The uncertain future of antitrust: What is needed

Fortunately, most hypercompetitive firms never run afoul of the antitrust laws. In fact, recent court decisions have increasingly recognized the real­ities of hypercompetition. The courts have eased restrictions on competi­tion on price and quality (arena 1 competition). The decision in favor of American Airlines and a ruling in the cigarette industry have made pred­atory pricing harder to prove, for example. In a 1993 U.S. Supreme Court decision concerning predatory pricing (Brooke Group, Ltd. v. Brown and Williamson Tobacco), Justice Anthony Kennedy wrote in overturning a lower court’s decision that “predatory pricing schemes in general are im­plausible.”58 The court held that companies must prove that the company’s “predatory” actions would ultimately lead to higher prices for consumers. The DuPont titanium dioxide case allowed pricing below cost to increase volume if it is done to gain economies of scale or learning- curve effects. In other words, all you need is an excuse to get tough on pricing.

Recent court decisions are also easing restrictions on aggressive compe­tition on timing and know-how (arena 2). The Berkey Photo v. Kodak case indicates that companies can introduce innovations even if they may damage a smaller competitor. But even though appeals courts overturned the original $87 million award against Kodak, the company spent eight years in litigation and still ended up paying $6.7 million to its smaller com­petitor.59

These decisions recognize, at least in part, some of the new realities of hypercompetitive markets. The U.S. Supreme Court’s decision in the Brown and Williamson case emphasized “the realities of the market” above abstract theories.60 These realities, according to the majority opin­ion in the case, recognize that lower prices tend to benefit consumers even if they hurt rivals and that predatory pricing schemes are unlikely to create a sustainable monopoly in the current business environment.61

While the courts are gradually shifting their view, so too is the federal bureaucracy. The rise of the Chicago School of Economics in the 1980s led to less aggressive enforcement by the FTC and the Justice Department. In fact, the antitrust division of the U.S. Department of Justice has shrunk by a third since 1980.62 The number of antitrust suits in U.S. district courts declined from 877 in 1986 to 657 in 1989, and almost all of those suits were private.63

This reduction in antitrust action during the 1980s was precipitated by the Chicago School’s perspective on antitrust and competition. Chicago sees profits not as “monopoly booty” but rather as “rent to unique factors,” that is, rewards for good products and better resources.64 The goal of strat­egy, according to the Chicago School, is not to collude or build monopo­lies but rather to compete aggressively to seek rents.

It argues that antitrust should be relaxed to promote active competition and open and free markets, which they believe result in a type of efficiency called static, or allocative, efficiency. In other words, the market takes care of itself by establishing its own natural equilibrium price. They claim that easy entry and exit creates “contestable” markets, which will attract entry when firms identify profit opportunities because prices are too high. This encourages companies to compete vigorously and results in low prices for consumers.

Unfortunately, the result of many free and open markets was not static efficiency. As noted earlier, hypercompetition results in some firms gain­ing dominance and others losing. Thus, at any given moment in time, price may not fall to the perfectly competitive price. In fact, prices may be raised to support competition in other arenas. Thus, the outcome of the laissez-faire enforcement policy of the 1980s has been considered disap­pointing by traditional antitrust enforcers, who want to see perfect compe­tition and competitive parity among the players.

Unfortunately, the Chicago School may have advocated the right anti­trust policy for the wrong reasons. Open and free markets do achieve effi­ciency, but it is not the type of static efficiency expected by traditional antitrust enforcers. It is dynamic efficiency. The Chicago School has been attacked for positing contestable markets and a hypothetical balance that was not seen during the 1980s. However, Chicago’s conclusions about an­titrust policy are still sound.

1. No Antitrust Policy before Its Time

Chicago may have also asserted its position too soon. Competition contin­ues to heat up in many markets. Technological change creates periodic windows for entry, and global competitors get government help to over­come many barriers. Thus, consistent with the assumptions of the Chicago School, markets are becoming more contestable in the 1990s, and compet­itors are aggressively pursuing profit opportunities. This all results in hypercompetition with constant jockeying for dominance in four arenas of competition, not static efficiency.

