COPING WITH MARKET POWER IN THE MODERN ERA

Draft of a paper for the Hudson Institute

March 2007

Irwin Stelzer[^1] THIS IS THE FINAL VERSION TO PRINTER

> "In the United States ... there is much

current debate about what the law against

monopolization is, and should be."[^2]

"Unilateral or 'single-firm' conduct ... still

> vexes.... The question of the proper test
>
> that our agencies should apply to conduct
>
> of a single firm with market power now has
>
> dominated antitrust debate for several years.
>
> We are not alone.... Currently, the issue of
>
> how to evaluate unilateral conduct is the
>
> most heavily discussed and debated area
>
> of competition policy in the international
>
> arena."[^3]

With a new Congress prepared to review regulatory and competition
policy; America's enforcement agencies also undertaking a joint review
of the application of existing policy to dominant firms,[^4] and an
independent commission[^5] doing the same; authorities in Europe
re-examining past policies towards firms with substantial market power;
and countries all over the world, including most notably China,[^6]
considering adopting or modifying competition policies;[^7] it seems a
good time to attempt to make a contribution to the discussion, or at
least to that part of it dealing with the knotty problem of the scope of
activities to be permitted to firms with substantial market power.

Americans have never been comfortable with unconstrained private power,
which is why we have traditionally attempted to regulate it or, better
still, adopt policies that encourage and maintain sufficient competition
to reduce the effect of excessive market power on the operation of free
markets and social mobility. This discomfort is sometimes quiescent, at
other times noisy; sometimes a spontaneous response to an exercise of
corporate power that the public finds unacceptable, sometimes a response
whipped up by office-seeking politicians for whom business-bashing seems
a promising route to power of their own. It is, in other words, many
things at many times.

[The Modern Corporation]{.underline}

But one thing it is not, is new. Long before 1890, when Senator John
Sherman persuaded his colleagues to adopt legislation to control the
monopolies of his day, and President Benjamin Harrison signed Bill S.1
into law, Americans found it difficult to come to grips with what Irving
Kristol has called the "accidental institution" that is the modern
corporation.[^8] Designed to permit an agglomeration of capital that
would create firms large enough to take advantage of economies of scale,
while limiting the liability of its investors, features that according
to one historian "opened up the modern capitalist system that has
brought prosperity to every society that has ever properly adopted
it,"[^9] the corporation is, again quoting Kristol, "a quasi-public
institution ... which liberal democracy never envisaged, whose birth and
existence have been exceedingly troublesome to it, and whose legitimacy
it has always found dubious."[^10] These entities were easier for a
liberal democracy to accommodate when they existed for a single purpose,
such as the construction of a canal, than when they became all-purpose
businesses---"persons" with eternal life and virtually limitless reach.
As two astute observers of the American scene put it, the power of these
companies stems from the fact that "they possess most of the legal
rights of a human being, without the attendant disadvantages of biology:
they are not condemned to die of old age and they can create progeny
pretty much at will."[^11] Little wonder that they were seen as
"strange, gigantic, ruthless and awe-inspiring" by the time Senator
Sherman turned his attention to them.[^12]

With reason. First, the corporation may be and is "a person" in the eyes
of the law, but it has no form that the citizenry can identify and hold
accountable. The public needs to have "real people" such as John D.
Rockefeller to blame when the accretion of market power threatens the
public's ability to rely on the market to protect its interests and
welfare. Second, the modern corporation exerts substantial power, not
necessarily in the market for its output, but over the lives of its
employees and suppliers, as the recent downsizing of the American
automobile industry indicates. Third, the modern corporation, for all
its protestations of social responsibility, still has---or should
have---the goal of maximizing shareholder value, whereas the smaller,
often family-controlled firms it replaced could and sometimes (but far
from always) did adopt a more paternalistic attitude towards their
employees and the communities in which they operated.[^13]

At some point in their history, corporations, already deemed worrisome
institutions by many, grew to a point where they created two problems
for society: control slipped from their owners to a cadre of managers
whose interests were not at all times (if ever) aligned with those of
the shareholder-owners; and in some cases monopoly power was acquired by
means other than sheer efficiency and serving the interests of
consumers. Add these problems to the other misgivings, and America's
love-hate relationship with the big corporation---the entity that brings
them the benefits of economies of scale and global reach, but also seems
at times beyond their control and just too powerful---becomes
understandable.

The first of these problems meant that the corporation was no longer, if
indeed it ever had been, a democratic institution.[^14] Society was
faced with organizations with capitalization and sales levels reported
in numbers containing strings of digits until then only associated with
governments, its owners unable to control its policies. This was brought
sharply into focus when Adolf A. Berle and Gardiner C. Means published
their classic, *The Modern Corporation and Private Property*.[^15]

"The separation of ownership from control," they wrote, "produces a
condition where the interests of owner and of ultimate manager may, and
often do, diverge, and where many of the checks which formerly operated
to limit the use of power disappear."[^16] This is the agency-principal
problem that has not been solved by generations of tinkering with the
laws under which corporations operate, witness the current rows over the
levels and forms of compensation bestowed on executives by often
less-than-independent boards. It remains the case that so-called
enforcement costs---the costs to scattered owners of comparing the
performance of a corporation with its potential, of appraising the
competence of management, and of mounting a challenge to the existing
management---give managers "considerable discretion in their choice of
what goals to pursue."[^17] "Considerable" but not complete, since
minority shareholders are at times capable of forcing themselves unto
the boards of their companies,[^18] and since Mike Milken's development
of financial techniques has made it easier for corporate raiders to
mount takeovers of companies with slothful or self-serving managements,
which might provide a workable substitute for a closer link between
owners and managers in cases of major management misfeasance.[^19]

This nervousness about the corporation increases when our second problem
emerges---a company acquires monopoly power. Hence the body of law that
constitutes what we call competition policy. The 1890 Sherman Act,
whether conceived originally merely to maximize consumer welfare, as
some contend,[^20] or having broader social and political goals, as
others argue,[^21] did succeed in bringing some of the worst corporate
actors---the "malefactors of great wealth," as Teddy Roosevelt dubbed
them---to heel and, as amended, succeeded in placing limits on mergers
that have the potential of substantially lessening competition.

