The new trustbusters: what's behind the resurgence of antitrust activism - and why it's bad news for consumers

Reason, March, 1999 by James V. DeLong

Joel Klein is a famous man. The head of the Antitrust Division at the U.S. Department of Justice usually toils in anonymity, known only to the in-groups of the bar. Not Klein. He has sued Microsoft, the most prominent company in America's jazziest industry, and demonized the world's richest human, Bill Gates. He has assaulted the ubiquitous credit card franchises of Visa and MasterCard and blocked important aerospace industry consolidations. He makes speeches extolling the pivotal role of the Antitrust Division in the "new economy" of globalization and information. These acts have earned him serious attention in the national press.

Not to be left behind, Klein's fellow antitrusters at the Federal Trade Commission are equally active. They have beaten up on superstores by stopping the merger of Staples and Office Depot and by knocking down important marketing practices of Toys "R" Us. Like the DOJ Antitrust Division, the FTC has gone high tech. It is challenging Intel, the grandee of computer chips, and probing Cisco Systems, the dominant company in Internet switching hardware. In a recent suit against a drug company, the FTC asserted a heretofore unknown authority to force an alleged monopolist to refund to consumers $120 million in allegedly ill-gotten profits.

Professional discussion of this surge in antitrust activism is proceeding at two levels. One is the highfalutin language of bar association meetings and academic conferences, where sessions are given titles like "Antitrust Enforcement and High Technology Markets," "Networks, Lock-In Effects, and the New Economy," and "New Approaches to Reviewing Horizontal Agreements." In this world, Platonic guardians mull over the implications of technological change and devise optimal policies to safeguard American enterprise. They "open up a dialogue with the bar and the academic community about antitrust doctrine," as Klein put it in one of his speeches, on topics such as "the relationship between antitrust and intellectual property, the significance of...network effects and tipping points...the impact of differentiated products theory, the role of potential competition and innovation markets, and [the meaning of] 'agreement.'"

The second level of analysis is more skeptical, grounded in the public choice school of economics. Public choice theory holds that exercises of government power are driven by the material and ideological interests of the people who wield it and by the private parties who can reward them with campaign contributions, money, job security, or whatever else they value. Viewed through the lens of public choice theory, the recent burst of antitrust activity is not primarily about consumers or competition. It is about four kinds of interests: 1) competitors of successful firms who want to hamstring their rivals, appropriate part of their businesses, or turn the clock back so they can re-run the race; 2) companies blown by the winds of technological change and looking for ways to nullify their disadvantage; 3) the personal ambitions of antitrust enforcers, who do not prosper in quiet times; and 4) the class interests of the legal profession, which are served by a combination of activist bias and mushy theories.

Only a taste of this view creeps into the formal talks at antitrust conferences. To get the full flavor, you must hang out in the corridors and hotel bars, and stick around for the after-conference receptions. There you hear jokes like this one: "What is the government's theory in the Microsoft case? That the state of California has more computer companies than the state of Washington, and a hell of a lot more electoral votes." Or this one, about "GoreTechs," the high-tech entrepreneurs who confer with Vice President Al Gore: "What is Gore-Techs? A new fabric made by combining silicon and money, used for wrapping up politicians."

In these less formal settings, last summer's Senate Judiciary Committee hearings on Microsoft, in which Chairman Orrin Hatch (R-Utah) laid into Bill Gates, are dismissed with, "What else would you expect from a senator who has Novell in his state?" Testimony in the ongoing Microsoft trial about the frequency with which the head of Netscape, the moving force behind the lawsuit, met with Klein and other Antitrust Division representatives is greeted with blase yawns. So are testimony and e-mail messages showing that high-tech companies regard government antitrust action as simply one more tool in their competitive arsenal, an alternative to price cuts or new products. And as the head of Netscape said when asked why he did not file his own suit, it is much cheaper to use the government's lawyers.

Behind the scenes at the conferences, you hear snickers about the innocence of Microsoft, which thought it could sit out there in Redmond writing software and ignoring Washington, D.C. - as if such a big pot of wealth could go unnoticed by a rapacious imperial capital. The idea that perhaps a company should be able to do its business and ignore Washington is regarded as hopelessly naive. Microsoft is now playing catch-up, adding former congressional aides to its staff and boosting its budget for political contributions.