Unfortunately the lack of a static efficient outcome has led to some troubling signs of a return to more aggressive enforcement. Changes in enforcement during the 1980s, and maybe even legal decisions, may have had as much to do with politics as with a new perception of competitive realities. Under President Bush antitrust enforcement began to pick up steam. Legislation proposed by the Reagan administration to permanently change the antitrust laws was not passed by Congress. The Clinton admin­istration has given signs that it intends to pursue antitrust even more ag­gressively.

2. What Is Needed: A New Ideology of Competition

The United States must not only reconsider how it enforces antitrust, it should also reconsider the design of antitrust laws in an environment of increasing hypercompetition. As discussed in this chapter, current anti­trust laws are no longer necessary to ensure competition in dynamic mar­kets, and they now have a variety of chilling and dampening effects on dynamic competition. These laws should be redesigned to continue to achieve their original purpose of promoting competition. But the defini­tion of competition must be changed. The view that the only “good” com-petition is perfect competition is dead. It is too static for the future. A new ideology, recognizing the new realities of hypercompetition, is needed. This must effectively promote hypercompetition in each of the four are­nas, encouraging aggressive movement up the escalation ladders, even if this is “unfair” to the losers of these battles.

To the extent that markets remain complacent and less aggressive, the appropriate role of regulators is to increase hypercompetitiveness. Instead of punishing aggressive competitors, government should assure that the slow competitors move aggressively. Laws should continue to limit forms of cooperation that dampen competition, but not if that cooperation is being used for a hypercompetitive purpose, as outlined in the previous chapter. They should allow stronger U.S.-based global competitors to ally with each other and produce benefits for consumers in lower prices and higher levels of innovation. This would also strengthen the overall econ­omy more than protect smaller players, which will also fall prey to large foreign firms in the absence of such change.

Even if the trend toward less aggressive enforcement continues, this is not enough. The laws need to be redesigned to meet the realities of cur­rent competition. No company could survive today using strategies and equipment designed for the markets of the 1900s or 1930s. The world is moving rapidly forward, but the law has not kept pace.

In today’s competitive environment laws must be changed to recognize the realities of hypercompetition. Regulators should also have different policies for industries that are in hypercompetition and those that are not. The government could also utilize tools such as the Four Arena analysis to determine which industries are moving rapidly up the escalation ladders and which may require some intervention to keep them moving. Compar­ison should be made with overseas markets, especially those in Japan and Germany. Thus, the government should be required to classify industries based on whether at least one player is rapidly moving up the escalation ladders in the four arenas. Note that this does not mean all players need to be moving at the same rate on the same escalation ladder. Some may lead in different arenas, and sometimes one firm can be totally dominant on all the ladders in hypercompetition. So large aggressive players should not be the target of government intervention. They are doing a good job. In­stead the weak smaller firm should be made more competitive by encour­aging the use of the New 7-S’s. When the small firms are more aggressive, large sluggish firms should be forced to be more aggressive or broken up to enhance their flexibility and speed. This is in direct contrast to today’s policy, which slows down large aggressive players, leaves sluggish firms alone, and protects weak smaller firms. Thus, the methods of antitrust en­forcement should differ for slow-moving (nonhypercompetitive) indus­tries and for fast moving (hypercompetitive) ones.

SLOW’MOVING INDUSTRIES

In domestic markets that are not currently hypercompetitive, regulations should encourage hypercompetitive actions. The government should move to break up collusive behavior (except when it is used in a hypercompetitive way, as discussed in Chapter 10). In particular, it must eliminate collusive agreements where the funds are being used for higher dividends and inflated wages instead of new product development, cost-reduction programs, market expansion, and other hypercompetitive pur­poses. Actions should also be taken to force players to speed up the lad-ders, if the market is not doing so, by removing disincentives to competition, and making sure entry is free and open (even to foreign com- petitors).

Even in slow-moving industries the government needs to weigh the costs of intervention and carefully monitor movements in domestic as well  as overseas markets. While the government should protect consumers, regulators should also take a broader view to consider and measure the impact of their actions on jobs, innovation, and global competitiveness.