But its critics contend that the antitrust laws have done more than
constrain those worst actors; the statutes and the body of judicial
decisions associated with them have often stifled "hard" competition by
placing unnecessary constraints on the ability of firms with large
market shares to engage in a variety of practices that are
pro-competitive, for example, by creating a fear in executive suites
that competitive price cuts will be deemed "predatory."[^22]

This is not the place to resolve the dispute between those who worry
that the antitrust laws stifle competition, and those who argue that
without the constraints they impose on the use of abusively acquired
market power, competition will be weakened. Suffice it to say here that
the courts in the United States have consistently made clear that size
alone is no offense, and that market power acquired only "as a
consequence of superior product, business acumen, or historic accident"
is not objectionable.[^23] Authorities in the EU hold a similar view. In
a recent paper they note that the purpose of their regulations is "not
to protect competitors from dominant firms' genuine competition based on
factors such as higher quality, novel products, opportune innovation or
otherwise better performance, but to ensure that these competitors are
also able to expand in or enter the market and compete therein on the
merits, without facing competition conditions which are distorted or
impaired by the dominant firm."[^24]

But it is the place to attempt to resolve another question: whether the
body of competition policy that has evolved over the years can usefully
be applied to the fast-changing, high-tech world of today, and if so, by
whom. Those who believe that US competition policy was ill-conceived
from the start will, of course, be unpersuaded by any argument that it
remains an important policy, worth preserving, and therefore need read
no further. Those who care to proceed will find this paper divided into
two parts: a consideration of the applicability of competition policies
forged in the day of brawny manufacturing to our economy of brainy
high-tech companies; and some thoughts on the role of private parties in
enforcing competition policy.

[Applicability of Competition Policy to Today's Economy]{.underline}

Even the most casual student of antitrust policy will know that almost
every change in the circumstances in which our industries operate---the
emergence of large-scale manufacturing, the conglomeration movement,
globalization, increased importance of research and development---has
led to calls for major revisions of policy. Those who found the changes
threatening would call for a tightening of policy, such as rules to
limit the size of corporations, or rules that would discourage even
those mergers aimed solely at diversification, rather than an increase
in market power.

At other times a change in economic circumstances resulted in calls to
loosen policy. When the nation was in the throes of the Great
Depression, many critics of antitrust policy received a sympathetic
hearing from policy makers[^25] and the courts[^26] when they argued
that the solution to the perceived ills---low prices and high
unemployment---was a relaxation or repeal of the laws that prevented
businesses from conspiring to raise prices. More recently, critics of
antitrust policy have been arguing that firms in rapidly changing,
high-technology industries[^27] must be given greater leeway in pricing
and other business practices, and that globalization so increases
international competition, both actual and potential, that consumers are
sufficiently protected against the possibility of exploitation to make
antitrust actions more or less redundant.

It is testimony to the durability of the economic concepts underlying
antitrust policy that it has been able to adapt to the changes in the
American economy over almost 120 years without interfering
with---indeed, continuing to contribute to---the forward march of the
economy.[^28] Neither the increased importance of high-tech
industries---if, indeed, we have witnessed such a phenomenon (remember
that the Standard Oil Trust was considered the high-tech company worthy
by some of special treatment in the 19^th^ century)---nor globalization
requires abandonment of these core concepts.

As for new technologies: Peter Freeman, Chairman of the UK Competition
Commission and a lawyer with a lifetime of experience in antitrust
matters, put it after considering just how "new" the "new economy" is,
"Our main concepts and tools of analysis---which are themselves becoming
increasingly sophisticated and quantitative over time---are likely to
remain generally suitable for the task ... \[of\] dealing with
technology issues."[^29] Surely, the threat to the durability of
monopoly positions from the increased pace of technological change can
be accommodated by taking account of the effect of potential
competition, or the "contestability" on the durability of entrenched
positions.

As for the emergence of international competition, it is also easily
accounted for by expanding the definition of the geographic market in
which competition occurs to include sources of products with unimpeded
and economic access to the domestic market.

But are these adaptations sufficient to ensure the continued relevance
of traditional competition policy to so-called high-tech, global
industries? This is a question surely worth considering now that these
industries play such a prominent role in our economy.

[The New Critics]{.underline}

The new critics of competition policy worry that even with realistic
definitions of such concepts as the scope of geographic markets and the
extent of contestability, traditional competition policy cannot cope
with the fact that monopoly power, when it does emerge, is so transient
that any attempt to cure it by recourse to the antitrust laws will do
more harm than good. Yes, they say, some firm in a high-tech industry
might use its market power to disadvantage a competitor, or to create
barriers to entry, but that market power will soon wilt in the face of
new technology. To take drastic measures to reduce the market power
before natural market forces do the job is somewhere between futile and
counterproductive.

