the Massachusetts Institute of Technology, commented, “You know predatory pricing when you see it.”38 But everyone involved has his own view of what predatory pricing is, and even the legal definition continues to be rede­fined by shifts in court cases and government enforcement. So companies that practice the art of aggressive and successful competition are in con­stant danger of being charged with indecent behavior. Companies that are at all risk-averse are forced to stay well inside the lines of the law to avoid action from competitors and the government.

The Wall Street Journal reports that the lines of the law are so hazy that even as Northwest and Continental airlines were filing a suit accusing American Airlines of predatory pricing, these two accusers were them­selves accused of alleged predatory pricing by smaller competitors.39 That companies can be accused of predatory pricing and accuse other firms of predatory pricing is a sign of how muddled the current laws have become. Companies can be hauled into court for pricing too high as well as pricing too low, so U.S. businesses are caught between a rock and a hard place when it comes to pricing policy. If the company prices are seen as too low, it could be charged by a competitor’s nuisance suit with predatory pricing. If its prices are seen as too high, a company could be charged with collud­ing to raise prices above marginal costs based on market power or tacit collusion. Either way aggressive competitors end up in court. In the airline industry, when prices go up, companies are charged with tacit price fixing through posting prices on a computer system. When prices go down, com­panies are charged with predatory pricing.

Overall, then, antitrust has a chilling effect on hypercompetitive be­havior, because even when companies are not being sued, no one really knows what is acceptable. The laws are so vague that they are not enforce­able with consistency. This causes firms to be more conservative and risk- averse. It is hard to tell how pervasive this chilling effect has become, but when one asks managers how pervasive it is, they say that the aggressive­ness of their strategic actions is restrained by the law.

CHILLING EFFECT 3: THE EXTREME COSTS
OF GOVERNMENT ANTITRUST SUITS

Even though suits initiated by the government are becoming increasingly rare and are rarely lost by the defendant, they still strike fear in the hearts of managers. Just as the severity of the death penalty scares people, the costs of a criminal or civil government suit makes a lot of people more cautious than their foreign rivals.

Companies and the government are expending considerable resources on cases that ultimately prove to be unnecessary or unwinnable. The thirteen-year IBM investigation and lawsuit, for example, cost the com­pany and the Justice Department an estimated $200 million in legal and photocopying costs alone.40 It required more than twenty-five hundred de­positions, including forty-five days by chairman Frank Carey.41 To give an idea of the scope of the impact, every part of the organization was ordered to save documents that could be related to the case, and special collection bins were scattered throughout the worldwide organization. By the end of the investigation in 1982, just the cost of storing those forty-six thousand tons of documents alone was costing IBM $5 million per year.42 In addi­tion, millions of dollars were spent by the federal government in develop­ing its millions of pages of testimony on the case.

Antitrust actions can also negatively affect stock value and damage the company’s reputation (leading to higher transaction costs if other compa­nies believe the tarnished firm will act opportunistically or be un­trustworthy). In addition, private antitrust lawsuits were estimated to cost U.S. companies $250 million per year in litigation costs.43 The magnitude of these costs is enough to make many managers worried about the impact of aggressive behavior on the top managers and even the value of the com­pany.

CHILLING EFFECT 4: THE LOSS OF REWARDS FOR INNOVATION

In hypercompetition companies need to use the New 7-S’s to gain tempo­rary dominance and use them over and over to keep dominance. But anti­trust laws often punish dominant firms, even threatening to break them up. This removes the incentive for racing up the escalation ladders and disrupting markets, thereby reducing the competitiveness of firms. The government refuses to see that it is good strategy (not monopoly power) that gives the firm its dominance. When laws try to create an even playing field by forcing firms into continual competitive parity, they chill hypercompetitive behavior by criminalizing competition and reducing the dynamic efficiency of the market process.

Kellogg, General Mills, General Foods, and Quaker Oats were charged with antitrust violations in 1972 because of their hypercompetitive behavior. The FTC’s case claimed that they “sought to stifle rival firms by introducing a ‘profusion’ of about 150 brands of cereal between 1950 and 1970,” many of which were differentiated on the basis of minor variations in color or shape44

Even though losing this type of suit is becoming less likely, there is still a chilling effect on innovation created by private lawsuits alleging exclu­sionary actions of this type. When antitrust laws force successful innova­tors to prove their innocence in court, innovation becomes more costly, and customers are forced to pay a hidden price due to the long-term loss of product innovation.

