Antitrust policy and the need for a fundamental shift in American ideology

Traditional antitrust laws were created to respond to the needs of the old realities of competition. They are based on the assumption that mar­kets are static and companies can build sustainable advantages that result in monopolies or quasi monopolies. Antitrust laws were also designed to counter the power of large corporations that sought to sustain their advan­tages through oligopolies using collusive bargains.

Those laws were intended to prevent monopoly or oligopoly by encour­aging perfect competition and “fair play.” The idea was to achieve perfect competition by forcing firms into competitive parity. The method was to create a level playing field where a fair fight could occur and no one would dominate. This was like boxing where matches are based on pitting fight­ers of equal weight against each other and having rules that prohibit hit­ting below the belt.

Yet we know that parity is not the goal of hypercompetition. Competi­tive parity would mean all the players are frozen at the same rung of each of the escalation ladders in all four arenas, thereby eliminating any form of dominance or advantage. Part I clearly established the problem with this idea of parity when markets are highly dynamic. Players must continually jockey for leadership positions by racing up the ladders, restarting the cy­cles within each arena, and opening up new or temporarily dormant arenas unexpectedly. Size can be an advantage or disadvantage in achieving these hypercompetitive goals, but equal size is never assured.

Moreover, the antitrust laws as they are traditionally designed are no longer necessary for ensuring vigorous competition in hypercompetitive markets. Advantages are not sustainable in hypercompetition. Entry bar­riers are tom down and collusive behavior is impossible. Companies de­velop rapid product innovation, engage in intense price/quality competi­tion, initiate market expansion or entry, form alliances with others, or build deep pockets. When firms race up each of the four escalation ladders, the market itself creates four types of dynamic efficiency. As discussed below, this dynamic process benefits consumers and gives smaller compet­itors a chance to disrupt the status quo at any time.

This chapter will address how antitrust laws are designed to generate static efficiency and to promote fair play in ways that tend to destroy the dynamic efficiency of the market. Antitrust laws are not only ineffective in hypercompetition; they also appear to limit the very strategies compa­nies need to use to succeed in hypercompetitive markets. Applying tradi­tional U.S. antitrust enforcement in an environment of hypercompetition is like driving a Model T on an expressway. The law moves too slowly to keep up with the traffic in the market, and what was once effective trans­portation has now become a threat to survival.

1. America’s Most Wanted

Many of America’s most successful companies have found their way onto the Most Wanted list at one time or another because of their successes. They were hotly pursued by the Department of Justice or Federal Trade Commission or hauled into court by their smaller rivals. The irony is that these highly competitive firms are charged with anticompetitive behavior for being too competitive and too good at serving the customer.

As noted in the introduction, Microsoft is one of the most successful soft­ware companies in the world, posting earnings of $708 million in the 1992 fiscal year. Business Week reports that the company created more than six thousand new jobs between 1989 and 1992¹ and is a fierce international competitor because it is hypercompetitive. In addition, Microsoft claims that another five hundred new companies are developing software for Windows, creating another eighteen thousand jobs.²

For this success Microsoft was rewarded with an FTC probe which, Busi­ness Week reported, considered such options as breaking the company into pieces, erecting a “Chinese wall” between divisions, or changing the way it sells software to computer makers.³ Among other issues, Business Week reports that Microsoft has been criticized for allegedly announcing its new products early and using its advance knowledge of software develop­ments to aid the development of applications programs.⁴ Business Week reported that Microsoft could also face private lawsuits from rivals.⁵ After two deadlocked votes by the FTC, which didn’t end the investigation, the Justice Department began reviewing documents in 1993 to determine if it should launch its own investigation of Microsoft. If Justice decides to take on the case, analysts estimate that the probe could take as long as the FTC investigation. So the specter of federal action could hang over Microsoft, without any formal charges, for years to come⁶