In my view, that argument fails for two reasons. First, it ignores the
fact that even if all markets are, in the long run, contestable, the
long run can be very long indeed. Certainly, it can be long enough to
allow a dominant firm to earn substantial monopoly profits, and to leave
the corpses of several potential competitors strewn across the economic
landscape, or at least to keep the survivors on life support.

Second, and more important, it is not the case that all market power is
transient. Dominant firms, freed of the constraints imposed by
competition policy, can engage in practices that create virtually
insurmountable barriers to entry[^30] and the development of more than
token competition, with a consequent loss of consumer welfare. "All in
all, proper R&D incentives require at least some potential competition.
In a stable monopoly position, the incentives for R&D are limited,"[^31]
writes one scholar---and nothing stabilizes a monopoly position so much
as uninhibited ability to deploy the weapons naturally associated with
market power. Or, as three international scholars recently put it after
an extensive review of the economic literature, "It seems to us that
there are no strong normative conclusions in this literature to calm the
apprehensions of those who have never been persuaded that the
unregulated activity of large, dominant firms which characterize many
modern markets has benign effects on welfare."[^32]

In recent articles and in conversations with several distinguished
economists skeptical of the desirability of unsheathing the antitrust
sword to slay the monopoly dragon, the case of AT&T was raised.[^33] The
new and, it should be noted, many not-so-new critics, point out that
what the courts tore asunder the market is now reconstituting through a
series of mergers of local and long-distance telephone companies. Had we
only let the market work its magic, we would have been spared the costs
associated with recourse to the legal system.

This analysis fails to take account of several important facts. AT&T in
its pre-break-up form undeniably had very substantial market power, some
of it garnered by coercing independents.[^34] Although "the list of new
technologies created by \[the\] Bell \[System\] ... is impressive," and
employees of the Bell Labs did feel "we were part of a holy crusade to
improve the world's communications and thereby to improve the lot of
man,"[^35] as a former employee points out, my observation is that AT&T
executives managed technological change at a measured pace, designed to
preserve the value of the company's existing assets and to allow it to
preserve its vertically integrated structure. A combination of its
ability to manage---some might say "game"---the regulatory process,[^36]
and performance that compared favorably with the then-dismal performance
of foreign telecom companies, many of them state-owned, kept the public
and politicians sufficiently satisfied to prevent a clamor for removal
of barriers to entry. AT&T prohibited "foreign attachments" such as
answering machines, or any device not manufactured by its subsidiary,
Western Electric.

After the break-up---and not only because of it, to be sure---the pace
of change accelerated in a way that would have been impossible under the
old regime. According to one careful study that doesn't stint in its
praise of the accomplishments of Bell Labs, AT&T "sometimes failed to
put the ensuing inventions to use, either because they threatened to
undermine current revenue streams or because management did not
appreciate the inventions' potential in the marketplace."[^37] It is one
thing to say that new technologies would have eroded AT&T's market
power---eventually; it is quite another to demonstrate just how
potential entrants would have been able to raise capital and begin the
arduous task of confronting a firm with the regulatory nous, market
power, and attendant political power, of the integrated Bell
System.[^38]

Because of the dissolution of that system, competitors had space in
which to develop, so that we now have wireless telephony,
voice-over-internet, and at least a few competitors vying for consumer
favor. Alfred Kahn, a close student of regulatory and competition
issues, lists the following as achievements of the deregulation that
followed dissolution of the old system: a sharp fall in long-distance
rates; more efficient price structures; "a proliferation of
telecommunications services and equipment"; and increased
efficiency.[^39]

The reconsolidation that we are witnessing is not a restoration of the
old monopoly power, but an attempt to put together an entity capable of
coping with the competition that sprang up after the AT&T breakup,
partly as a result of that change in structure, partly as a result of
the rush of technology. If this analysis is correct, successful
antitrust enforcement can reasonably claim some credit for the advances
in telecom competition, and associated innovation, since the dissolution
of the AT&T monopoly.

So the lesson of AT&T is not that the dissolution was a useless
application of competition policy.[^40] The lesson is that a dominant
firm, able to control the pace of innovation, did just that, and when
its dominance was ended by application of antitrust policy, massive
leaps in innovation occurred.

This came as no surprise to students of the history of antitrust policy.
F.M. Scherer notes that during the period of Standard Oil's dominance
(the company held 80 percent of U.S. refining capacity in 1880)
innovation as measured by patenting activity was lower than in earlier
periods, but that after the company's dissolution into 34 fragments,
"there is new growth and substantial increase in the lever of
patenting."[^41]

[Market Dominance and Innovation]{.underline}

Moreover, if innovation is indeed now more than ever an important driver
of productivity and, therefore, of advances in our standard of living,
it is more important than ever that dominant firms not be allowed to
control the pace at which innovations are developed and introduced by
deploying tactics that create barriers to entry or artificially limit
the growth of firms that do succeed in wedging themselves into the
market.

I would proceed from that reasonable assumption to another, equally
reasonable in my view: rapid diffusion of innovation can be assured only
by preserving a competitive marketplace. There is no denying that
"despite the very extensive literature on the subject, the issue of the
links between market power and innovation is still not settled."[^42] As
between those who argue that only large firms have the optimal scale for
innovation, and those who argue that dominant firms have little
incentive to innovate, I come down on the side of the latter.