2. Damp and Chilled to the Bones

It is unclear whether these chilling effects merely freeze a few companies in place or chill most managers to their bones. However, the government tends to completely dismiss the cost of chilling hypercompetitive behav­ior.

If antitrust laws are having a chilling effect on managers, then the di­rect costs of antitrust litigation do not even begin to capture the full finan­cial impact of these regulations. The costs of lost opportunities and con­ceding market share and jobs to foreign competitors are enormous. Although the connection between the failure of corporations and private or government antitrust actions has yet to be demonstrated, it is an issue that should receive careful attention from federal legislators and regula­tors. If, as many managers suspect, there is a link between antitrust actions and strategic conservatism, this should be a compelling reason for recon- sidering the current structure of antitrust laws. Moreover, even if a general chilling effect is not found, it is clear that some specific hypercompetitive behavior has been historically dampened by the law.

Antitrust laws also have a direct impact on competition by restricting specific hypercompetitive tactics and slowing hypercompetitive moves by competitors. Among these dampening effects are

  • limiting the hypercompetitive use of cooperation
  • destroying critical mass (size) and strongholds
  • making secrecy more difficult
  • eliminating the use of hypercompetitive language and strategic in­tent

Each of these is discussed below.

DAMPENING EFFECT 1:

LIMITING THE HYPERCOMPETITIVE USE OF COOPERATION

As discussed in Chapters 4 and 10, joining forces to compete against other firms or alliances can be an effective use of cooperation in hypercompeti­tion. Although the recent changes in the laws allowing closer domestic cooperation are in the right direction, they probably don’t go far enough. Collaboration is not the preferred response to hypercompetition. But if groups of companies use collaboration in a hypercompetitive way (such as to gain the resources to take on other groups of companies using the New 7-S’s), then collaboration enhances hypercompetitiveness. In competing with a Japanese keiretsu, for example, U.S. firms are at a disadvantage be­cause of the restrictions of antitrust laws, which still prohibit joint manu­facturing and some vertical integration strategies.

Traditionally, antitrust laws have tended to keep U.S. firms from join­ing together to compete against foreign rivals. For example, the partner­ship between GM and DuPont might have served as an American keiretsu, but it was broken up by the federal government in the 1940s. Had GM and DuPont been allowed to continue in their alliance, the competi­tive environment might have been very different in the U.S. car industry. Would GM have been more aggressive in the use of new plastics and new fuels if DuPont and GM worked more closely together? Would GM have reacted faster to its loss of U.S. market share if DuPont executives served as vigilant members of GM’s board? We will never know.

With the rise of R&D consortia and a flourishing of business alliances, the government’s attitude toward cooperation has relaxed somewhat re­cently. In 1984 Congress passed the National Cooperative Research Act, which makes it easier for firms interested in pursuing joint research and development to do so. Even so, firms cannot jointly manufacture products developed from this research without risking antitrust suits, and vertical integration of the type between DuPont and GM is still intensely scruti­nized.

These consortia in the United States are often tangled in a web of red tape that makes it difficult for them to operate effectively. For example, by 1993 the U.S. Advanced Battery Consortium, created to encourage the development of batteries for electric vehicles, has been able to distribute only $81 million of a projected $264 million since its founding in 1991.45

New regulations signed into law in 1993 have reduced antitrust penal­ties for companies involved in U.S. joint manufacturing alliances.46 But these reforms stop short of actively encouraging joint manufacturing pro­jects. Companies would still face the uncertainty of antitrust suits, even with reduced levels of penalties. The irony is that America’s Big Three automakers already have such joint manufacturing ventures with foreign competitors, without fear of antitrust action, but have been prohibited for the most part from teaming up with one another.

DAMPENING EFFECT 2:

DESTROYING CRITICAL MASS (SIZE) AND STRONGHOLDS

In the past, aggressive U.S. antitrust actions have even led to the creation of foreign competitors. A landmark ruling against the Aluminum Com­pany of America (ALCOA) in 1945 illustrates the impact of antitrust laws on global competition. Appeals court judge Learned Hand wrote in his opinion, “ALCOA insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened and to face every newcomer with new capac­ity already geared into a great organization, having the advantage of expe­rience, trade connections, and elite personnel.”47 ALCOA was being pun­ished for being too hypercompetitive, made a criminal for “embracing each new opportunity” and aggressively defending itself against all comers.

