Antitrust's Greatest Hits

Reason, Nov, 2001 by David B. Kopel, Joseph Bast

The foolish precedents behind the Microsoft case

New developments in the antitrust face-off between Microsoft and the U.S. Department of Justice keep on coming. On August 17, Bill Gates' company failed in its efforts to delay any more action in the case until the Supreme Court decides whether to consider Microsoft's request to dismiss the suit. That was bad news for the company, since the next major step would be to decide what "remedies" will be imposed. Then, on September 6, the DOJ announced that it would no longer seek a breakup of the company--and, more surprisingly, that it would drop its claim that Microsoft had illegally "bundled" separate programs. But the other charges remain, and it is clear that Microsoft's enemies will surely urge the court to impose every possible restriction on the company's ability to adapt to changing conditions--particularly the diminishing importance of the personal computer and the growth of Web-based computing.

It has been six years since Microsoft introduced Windows 95, the operating system that, by "bundling" itself with a Web browser, prompted the government's first antitrust suit against the company in 1997. Put another way, six years have gone by without Microsoft suffering any penalty for its supposed misconduct--unless, of course, you count the expenses and negative publicity it has incurred fighting the Justice Department. When Windows 95 debuted, Microsoft's critics and competitors made many predictions of the unpleasant things that would happen if the company kept doing business without new restraints. It's past time to see whether those predictions have come true.

It is also past time to take an even longer historical perspective: to look at the government's earlier adventures in antitrust and see how they compare with the Microsoft case. The results are very telling--not just with regard to Microsoft, but to antitrust law in general. Indeed, when one looks closely at the ground-breaking government actions taken against Standard Oil, the Aluminum Company of America, and AT&T, it becomes clear that something other than preventing harm to consumers--the stated goal of federal antitrust legislation--is the motivating force behind applying the law. Misinterpretation of these cases lies behind the claim that Microsoft, unless punished, crippled, or otherwise injured, will achieve a "chokehold on the Internet" or somehow undermine the entire computer industry.

What follows is a medley of what might be called antitrust's greatest hits and an analysis of how the lessons of history are being misapplied to the Microsoft case.

The Oil Standard

From 1906 to 1911, antitrust authorities prosecuted Standard Oil, a case that culminated with John D. Rockefeller's company being forcibly broken up into several smaller businesses. The Microsoft wars have often been compared to the Standard Oil case, and the analogy is apt--though not in the way it is usually intended.

Like Microsoft, Standard Oil was pilloried for practices considered legitimate when used by other companies. Since Standard Oil was such a high-volume customer, railroads gave it special discounts in exchange for planning shipments in ways that enabled railroads to use their lines and railcars most efficiently. Standard Oil's competitors complained bitterly about these discounts (called "rebates"), which the railroads kept secret from other oil companies.

Also like Microsoft, Standard Oil may have harmed its competitors, but it helped its consumers. Rockefeller's chemists developed 300 different byproducts from oil and created production and distribution processes far more efficient than those of other companies, allowing it to underprice them and to buy many of them out.

Standard Oil began in 1870, when kerosene cost 30 cents a gallon. By 1897, Rockefeller's scientists and managers had driven the price to under 6 cents per gallon, and many of his less-efficient competitors were out of business--including companies whose inferior grades of kerosene were prone to explosion and whose dangerous wares had depressed the demand for the product. Standard Oil did the same for petroleum: In a single decade, from 1880 to 1890, Rockefeller's consolidations helped drive petroleum prices down 61 percent while increasing output 393 percent. He eventually built Standard Oil of New Jersey into a trust composed of 18 companies operating under a single board of directors.

Standard Oil used resources with legendary efficiency, introducing many new labor-saving devices to its factories and locating sophisticated facilities at key points in its distribution system. Yet Rockefeller paid wages well above the market level, believing that high wages and good working conditions would save money in the long run by averting strikes and by encouraging loyalty among employees. Before Standard Oil revolutionized oil derivatives by lowering prices and improving quality, the high prices and limited supplies of whale oil and candles prevented all but the wealthy from being able to work or entertain after dark. Thanks to Standard Oil, families could illuminate their homes for just one cent per hour. And he saved the whales.