Moreover, regulators must recognize that the dynamics of the market may change naturally. If markets are nonhypercompetitive, a hypercompetitor may enter it, knowing that it can easily dominate the established laggards in the market. Substitute products may be invented, the market may merge with other markets, players may vertically integrate into the market from adjacent industries, or the boundaries of the market may expand to a worldwide market. Enforcement is unnecessary where impending changes will do the job faster and better than the government can and where the number of nonhypercompetitive markets is decreasing naturally due to technological advances, globalization, and all the other sea changes that are present or soon to come.

In some cases intervention may be warranted. The slow-moving U.S.steel industry in the 1950s and 1960s might have benefited from more aggressive government action to shake it up and encourage it to be more competitive. But if, as in Japan, the cooperation at home is used to fund more aggressive competition and expansion abroad, it should perhaps be allowed. Instead, tacitly cooperative behavior in the U.S. steel industry made it a sitting duck for foreign competitors because the profits went to higher dividends and wages, not market disruption. The ideal goal should be to create an environment in which companies compete aggressively at home and abroad, but circumstances sometimes say that forcing firms to do this may disadvantage them against global players with secure domestic strongholds.

In slow-moving industries no player is hypercompetitive—even the in­dustry leader. In this case the leader should be encouraged to be more hypercompetitive. Breaking up AT&T has created a hypercompetitive, high-tech firm out of a large bureaucratic utility. The breakup also con­tributed to the development in the telecommunications industry of sev­eral strong and aggressive Baby Bell competitors, which have become suc­cessful players in global competition. By the end of the 1980s, the Bell operating companies and AT&T were spending a larger share of revenues on research and development than before the breakup. The estimated an­nual welfare gains from repricing services ranged from $664 million to $ 1.4 billion through 1988. Overall, “the efficiency gains from the opening up of the telephone industry have more than offset the possible losses that may be caused by the sacrifice of economies of scale and scope or the absence of fully compatible equipment and services.”65

Although this may not have been the reason for AT&T’s breakup, the dissolution of large firms that have lost their spirit to dominate by rushing up the escalation ladders could make a big difference in the U.S. ability to compete in global markets. In contrast, however, most antitrust suits and traditional enforcement efforts have focused not on the laggards but on the aggressive large firms.

Government action to increase competition would make domestic mar­kets more aggressive, benefiting consumers by encouraging dynamic effi­ciency. It would also strengthen companies in global competition, thereby benefiting the nation.

HYPERCOMPETITIVE INDUSTRIES

In hypercompetitive environments, however, the government should rec­ognize the dynamic efficiency of hypercompetition and take a more laissez-faire approach to regulation. It should let the dynamic efficiency of the market work and correct itself, even if it leads companies temporarily to build strong positions. Liberal permission for joint ventures, mergers, alliances, and other partnering arrangements should be granted because such arrangements are rarely collusive or monopolistic in nature. They only enhance competitiveness. In sum, the government should refrain from slowing down the winners or freezing competition at competitive parity.

The government should not hammer the nail that sticks out. If an in­dustry leader emerges, it should be congratulated, not punished. It is inter­esting that on an individual level, American culture theoretically is based on rewarding individualism and personal achievement. However, on a corporate level, there is quite the reverse ideology. Yet in Japan individu­als are hammered if they stick out, but corporations are not.

3. The Self-Destruction of Antitrust Bureaucracy

By pursuing a policy of encouraging competition in sluggish industries and limiting involvement in hypercompetitive industries, regulators would be working to move all industries into hypercompetition. Thus, in the long run the goal of antitrust regulators should be to put themselves out of busi­ness. This should be an easy task given that most industries are gravitating toward hypercompetition on their own.

THROWING FUEL ON THE FIRE

It is clear most industries will move toward hypercompetition in the next few years if they are not already there. To fuel the fires of this process, the government should turn up the heat, creating pressure that forces hypercompetition. The fuels for these changes seem to be globalization, technological change, and increased information-processing abilities.

To fuel the fires, the government can fan the flames of hypercompeti­tion by making sure that U.S. markets remain open to foreign entry and U.S. firms have few regulatory barriers to the adoption and sharing of new technologies and information processing methods. In this way the govern­ment provides firms with the incentives to race up the escalation ladders faster than their competitors and access to the technological and informa­tional resources necessary to do so.