First, any sensible comparison of economies in which competition policy
exists and is enforced, with economies in which cartels and national
champions are encouraged, must lead a dispassionate observer to conclude
that competition produces superior economic performance. An econometric
study by economists at the Federal Reserve Bank of New York concludes,
"Greater competition produces large effects on macroeconomic
performance.... Lower levels of competition are associated with
significantly reduced output and consumption and home and abroad...";
had the EU adopted the more deregulatory and competitive US model, its
output would be some 12.4 percent higher.[^43]

Second, studies comparing the innovation records of dominant firms with
those in more competitive industries generally contain an intrinsic bias
in favor of the former. These studies are observing the behavior and
performance of the dominant firms operating under the constraints
imposed by competition policy. For that reason, these studies provide no
basis for conclusions about the effectiveness of competition policy in
producing more rapid innovation: remove the constraints, and the
dominant firm might well see little reason to maintain its previous pace
of innovation, confident that if a competitor rears its head, it will be
able to lop it off with tactics not now permitted.

Third, most of these studies fail to capture the role of venture
capitalists in financing upstarts. These capitalists, the first port of
call for a newcomer after he has exhausted his own and his family's
resources, are notably hard-headed realists. If they believe that an
entrenched incumbent will be allowed to snuff out incipient competition
by inducing manufacturers to boycott the new product, or by using
technological legerdemain to tie its own competing product to its
monopoly product, or by setting a pricing schedule that in effect
results in full-line forcing,[^44] venture capitalists will, at the very
least, raise the cost of capital to reflect the enhanced risk, and more
likely suggest to the newcomer that completion of his doctoral
dissertation or a job with the entrenched incumbent is his best option.
They must always be satisfied, before opening their wallets, that the
incumbent does not have sufficient market power to nip the competition
in its incipiency. Potential suppliers cannot be threatened with
retaliation if they do business with the newcomer; most distributors
cannot be fearful of the consequences of dealing with the new entrant;
the dominant incumbent cannot manipulate its price schedules so as to
make it uneconomic for its customers to divert part of their custom to a
new entrant. Only with the assurance that the law protects their
investment from being washed away by such tactics that have nothing to
do with the relative merits of the competing products, will venture
capitalists write the checks the challenger needs.

They know what some academic analysts do not: experience suggests that
dominant firms are willing to have recourse to tactics that are related
to their market power, rather than their efficiency. The use of these
tacticsturns the battle into one in which the firm with greater market
power wins, rather than the firm with the best mousetrap. It is those
tactics that the antitrust laws, applied both by the enforcement
agencies and private parties, are uniquely equipped to prevent.

-   A firm with substantial market power, even power fairly won in the
    marketplace, cannot leverage that power by tying other products to
    the one that it dominates.

-   A firm with substantial market power cannot use that power to
    pressure customers not to deal with its competitors, or impose
    supply allocations and/or a pricing system that accomplishes that
    same result.

-   A firm with substantial market power over a product, access to which
    is crucial for firms that compete with it in other product markets,
    cannot make access conditional on an agreement by its potential
    competitors to cede other markets to it.

Surely, nothing in the current economic thinking, or in the nature of
high-tech industries, makes such restrictions on the tactics available
to dominant firms obsolete. Indeed, such constraints on the use of
market power are more compelling in the case of industries in which
waves of creatively destructive innovation are to be relied on as the
principal engines of progress.

[Adaptation To A High-Tech Economy]{.underline}

That's why it would be folly to abandon or seriously weaken the
competition policy that has contributed so much to the growth of the
American economy and has conferred on us the socially stabilizing
consequences of a policy that promises the upwardly mobile a fair field
with no favors. Of course, antitrust policy will have to be applied with
the economic sense that has enabled it to remain a viable tool for the
preservation of competition for over a century. That will require that
at least three areas of enforcement be applied with sensitivity.

-   If it is indeed the case that high-tech products have short economic
    lives, that fact will have to be factored into any appraisal and
    measurement of market power. Antitrust policy has never been aimed
    at demonstrably transient market power, and I see nothing in current
    enforcement policies that gives reason to fear that it will be in
    the future.

-   The question of relief will have to be given even greater
    consideration in the future than in the past. The notion that the
    antitrust laws are proscriptive rather than prescriptive is less
    compelling than it once was: if an enforcement agency doesn\'t know
    what remedy to propose, it should stay its hand. And that remedy
    cannot always rely on ongoing judicial supervision of the practices
    of a company specializing in the creation of intellectual property,
    for two reasons. First, we do not want to slow the pace of
    innovation to accommodate the more leisurely one of the judicial
    process. Second, it is not at all certain that the courts can cope
    with firms understandably reluctant to comply promptly with their
    orders, witness the recent confession of the judge in the Microsoft
    case that the remedies she had ordered are not working terribly
    well.[^45] This difficulty with behavioral solutions may mean that
    relief would have to be more radical in the case of high-tech
    violators of the antitrust laws than in the case of lower-tech ones,
    with divestiture and structural solutions playing a larger role
    relative to the prohibition of specific practices.

-   The business practices of dominant firms will have to be more
    carefully scrutinized to separate legitimate applications of
    efficiencies from the application of market power. Practices
    requiring the closest scrutiny include pricing policies that make it
    uneconomic for customers to divert business to new entrants, that
    create covert tying of new products to those in which the firm has a
    dominant market share, and that offer supply assurance only to
    customers who demonstrate their "loyalty" by taking their full
    requirements from the dominant firm.