American Airlines is another hypercompetitive U.S. company under attack for antitrust reasons. As discussed at the opening of the book, American has moved aggressively from advantage to advantage, from developing the business class to launching frequent-flier programs. It has also been an ag­gressive competitor, restructuring pricing and using what has been called dogfighter tactics.⁷ Between 1983 and 1988, while other airlines were cut­ting back staff, American Airlines increased its workforce by 81 percent to seventy-eight thousand employees.⁸ American is also a fierce international competitor, boosting overseas flights from 12 percent to 26 percent of its total revenues between 1988 and 1992.⁹ American and other U.S. airlines dominate flights between the United States and virtually every major foreign market.¹⁰

In May 1992 American again seized the initiative with a simplified fare structure and half-price promotion that sent competitors scurrying for the courts. Business Week reported that American was sued by rivals for pred­atory pricing, and CEO Robert Crandall appeared before a Senate commit­tee investigating accusations that American was trying to drive out weaker competitors.¹¹ A federal court ultimately cleared American in 1993 of charges that it was trying to drive competitors out of business, but the rivals that filed the suit were considering an appeal.¹²

Even though competitors claimed American was too dominant, the pre­carious nature of American’s strength was driven home by its $1.2 billion loss over the three years preceding 1993. It has been forced to concede markets to small, lean, and flexible competitors such as Southwest Airlines and Reno Air, which have been able to outmaneuver their large rival.¹³

2. Killing the Goose That Laid the Golden Eggs

U.S. companies such as Microsoft and American Airlines are frequently punished for the very types of activities that are necessary for survival and success against foreign competitors in hypercompetitive environments. These companies are moving aggressively up the four escalation ladders. They are racing to seek new advantages and competing intensely on price and quality as well as timing and know-how. They are building and under­mining strongholds, and using the deep pockets they develop from one round of competition to build their next temporary advantage. For exam­ple, Microsoft replaced its simple DOS operating system with Windows and may erode the new Windows stronghold with its NT software. The company used the resources from MS-DOS to move to its next advantage in Windows rather than try to shore up its position with DOS, as would have been the traditional strategy of sustaining advantage. In every arena these companies have acted as aggressive hypercompetitors and have been a model for successful world-class competition. Yet this behavior is criti­cized by competitors as an unfair and monopolistic practice, despite the clear benefits to society of rapid product improvement.

The danger of a government policy that hunts down such companies is that it could end up destroying companies that are the nation’s best hope for succeeding in global hypercompetitive markets. As one senior FTC official acknowledged in describing the challenge of the federal government’s probe of Microsoft, “Everybody understands how important this industry is to us. We need to fix this thing without killing the goose that laid the golden egg.”¹⁴ Can the government force a company to be less hypercompetitive and at the same time expect it to succeed in an in­tensely competitive global environment?

There is an even more fundamental question policymakers must an­swer: Are antitrust laws needed in hypercompetition? Traditional views of antitrust are based on an assumption that markets are static and advan­tages are sustainable. This book has demonstrated what managers now see on a daily basis—that markets are, in fact, dynamic and advantages erode rapidly in hypercompetition. The boundaries and shape of markets are changing so rapidly that it is hard to know whether today’s market will even exist tomorrow. This shift in the realities of the environment calls for an equally fundamental shift in antitrust policy.

While views adopted by the Reagan administration were more laissez- faire than traditional models of antitrust, the views of the Reaganites never completely took root in the government. Congress refused to adopt into law Reagan’s proposed relaxation of criminal antitrust restrictions. Even though most are unsuccessful, hundreds of private suits are still per­mitted by the law, carrying the potential of treble punitive damages. States aggressively continue to enforce more restrictive policies, and the big question is whether the future will bring a return to aggressive federal en­forcement supported by traditional antitrust views at a time when the pub­lic demand for populist, anti-big business revenge is growing because of the sagging economy. Yet in an age of hypercompetition, America should be asking whether we can afford the price of enforcing laws that are no longer needed.

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