The upshot of this punishment was that the company was broken in two—its U.S. operations continuing as ALCOA and its Canadian opera­tions continuing as ALCAN. Now the Canadian competitor resulting from this process has become a strong foreign competitor to ALCOA, even challenging it in U.S. markets. So the U.S. government created a foreign competitor that then challenged the U.S. company. At the time it seemed to be a good idea to break up this monopoly, but this view was rather shortsighted and did not recognize the dynamics of the market­place. Over time, global markets, government nationalization, the inven­tion of substitute materials, vertical integration, and alliances with large aluminum users created lots of new competitors.

Only in America do we take our strengths and destroy them. Whereas some countries have an industrial policy that promotes the strongest com­petitors, America has a reverse industrial policy designed to break up and hold back its largest, most aggressive firms. While we are not advocating the creation of an industrial policy, America should not be binding the hands of its most powerful competitors. It should stand back and let com­petitive firms succeed.

DAMPENING EFFECT 3: MAKING SECRECY MORE DIFFICULT

Although winning antitrust claims in court is difficult, gaining a hearing often is not. The discovery process in private suits can give a competitor access to cost data and other strategic information that hypercompetitive firms would normally like to keep secret. Thus, the trial itself affects com­petition by revealing strategic information about a competitor and there­fore limiting its ability to surprise and disrupt its rival.

For example, during a suit based on the Robinson-Patman Act, three defenses against charges of price discrimination are allowed: distress con­ditions such as bankruptcy, lower costs of producing or delivering goods, or the need to meet an equally low price of a competitor.48 Even if sensitive corporate information is sometimes protected through the court’s use of third-party audits and legal mechanisms that prevent direct transfer of in­formation to a competitor, the company filing the suit often can use the discovery process to find out which of the defenses is being used. If the accused company is using a defense of lower costs, this reveals key infor­mation to the competitor. If it isn’t using that defense, it may reveal that the company doesn’t have lower costs. If the accused company does try to plead lower costs, the plaintiffs lawyers can use the discovery process to challenge how those costs are computed, revealing considerable strategic

information about how the defendant computes margins and profits on products, how it allocates overhead, and other information.

DAMPENING EFFECT 4: ELIMINATING THE USE OF HYPERCOMPETITIVE
LANGUAGE AND STRATEGIC INTENT

Antitrust laws have not only dampened the aggressiveness of actions but also limited how U.S. competitors can talk about strategy and set their goals. Because intent to destroy competitors is such a central part of many antitrust cases, corporate statements that show such aggressive intent can be the smoking guns of antitrust cases. Yet in hypercompetition market disruption and the destruction of a competitor’s temporary advantage are key to success. So companies are forced to pretend that they are not doing what they are doing. American companies cannot use aggressive meta- phors to describe their actions if those metaphors convey evidence of in­tent. Companies cannot “kill” competitors, and they cannot use “preda­tory” pricing to undercut competitors. But they do act aggressively, and they do help their competitors die a natural death. They are not allowed to price below costs, but they do legitimately adjust their bookkeeping meth­ods to make sure they don’t price below their recorded costs. All of this has forced the United States to become a nation of hypocrites that do things that they can’t admit to.

Honda’s slogan, Annihilate, crush, and destroy Yamaha! is not the type of statement a U.S. senior executive could make openly. The trouble such language can cause in the United States can be seen from the case when Harvard professor Michael Porter allegedly presented a plan for “conquer­ing” the USFL to National Football League managers in 1984. The presen­tation was cited as the “smoking gun”49 in the USFL’s successful antitrust case. According to reports of court testimony, Porter’s presentation in­cluded a war metaphor and references to guerrilla warfare and generalship, all of which were considered evidence of the NFL’s intent to destroy the upstart league.50 When one of the leading U.S. strategic thinkers comes under attack for merely talking about aggressive competitive actions, it is clear that the American defense of free speech does not extend to state­ments of good business strategy.