All of these potential barriers to entry must be examined closely, lest
"high-tech" be converted to "my-tech" by dominant firms. Application of
these principles will not be easy. It never has been. But we know enough
about how to measure dominance; how to appraise business practices to
determine which have as their intent and effect preservation of market
power, and which are genuinely competitive weapons related solely to
efficiency; how to include such factors as the presence of international
competition; and how to account for the effect of technology on the
durability of market dominance, to continue to use the antitrust laws to
make certain that consumers get to determine who wins the competitive
race.

[Private Enforcement]{.underline}

If enforcement of competition policy is, indeed, important to continued
improvements in consumer welfare---call it our standard of living, to
use a more familiar term---it would seem self-evident that supplementing
the limited resources available to public-sector[^46] authorities with
those of the private sector makes sense. As Phillip Areeda put it,
provisions for private actions "enlist plaintiffs in the work of
detecting, punishing, and thereby deterring wrongdoing."[^47] The
European Commission agrees. In a recent paper it argued that
"facilitating damages claims for breach of antitrust law will not only
make it easier for consumers and firms who have suffered damages arising
from an infringement of antitrust rules to recover their losses from the
infringer but also strengthen the enforcement of antitrust law."[^48]

An army of private enforcers, enlisting help from attorney-entrepreneurs
free to accept cases on a contingency fee basis, is an important
supplement to the limited resources of the enforcement agencies. The
number of private actions brought under the antitrust laws historically
has exceeded by far the number brought by the government. True, many of
these follow successful government-initiated actions, but it is also
true that private cases account for 90 percent of competition
enforcement actions[^49] and, according to the estimate of one
practitioner/scholar, that some 80 percent of court decisions
establishing important principles (not all of which I find agreeable, I
might add) in the competition policy area have resulted from private
actions.[^50]

A less obvious but equally important reason that private enforcement is
so important is that it is free of direct political influence. In
America, administrations come and go, some more given to a jaundiced
view of the activities of dominant firms than others,[^51] witness the
soft settlement worked out with Microsoft when the Bush administration
took office and control of the Department of Justice, and rid itself of
the meddlesome Joel Klein, the head of the Antitrust Division. As Robert
Pitofsky has noted, "The Department of Justice and the FTC during the
Clinton years did bring cases that would not have been considered during
the Reagan years and probably would not have been brought during the
first Bush administration."[^52]

In Britain, governments come and go, and not all future governments
might be as wedded to the concept of political independence for
regulators as is the current one. In the EU, Neelie Kroes, the current
competition commissioner, has breathed new life and considerable sense
into EU competition policy,[^53] but there is no guarantee that her
successor will follow the same path.

The private sector suffers no such swings in attitude---

the businessman who believes he has been the subject of an
anticompetitive act by a dominant competitor has equal access to the
courts no matter who controls the White House, Congress, Parliament, or
the European Commission. Politicians' motives vary; the survival
instincts of private entrepreneurs never change.

Unlike some enforcement agencies, private litigants are not subject to
the political pressure that incumbent dominant firms, which often have
large numbers of employee/voters in key congressional districts, can at
times bring to bear on enforcement agencies.

This contribution of private actions is especially important at this
time, for several reasons. First, enforcement policy is in flux, with
serious policymakers, including our Department of Justice and FTC,
musing about the way competition policy should be applied to the
practices of dominant firms. If that musing results in a greater
official tolerance of acts once deemed likely to reduce competition, we
will have to rely increasingly on the private sector to carry the
antitrust torch.

Second, the practices of dominant firms have become so sophisticated
that attempts to separate legitimate competitive instruments from
anti-competitive behavior are more difficult than ever. After all,
potential monopolists have come a long way since the days of John D.
Rockefeller and other crude practitioners of the art of monopolization,
and since Alcoa thought it a good idea to buy up all the available
hydroelectric sites to deny potential competitors access to needed
electrical energy.

In the face of this sophistication, administrators of our antitrust laws
might feel cowed by the complexity of these issues, might not feel
competent to tell what sort of practice is exclusionary or predatory.
But the private victims most certainly can. And the private enforcement
route gives them an opportunity to state their case, and the courts an
opportunity to apply their judgment to the facts of the case, against a
background of traditional market share, profit-sustainability, entry
history and other important "facts on the ground."

Third, as noted above, we are in a period in which the glamour of "high
tech" is blinding the eyes of some enforcement agencies. They are being
asked to believe that sauce for the old economy goose is not sauce for
the new economy gander. Not so. Indeed, since technological change is a
more and more important driver of productivity growth, it is important
that powerful incumbents in those industries not be allowed to engage in
practices aimed at preventing or slowing incursions of technologically
superior challengers. And who better to reveal the effect on competition
than a competitor, injured by illegal anticompetitive practices,
conversant in the technical jargon, on the sharp edge of customer
relations, well-informed of the details and consequences of the dominant
firm's practices, and with the incentive both of survival and a damage
award to impel him to action?

In short, now more than ever---in this age in which enforcement agencies
suffer from constrained resources, in this age in which enforcement
agencies might find it daunting to come to grips with the complexities
of markets in high-tech industries, in this age in which dominant firms
are increasingly sophisticated in the anticompetitive weapons they
deploy---it is important to preserve and enhance the role of private
enforcement in giving added strength to competition policy.

That is not to say that the process cannot be abused---either by
well-heeled competitors using the courts as part of their competitive
strategy, or by nuisance suits filed in the hope of a quick settlement.
But there is good reason to believe that the benefits of keeping open
the private-action route to redress outweighs the possible costs of
unwarranted litigation.

