The obsolescence of antitrust

Antitrust laws were originally designed as a counterweight to the power of large corporations. These laws leveled the playing field for the “little guy”: customers and small competitors. They were supposed to prevent monop­olies, collusion and price fixing, predation, and exclusionary practices. These laws were created in a time of robber barons. But now, even though the robber barons are dead, America is still suffering under the same regu­lations that were used to constrain their power by Teddy Roosevelt in the trust-busting era of the early 1900s and by Franklin Roosevelt during the 1930s.

Today the power of large corporations, derived from sustainable advan­tages of these firms, is being rapidly eroded. Author Ron Chemow com­ments, “Years back, there was a tremendous fear about the power of Amer­ican business; now there’s a tremendous fear about its weakness.”15 Companies are only as successful as their next dynamic strategic action. Tiny companies such as Microsoft suddenly become powerhouses, and powerhouses such as IBM sink beneath the waves of competition. More­over, consumers do not need as much protection in an environment where hypercompetition makes the customer king. As soon as a firm stops satis­fying customers, it is replaced by one that is more customer oriented.

1. Who’s Afraid of the Big Bad Wolf Now?

The record of antitrust actions against IBM and General Motors are cau­tionary tales about the declining value of current antitrust regulations in hypercompetition. These stories also provide some indication of the sur­prising costs of antitrust enforcement for U.S. competitiveness.

After a grueling thirteen-year antitrust lawsuit, the Department of Justice dropped its case against Big Blue in 1982. The government collected 760 million documents from IBM during the litigation, and IBM’s lawyers moni­tored corporate meetings to keep from fueling the fires during the time that IBM was under siege.16 But by then the damage was done. Although there were many factors that contributed to IBM’s decline, the litigation certainly worked to make the company less aggressive and less flexible. The lawsuit, in the words of the chairman of a large IBM competitor, “gave the lawyers too much power and made the company risk-averse.”17 It dampened IBM’s aggressiveness. IBM’s delays in seizing opportunities in personal comput­ers, RISC-based chips, and other areas have been blamed, in part, for its decline. As just one example of lost opportunities, IBM passed up a chance to purchase a 10 percent share of Microsoft in 1986 (which would have re­sulted in a profit of more than $2.6 billion) “because it worried about seem­ing to dominate the PC business too thoroughly.”18 Between 1986 and 1993 IBM cut more than one hundred thousand jobs.19 In 1992, struggling to stay above a sea of red ink, IBM announced plans to cut another twenty-five thousand workers, shave $25 million from product development budgets, and $1 billion from administrative expenses20 Despite these moves, IBM posted a $4.97 billion loss in 1992.21

In 1936, holding more than 50 percent of the U.S. auto market, General Motor’s management concluded it could not seize more of the market with­out triggering severe antitrust actions.22 For more than thirty years this policy was effective. General Motors would let other competitors open new mar­kets, always keeping its overall share of the market around 50 percent. When Volkswagen entered the U.S. market in the 1950s and 1960s, GM did not counter the new entrant forcefully as it had done successfully against VW and Fiat in Europe. As one commentator noted, “At the time, GM was very much under the anti-trust gun. Dupont had just been ordered to divest itself of its holdings of GM shares; there were anti-trust suits regarding GM’s truck and bus business, its earth-moving equipment business, and its loco­motive business.”23 To preserve this 50 percent limit, GM sat by as Euro­pean and then Japanese competitors established their toeholds in the U.S. market. So while domestic and foreign competitors were moving aggres­sively into new markets, General Motors was treading on eggshells, per­haps even backpedaling to ward off lawsuits.

Certainly this was not the only factor in GM’s precipitous decline, but it contributed to a culture that was slow to respond to change and seize new opportunities. In 1992 GM posted a stunning $23.5 billion loss. GM’s control of more than half of the U.S. auto market in the 1960s fell to less than 35 percent in 1992. Meanwhile, foreign companies collectively gained an equivalent 35 percent share in the U.S. market24 with active support of their home governments.

In both these cases the government and corporate executives were as sure of the invulnerability of large corporations as the builders of the Ti­tanic were sure it was unsinkable. As Robert B. Coulton, a management consultant and former GM employee remarked, “General Motors was so large and so wealthy, the chairman’s biggest worry used to be that the gov­ernment would break up the company.”25 Both regulators and executives were shocked and surprised at how rapidly advantages can be lost in hypercompetition.

These cases illustrate that markets often are more effective than gov­ernment action in ensuring that large competitors do not abuse their power. As the Economist comments: “After thirteen years, America’s Jus­tice Department dropped its probe into IBM because the computer indus­try had changed beyond all recognition, and because IBM had started to show signs of the malaise which now cripples it. A similarly long-winded investigation of Microsoft would be overtaken by technology twice as swiftly. That is why both the FTC and the Justice Department should get off Microsoft’s back.”26

2. Markets Replace Antitrust Law

Dominant firms cannot become enduring monopolies, and oligopolies cannot develop long-term, cozy cooperative agreements, because of the rapid and incessant progress of hypercompetition in the four arenas. Com­panies that use pricing and other strategies to drive competitors out of a market will find that this strategy only works as long as customers are sat­isfied by the low prices because as soon as the prices increase, reentry is easy. Companies use exclusionary tactics to create entry barriers, but even these do not hold for long, as discussed in Chapter 3.

Moreover, market boundaries continue to grow, making antitrust laws unnecessary. As markets globalize, it is very difficult to create a global mo­nopoly or even oligopoly. Traditional antitrust laws fail to be effective be­cause they were designed for a U.S.-dominated economy. When the pri­mary market was the U.S. market and even world markets were dominated by U.S. firms, U.S. regulators could control the entire competitive dynam­ics of the system. But now large parts of the system are out of their control. By holding back domestic competitors to protect smaller domestic firms or domestic consumers, antitrust suits can dampen the ability of U.S. firms to act aggressively against international competitors.

Thus, once useful for constraining the power of monopolists, antitrust laws have become a dead weight suspended from the necks of some of America’s most successful firms.

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

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