CHANGING LAWS

Legislators must also reshape federal and state laws to limit private nui­sance suits that dampen hypercompetitive behavior. Without this type of legislation, private lawsuits could undermine any change in direction of

U.S. regulatory policy. In addition, diverse state laws can wreak havoc with competitors such as Wal-Mart that operate across a wide range of states and compete aggressively in a variety of markets. The federal gov­ernment should take federal jurisdiction over the law and supersede all state antitrust laws so that there is one uniform policy.

ASSESS THE DAMAGE OF THE CHILLING AND DAMPENING EFFECTS

Congress or the Federal Trade Commission should also conduct a study of the true costs of antitrust enforcement and legal cases. It should determine the extent of the impact of the chilling and dampening effects described above. It should assess the impact of legal costs and the cost of tying up management in lawsuits for U.S. companies. There should also be an at­tempt to assess whether the government can act fast enough to correct problems of antitrust enforcement in hypercompetitive environments. As suggested by the discussion above, it appears likely that the hidden costs and damaging chilling and dampening effects of the antitrust laws far out­weigh the positive benefits. If so, the causes of these effects must be re­moved.

DECRIMINALIZE COMPETITION AND SUCCESS

In a political environment in which government officials are targeting government waste, antitrust enforcement should be carefully examined just on its costs alone. Actions to control crime are a necessary expense of society, but costly enforcement of laws that are ineffective and make crim­inals of successful competitors is an unconscionable expense. The salaries and expenses of the Federal Trade Commission and Justice’s antitrust di­vision totaled more than $100 million in 1992.66 A more careful examina­tion of the benefits of these costs should be made, especially since the mar­kets will adjust themselves much more quickly as hypercompetition spreads everywhere.

4. It’s Time for Robin Hood to Look beyond the Trees and See the Forest

Antitrust legislation has noble objectives. In an environment in which large and powerful corporations had many opportunities to abuse their market power, consumers and small competitors may have needed a fed­eral Robin Hood to keep the big players in check and protect the little ones. When the competitive system did not provide this protection on its own, it was necessary to have an outside force that would work to keep players in check.

But today it is increasingly apparent that this protection is not effective, not needed, and has damaging effects. Now the arrows that are being lobbed out into the competitive arena are missing the mark, hitting inno­cent bystanders, and killing off the good guys—successful competitors that are the best at serving customers and the best hope for the future of U.S. competitiveness. Robin Hood may have served his purpose—protecting the little guy— at a time when he was needed. But now the customers who were supposed to be protected by the federal agencies are hurt by actions that force companies to charge higher prices, hold back on innova­tion, not enter new markets, and not collaborate to meet foreign competi­tion. These consumers, who are also employees, are hurt by the loss of U.S. jobs to foreign firms. It is clearly time for Robin Hood to see beyond the trees of Sherwood Forest and realize that there is a bigger picture, a sea change in the environment, that is reducing the need for antitrust inter­vention.

Like companies in hypercompetition, America faces a critical choice. It can embrace the new reality of hypercompetition—designing its policy to meet the new demands of this age—or it can hold onto the past. The latter course leads to the loss of the initiative and places the nation and its cor­porations on a downward spiral of decline. Allowing intense and aggres­sive U.S. competitors to continue their behavior also will help keep jobs in the United States, benefiting U.S. workers and the U.S. economy. If, however, the debate becomes a battle over politics or over economic ide­ology rather than a critical examination of the realities of current markets, the United States could enter a period of endless shifting in antitrust pol­icies that could undermine its most successful firms.

If large U.S. companies are to continue to succeed in the intense com­petition of international markets, the laws must be reshaped to allow and encourage the creation of temporary advantages and the disruption of competitors. The United States can no longer bind the hands of the nation’s best competitors and expect them to survive the fierce combat of global competition. No one, not even American institutions like IBM, GM, Xerox, Kodak, American Express, and Sears, can sustain advantages, build monopolies, or create collusive oligopolies today. They can only re­sort to the New 7-S’s, create temporary advantage, and fight more aggres­sively, as Coke, Pepsi, Intel, Microsoft, Ford, Motorola, American Air-lines, and hundreds of other U.S. firms have done. The law ought not to stand in any of their ways.

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

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