The cost of bringing such a suit is not trivial. An established rival
contemplating bringing an action has to reckon with the possibility that
large in-house and outside attorney and expert fees will prove to be
money wasted, and therefore will be disinclined to act unless reasonably
certain of his ground, or that the impact on his rival is worth a
substantial expenditure. And less well-heeled potential litigants must
persuade the lawyer/financier acting on a contingency fee basis that the
law firm stands a relatively good chance of being compensated for its
efforts---a good chance of winning. Frivolous law suits provide no such
favorable odds. Still, there is a risk of abuse, but in my view it is
outweighed by the losses that would result from seriously weakening this
enforcement weapon.

Finally, and at the risk of upsetting those who believe that competition
policy should be about efficiency and only efficiency, and should not
pursue the social objective of contributing to upward mobility and an
open society, I should point out that man does live by bread alone, that
our competitive economy is more than a machine to grind out more and
more products at better and better prices, laudable as that objective
is. During the debate on the Sherman Act, its sponsor referred to the
situation in which "a humble man starts a business in opposition to them
\[the trusts\], solitary and alone" and is forced out of business by a
monopolist's predatory acts:

Why, sir, I know of one case where a man

In good circumstances, a thrifty, strong, healthy

American was ... met in just the way I have

mentioned. If he had the right to sue this

company in the courts of the United States

under this section[^54] he would have been able

to indemnify himself for the losses he suffered.

Congress was well aware of the imbalance of power between powerful
incumbents and their challengers. "This section opens the door of
justice to every man, whenever he may be injured by those who violate
the antitrust laws," noted Congressman Webb of New York in a 1914 debate
on the antitrust laws.

So we cannot ignore the fact that underlying the policy of encouraging
private enforcement lies a deep sense that equity demands just such a
policy, that the preservation of open markets creates upward social and
economic mobility and diffuses economic and hence political power, keys
not only to the maintenance of competition, and to continued increases
in productivity and material well-being, but to the maintenance of an
economic system that is fair, and is seen to be fair.

END

[^1]: ^\*^ The author is director of Economic Policy Studies at the
    Hudson Institute and a consultant who counts among his clients both
    firms that some deem dominant, and others struggling against firms
    they deem dominant. A few of the thoughts herein were first put
    forward in my "Market Power and Competition in the Age of
    Technology," a speech delivered at a meeting of the Federalist
    Society for Law and Public Policy on November 14, 1998, and
    reprinted in *Lectures on Regulation and Competition Policy*
    (London: The Institute of Economic Affairs, 2001), 68-75.

[^2]: John Vickers, "Abuse of Market Power," Speech to the 31^st^
    Conference of the European Association for Research in Industrial
    Economics, Berlin, September 3, 2004. At the time he delivered this
    talk Vickers was chairman of the UK Office of Fair Trading.

[^3]: Deborah Platt Majoras, chairman, Federal Trade Commission, "The
    Consumer Reigns: Using Section 2 to Ensure a 'Competitive Kingdom'"
    at Opening Session, Hearings on Section 2 of the Sherman Act, June
    20, 2006, p.3 (mimeo).

[^4]: The Federal Trade Commission and the Antitrust Division of the
    Department of Justice are examining "whether and when specific types
    of conduct ... are procompetitive or benign..." Notice of Public
    Hearing, filed April 6, 2006.

[^5]: Known as the Antitrust Modernization Commission.

[^6]: China's cabinet, the State Council, last year approved an
    anti-monopoly law, but whether it is intended to be used in a manner
    similar to that in the US, the UK, and the EU is uncertain, since
    officials seem to intend to use the statute to attack the
    intellectual property rights of foreign companies, which they feel
    are being abused to prevent entry by Chinese firms. *Financial
    Times*, June 9, 2006 and November 11-12, 2006.

[^7]: Brazil is another country in which the "antitrust authorities are
    moving aggressively to try to break up anti-competitive behavior."
    But the enforcement trend is moving in the opposite direction in
    other countries, most notably Mexico. *Wall Street Journal*, July
    13, 2005.

[^8]: Irving Kristol, "On Corporate Capitalism in America," *The Public
    Interest* 41 (Fall 1975).

[^9]: Andrew Roberts, *A History of the English-Speaking Peoples Since
    1900* (London: Weidenfeld & Nicolson, 2006), 39. Roberts adds, "The
    way that the English-speaking peoples grasped and then perfected the
    idea of the corporation is the foremost key to their global
    success..." (p. 40).

[^10]: Kristol, "Corporate Capitalism." Each joint-stock company
    originally "existed for a very particular purpose, which needed to
    be defined in its statutes." Harold James, *Family Capitalism*
    (Cambridge, Mass. and London: The Belknap Press of Harvard
    University Press, 2006), 380.

[^11]: John Micklethwait and Adrian Wooldridge, *The Company: A Short
    History of a Revolutionary Idea* (New York: Random House, 2003), 2.

[^12]: Hans B. Thorelli, *The Federal Antitrust Policy, Origination of
    an American Tradition*, 226-27. First published by the Johns Hopkins
    Press (Baltimore) in 1954, it is now available from University
    Microfilms International, Ann Arbor, Michigan, Out-of-Print Books,
    1992.