American Airlines CEO Robert Crandall has been called “a walking antitrust case”51 because of his aggressive competitive statements in testi­mony to a Senate committee and in public statements. An American Air­lines memo about Pan Am, in which Crandall scrawled a note in the mar-gins, “Crush these guys,” was brought up in the 1993 antitrust case. De­fending the memo, Crandall has said he likes to use vigorous language to motivate employees. In response to questions by lawyers, he compared his statement to his comments about a caterer who served the wrong food on certain American flights. In a memo Crandall said to kill him. Of course, he said he was speaking metaphorically. The effect was that the force of CrandalPs language in reference to Pan Am was then undermined.52

This limits the ability of U.S. firms to create a warlike culture with ur­gency and motivation. To be number one is a less compelling mission than to crush the competition. Yet the Japanese often believe their proverb, “business is war.”

Companies are also not permitted to use “predatory” or “exclusionary” practices designed to destroy a specific competitor. They can, however, speed the competitor’s death by natural causes. Companies in the United States cannot be driven out of business by their American competitors. Those that try to destroy their competitors end up in court. So we create a fantasy land wherein many companies go bankrupt, but none, at least of­ficially, is destroyed by a competitor. Yet we know competitors do force others into bankruptcy with better products, lower prices, and new tech­nological advances. Again, by prohibiting the use of aggressive language, companies are forced to mask their true motives for actions that are de­signed to weaken or destroy competitors. So they fight this competitive battle with one hand behind their backs, or they carry on without being able to say they are doing so, creating communication and motivation problems that become especially rampant in large companies where there is no way to tell the troops of the unstated intent of many strategic moves.

Finally, pricing below costs can lead to charges of “predatory pricing” or “dumping.” So companies cannot talk about pricing below costs, but they can use transfer pricing and overhead allocations to manipulate costs. For example, if a company sets a low transfer price for a specific component from another one of its plants, it can significantly reduce the overall cost of the final product. Thus, it may be able to price its product below com­petitors but still not price below cost. Similarly, it could adjust how it charges overhead to a specific plant or product. Determining the company’s true costs in such an internal environment is virtually impossi­ble without exploring the entire internal accounting process within the company. Thus, companies may be able to price below their real cost (to enter a new market or to gain market share, for example), but they cannot talk about it, and they can’t keep the books in an accurate way. They must invent fictions to cover up what they are doing.

It might seem that if companies are able to act in the way they need to in hypercompetition, there is no great loss in not being able to openly discuss aggressive strategy. The problem is that, by not openly laying out such strategies, the company loses the ability to mobilize its employees and investors. It is much more powerful and clear for a company to set a goal to “annihilate, crush, and destroy” a competitor than to pursue the same strategy without clearly stating the objective of the company. Foreign companies can do this, but American firms cannot without risk of creating evidence that will be used in a court of law. U.S. executives are forced to talk mildly even when they act aggressively. They appear meek in a world of wolves and lions, creating misimpressions. This confuses employees and forgoes the ability to send competitors effective threats via verbal signals. And it gives rivals the sense that American firms can be attacked without fierce retaliation.

3. The Overall Perverse Effects of Antitrust

The net result of these chilling and dampening effects is to restrain our largest and best competitors, often at the expense of customers, because the law has three perverse effects:

  1. Protecting small competitors at the expense of large firms
  2. Freezing the dynamics of the market process at a time when markets are naturally becoming more dynamic
  3. Forcing American companies to partner with foreign firms when they are prohibited from partnering with other American firms

These effects are perverse because consumers often pay the price for the law’s lack of understanding of the true nature of competition in a dynamic, not static, sense.

PERVERSE EFFECT 1: PROTECTING SMALL COMPETITORS
AT THE EXPENSE OF CONSUMERS

Although government policy may be moving away from the goal of reduc­ing industry concentration and breaking up large firms, the net effect of federal and state actions and private lawsuits is often to protect small companies at the expense of both large companies and consumers. The Robinson-Patman Act was originally referred to as the Wholesale Grocer’s Protection Act because of its intent to protect small grocers against large retail chains.53

An examination of private antitrust lawsuits concluded that “there is reason to suspect that most private antitrust litigation is driven by extor- tion motives” and “antitrust laws do offer a mechanism by which firms can benefit themselves at the expense of their rivals and the consumers of their products.”54

Antitrust cases are brought either directly by smaller competitors or at their instigation. An antitrust case in Arkansas filed by smaller rivals against Wal-Mart seems to be more concerned with the damage done to small pharmacies trying to compete with Wal-Mart than with consumers. The federal investigation of Microsoft has been spurred on by its smaller competitors that stand to gain the most by restraining Microsoft’s contin­ued product innovation. The suit against American Airlines was brought by two smaller rivals. In each case weaker competitors are asking the gov­ernment, courts, or FTC to save them because they cannot stand the com­petitive pressure.