[^13]: This is not to say that employees are in fact worse off working
    for the modern corporation, with its health-care plans, day-care
    facilities and other benefits, than they were working for the
    mineowners of the late nineteenth century. It is just that the
    corporation somehow seems more remote, more difficult to raise a
    fuss with, than many of the old pre-corporate entities.

[^14]: Peter J. Wallison, a resident fellow at the American Enterprise
    Institute (AEI), argues that corporations "are not like political
    communities.... Directors owe their loyalty to the corporation
    itself, and \[corporate law\] does not permit them to represent the
    specific interests of shareholders the way constituents are
    represented in a democracy." "Are Corporation Democracies?" in
    *Financial Services Outlook*, AEI, December 2006, 1.

[^15]: First published in 1932 by Harcourt, Brace & World, reprinted
    with a new introduction by Murray Weidenbaum & Mark Jensen in 1968
    by Transaction Publishers of New Brunswick (USA) and London.

[^16]: Ibid*.*, 7.

[^17]: Donald A. Hay and Derek J. Morris, *Industrial Economics and
    Organization: Theory and Evidence* (New York: Oxford University
    Press, 1991), 277.

[^18]: For a discussion of circumstances in which separation of
    ownership and control does not leave managers free to operate
    independently of the corporation's owners, see Hay and Morris,
    *Industrial Economics and Organization,* 277-81.

[^19]: Henry G. Manne argues that the concept of corporate democracy
    represents an inappropriate application of a political idea to a
    market institution, but goes on to say that an unfettered market in
    corporate control "is actually a market for votes, since votes are
    the indicia used for control..." *Wall Street Journal Europe*,
    January 2, 2007.

[^20]: The best statement of this position is to be found in Robert H.
    Bork, *The Antitrust Paradox: A Policy at War With Itself*,
    originally published in 1978 by Basic Books to much gnashing of
    teeth by economists not taken with the arguments of "the Chicago
    school" and others, and reprinted in 1993 with a new introduction
    and epilogue by Judge Bork by New York's Free Press.

[^21]: See, for example, John H. Shenefield and Irwin M. Stelzer, *The
    Antirust Laws: A Primer*, 4^th^ ed. (Washington, D.C.: The AEI
    Press, 2001), 10-14. For a fuller treatment, Joel B. Dirlam and
    Alfred E. Kahn, *Fair Competition: The Law and Economics of
    Antitrust Policy* (Westport, Connecticut: Greenwood Press, 1970).

[^22]: Use of the laws by competitors to deter price cuts by more
    efficient rivals has prompted Judge Frank Easterbrook to propose
    that only consumers be allowed to sue for and recover damages based
    on any overcharges resulting from successful predation. Stephen
    Martin*, Industrial Economics: Economic Analysis and Public Policy.*
    (Englewood Cliffs, New Jersey: Prentice Hall**,** 1993), 482-83.

[^23]: *United States v. Grinnell Corp*., 384 U.S. 563 (1966).

[^24]: European Commission, DG Competition, "DG Competition discussion
    paper on the application of Article 82 of the Treaty to exclusionary
    abuses," Brussels, December 2005, 17-18.

[^25]: The Roosevelt administration attempted to raise prices for
    agricultural and many manufactured products, and key FDR advisers
    such as Rexford Tugwell and Adolph Berle "believed that free market
    competition was impossible and a cause rather than a cure of the
    Depression." Spencer Weber Waller, *Thurman Arnold: A Biography*
    (New York and London: New York University Press, 2005), 79.

[^26]: In 1933 the Supreme Court allowed some coal producers to
    eliminate competition among themselves to provide relief to the
    depressed industry*. Appalachian Coals, Inc. v. United States*, 288
    U.S. 344 (1933).

[^27]: I ignore here the question of just which industries are
    high-tech, and which are low-tech. Auto manufacturing, for example,
    is often cited as an example of an old, rust-belt industry, yet the
    use of computers and robots in manufacture surely gives it an
    arguable claim to high-tech status.

[^28]: Theodore Roosevelt's "trust-busting" was "designed to foster the
    free-market competition that has more than any other single factor
    been the key to American greatness. Roberts, *English-Speaking
    Peoples*, 13.

[^29]: Peter Freeman, "The Enterprise Act and Innovation," a talk to
    Confederation of British Industries Competition Conference, March 5,
    2004, p.10 (mimeo). In this connection see also Robert Pitofsky,
    "Antitrust at the Turn of the Twenty-First Century: The Matter of
    Remedies," *The Georgetown Law Journal* 91, no. 1 (November 2002),
    177-78. Pitofsky, former chairman of the FTC, argues that the
    enforcement agencies are quite able "to take the special qualities
    of intellectual property into account" and to prevent abuses of
    market power while preserving incentives of dominant firms to
    innovate.

[^30]: It should be noted that defining barriers to entry is no easy
    task. A good summary of the difficulties confronting the antitrust
    analyst can be found in Harold Demsetz, "Barriers to Entry," in *The
    Organization of Economic Activity* (Oxford, UK and Cambridge, Mass.:
    Basil Blackwell, 1989), vol. 2, chap. 2, 25-39.

[^31]: Marcus Glader, *Innovation Markets and Competition Analysis: EU
    Competition Law and US Antitrust Law* (Cheltenham, UK and
    Northampton, USA: Edward Elgar, 2006), 47. For a good discussion of
    the positions taken by various economists on the relation of
    competition to innovation see pp. 38-48 and Martin, *Industrial
    Economics*, 369-371.

[^32]: David Encaoua, Paul Geroski and Alexis Jacquemin, "Strategic
    Competition and the Persistence of Dominant Firms: A Survey," in
    *New Developments in the Analysis of Market Structure*, ed. Joseph
    Stiglitz and G. Frank Mathewson (Cambridge, Mass.: The MIT Press,
    1986), 75.

[^33]: See especially Robert W. Crandall and Clifford Winston, "Who
    Needs Antitrust," *Wall Street Journal*, March 9, 2006.

[^34]: Jonathan E. Nuechterlein and Philip J. Weiser, *Digital
    Crossroads: American Telecommunications Policy in the Internet Age*
    (Cambridge, Mass. and London: The MIT Press, 2005), 5-6.

[^35]: Edward E. Zajac, "Technological Winds of Creation and Destruction
    in Telecommunications: A Case Study," in *Evolving Technology and
    Market Structure: Studies in Schumpeterian Economics*, ed. Arnold
    Heertje and Mark Perlman (Ann Arbor: University of Michigan Press,
    1990), 257.

[^36]: "In long-distance services, Bell sought to retard competitive
    entry by urging the Federal Communications Commission (FCC) to
    forbid it...".F.M.Scherer and David Ross, *Industrial Market
    Structure and Economic Performance*, 3^rd^ ed. (Boston: Houghton
    Mifflin Company, 1990), 462. But note that the presiding judge
    rejected the government's regulatory-abuse theory, contenting
    himself with expressing doubts about the ability of the FCC
    effectively to regulate a company of the size and scope of AT&T.

[^37]: Nuechterlein and Weiser, *Digital Crossroads,* 389.

[^38]: The evidence about the effect of AT&T's integrated monopoly on
    the rate of innovation is mixed. The best analysis is to be found in
    Alfred E. Kahn, *The Economics of Regulation: Principles and
    Institutions*, 2:295-305. First published in 1970-1971 by John Wiley
    & Sons, it was republished in 1988 by The MIT Press.

[^39]: Ibid., "Introduction: A Postscript, Seventeen Years Later," 2^nd^
    ed., xix-xxiii.

[^40]: For a contrary view see Alan Stone, *Wrong Number: The Breakup of
    AT&T* (New York: Basic Books, Inc., 1989).

[^41]: F. M. Scherer, "Technological Innovation and Monopolization,"
    paper submitted to the FTC/DOJ Hearings on Single Firm Conduct,
    April, 2006, p. 6. The extent to which patents increase the rate of
    innovation is, of course, hotly debated. A good summary of views can
    be found in Kay Withers, "Intellectual Property and the Knowledge
    Economy," a paper published as part of the Institute for Public
    Policy Research's project "Intellectual Property and the Public
    Sphere: Balancing Competing Priorities," December 2005, pp. 10-14,
    http://ippr.typepad.com/ip.

[^42]: George Symeonidis, *The Effects of Competition: Cartel Policy and
    the Evolution of Strategy and Structure in British Industry*
    (Cambridge, Mass. and London: The MIT Press, 2002), 224.

[^43]: Tamim Bayoumi, Douglas Laxton and Paolo Pesenti, "Benefits and
    Spillovers of Greater Competition in Europe: A Macroeconomic
    Assessment," Federal Reserve Bank of New York Staff Report no. 182,
    April 2004, abstract and pp. 3 and 30.

[^44]: John Vickers, "Abuse of Market Power," p. 20, notes that a
    dominant firm can raise rivals'costs---unduly deny scale economies
    to rivals---by offering price reductions that are "*conditional* on
    the buyer not dealing with rivals."

[^45]: Judge Colleen Kollar-Kotelly of the US District Court for the
    District of Columbia expressed dissatisfaction but added after a new
    approach had been agreed upon, "My only wish is that it had been
    done earlier, so we wouldn't be at this point," that being the point
    at which "Microsoft still has not provided the documentation to
    competitors" that the decree demanded, according to Thomas Vinje of
    Clifford Chance LLP.

[^46]: The UK Office of Fair Trading reckons that it has resources
    sufficient to allow it to pursue only 20-25 cases per year.

[^47]: Phillip Areeda, *Antitrust Violations Without Damage Recoveries*,
    89 Harvard Law Review 1127 (1976).

[^48]: Cited in the *Financial Times*, January 19, 2006.

[^49]: Irwin M. Stelzer, "Thoughts on Competition Policy, lecture
    delivered at the Second Oxford Antitrust Law Conference and
    reprinted in *Lectures on Regulatory and Competition Policy*, p.25.
    See also the *Financial Times*, September 13, 2004, "Brussels
    Aspires to US-Style Litigation."

[^50]: Estimate by Max Blecher in an e-mail communication to the
    American Antitrust Institute, October 6, 2006.

[^51]: "When it comes to many types of antitrust enforcement ...the
    \[Bush\] administration has taken the most relaxed and least
    aggressive approach since the last years of the Reagan presidency."
    Stephen Labaton, "New View of Antitrust Law: See No Evil, Hear No
    Evil," *New York Times*, May 5, 2006.

[^52]: Robert Pitofsky, "Antitrust at the Turn of the Twenty-First
    Century," 169 (first cited in note 28).

[^53]: The EC competition directorate, known in the trade as DG Comp,
    was recently voted the antitrust agency most admired by other
    enforcement agencies, and by lawyers, economists, and executives.
    *Financial Times*, July 7, 2006.

[^54]: Section 7 of the original Sherman Act, now Section 4 of the
    Clayton Act, created a private right of action not present under the
    common law.