Are customers hurt by Wal-Mart’s low prices? Are they hurt by Microsoft’s dominance of the software industry? Have they been hurt by the volume pricing discounts offered to computer manufacturers (which have been the focus of the government’s investigation)? Could anyone argue that the software industry, with rapid innovation and competitive pricing, has been slowed by Microsoft’s actions? Were customers hurt by the fare wars in the airline industry?

It would be hard to find a consumer in any one of these markets that would complain about these strategies. In hypercompetition there is little danger that a company can kill off its competitors and then later boost prices, so who is being helped by antitrust enforcement? As an article on the Wal-Mart case notes, “Wal-Mart’s appeal to consumers could make it difficult for its challengers to win in the court of public opinion.”55 Yet an Arkansas judge ruled in October 1993 that Wal-Mart had violated state antitrust laws ordering the large discount retailer to pay nearly $300,000 to three Arkansas pharmacies.56

Do small companies even need government protection to thrive? They only need this protection if they are weak and ineffective competitors. But if the small firms are effective hypercompetitors, they will bring down the large companies through direct actions, by outcompeting them. While the major airlines were fighting in court over pricing policies, one of the few airlines to post a profit in the third quarter of 1992 (following the brutal summer fare wars) was a small company that managed to stay out of court.

Southwest Airlines, only the seventh largest U.S. airline, succeeded where the six larger airlines did not because of its impeccable record of delivering passengers and baggage on time, keeping its prices down, and offering dependable, no-frills service. It has lured growing numbers of customers away from larger competitors, allowing it to capture two thirds of Texas air travel. The big players, such as American, have studied Southwest’s ap­proach to see if they can apply some of its strategies.57 Southwest’s greatest protection has come not from government regulations or private lawsuits but from its own ability to identify and create new advantages over its competi­tors.

Even if the small players are truly weaker, it does not make sense to protect weak and ineffective small players by forcing the large players to be less aggressive. Instead it would be a more effective policy to force the smaller players to be more competitive like Southwest Airlines. If small players are using their natural advantages of flexibility and speed, they don’t need antitrust protection.

PERVERSE EFFECT 2: FREEZING THE DYNAMICS OF THE MARKET PROCESS

The second perverse effect of chilling and dampening hypercompetitive behavior is that the law’s goal seems to be to freeze movement along the escalation ladders at a point where the players have competitive parity. Yet in hypercompetition it is clear that the first to jump to the next rung on the ladder (or to restart the cycle) wins. By stopping this movement, the hope is to create a perfectly competitive market where price is set at the marginal cost of firms in the market and their cumulative production output equals the demand for that product at that price. This is, of course, a state of static equilibrium that can never exist in a dynamic world. Freez­ing movement up the escalation ladders in the four arenas of competition means the loss of the firm’s dynamic efficiencies. Thus, the consumer ac­tually pays in the long run for the short-run benefit of a price exactly equal to marginal cost.

PERVERSE EFFECT 3: FORCING U.S. PARTNERING WITH FOREIGN FIRMS

The law’s preoccupation with cooperation as a collusive device has led to the perverse effect of prohibiting many types of alliances among U.S. firms, creating foreign entities and transferring U.S. technology abroad even more quickly. IBM is able to partner with Siemens and Toshiba to

jointly develop and manufacture new RAM chips, but its joint venture with Apple and Motorola can only develop new lower-power consumer chips for laptops. If IBM wants to partner to produce these chips, it must find a foreign partner. Thus, completely integrated deals can be achieved only with foreign firms.

Even though the U.S. antitrust regulations have gone farther than ever before in allowing joint ventures among U.S. competitors, the law has not gone far enough. It still does not recognize that, in the dynamic environ­ments of hypercompetition, the two firms can partner in one area and compete vigorously in other areas. The regulations still do not see that partnering is often designed to enhance the competitiveness of the alli­ance so that it may compete against other alliances.

Consumers are harmed by what amounts to an obsession with collusion conspiracy theory. Any constraint on partnering slows the development of new products, prevents the combination of two firms’ manufacturing ef­forts from achieving economies of scale, and eliminates the creation of new sellers in the marketplace. Moreover, the transfer of U.S. jobs to over­seas joint ventures also hurts consumers because no one consumes very much (except welfare) without a job.

Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.

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