Antitrust drives innovation through market competitiveness---patents encourage monopolies that reinforce market exclusion

Indeed, my core belief is that the U.S. economy today is the most dynamic, creates the most jobs, and produces the highest level of innovation precisely because we as a nation committed long ago to a policy of vigorous but sound antitrust enforcement. My thesis before you today, then, is that antitrust enforcement is as essential to innovation and economic growth in the 21st Century as it has been in the 20th -- and that vigorous but reasonable antitrust enforcement is a crucial component of the fight to keep America competitive in international and high-tech markets.

Before I explain these views, however, it is imperative that you have a clear understanding of how modern antitrust law is applied. I need not go back to the legislative histories of the Sherman and Clayton Acts to ascertain whether those laws originally reflected an animus against large corporations. If they did, that is simply no longer the case. Congress drafted the antitrust laws in sufficiently general terms to delegate to the courts the task of developing an antitrust jurisprudence that is consistent with contemporary concepts of economic efficiency and consumer welfare. And the courts and federal antitrust enforcement agencies have accepted that responsibility.

As a result, current antitrust law recognizes the economic concepts of economies of scale and scope. Thus, on particular facts, a merger that eliminates competition between significant rivals may nevertheless pass antitrust muster if the parties truly can demonstrate that the merger is necessary to achieve substantial efficiency that will enhance consumer welfare. In the same vein, it is now clearly true that antitrust typically does not treat as inherently suspect horizontal or vertical joint ventures designed to integrate substantial business assets. This is especially true with respect to those types of joint ventures that are most directly involved in innovation. Despite the fact that such joint ventures had rarely been challenged under the antitrust laws, in 1984 Congress took action to lessen what was perceived to be an inhibitory effect of antitrust enforcement by making it clear that research and development joint ventures were to be judged under a rule of reason test. Last year, Congress took similar action with respect to production joint ventures. Whatever may have been the case previously, the time has long since passed when legitimate joint or collaborative activity among rivals could be viewed as inherently suspect under our antitrust laws.

With this understanding of contemporary antitrust policy firmly in mind, let me return to the original issue posed: is enforcement of modern antitrust polices that recognize economies of scale and scope, as well as the risk reduction benefits of collaborative action, inconsistent with the promotion of innovation? Lest you be left in doubt, for me the answer squarely is "no."

The economist Joseph Schumpeter was one of the first to articulate a theory that firms with stable and substantial market power were the most likely to invest in innovation. In particular, he suggested that firms with substantial market power -- those that did not have to think in terms of short-range response to rivals -- were the most likely to invest in long-range research and development. While not implausible as a matter of theory, Schumpeter's thesis has been severely undercut by real world developments, as Professor F. M. Scherer's 1984 book, Innovation and Growth, demonstrated. There, Professor Scherer showed that the largest corporations accomplish less in producing innovation than smaller enterprises, as measured by R & D expenditures, once some threshhold points are passed.

Further, in a world driven by rapid changes in technology, other empirical evidence available to us now indicates that the firms that prosper are more likely to be those that face fierce rivalry in their home markets than the sheltered monopolists. In a very real sense, it seems, the fear of being left behind is more likely to spur innovation than the security bred of stable market power.

This subject is extensively dealt with in Professor Michael Porter's recently acclaimed work, The Competitive Advantage of Nations. Noting that the need for antitrust enforcement has been questioned because of the globalization of industries and the view that domestic firms must merge or closely collaborate to gain economies of scale, Professor Porter found such claims to be inconsistent with available empirical evidence in the ten nations that he and his colleagues at the Harvard Business School studied. Rejecting arguments for lenient merger and cartel policies, he states that

"in fact, creating a dominant domestic competitor rarely results in international competitive advantage. Firms that do not have to compete at home rarely succeed abroad. Economies of scale are best gained by selling globally, not through dominating the home market. . . ." Id. at 662.

Observing that corporate managers often support lenient merger and collaboration policies because it is a "tempting way to raise short-term profits," Professor Porter views such policies as the path to national decline. Pointing to evidence that "active domestic rivalry is strongly associated with international success," he concludes that "a strong antitrust policy, especially in the area of horizontal mergers, alliances and collusive behavior, is essential to the role of upgrading any economy. " Id. at 663.

Those of us who have spent our lives in antitrust were not surprised by Professor Porter's findings. The fundamental thesis of strong antitrust enforcement is that rivalry, not market power, fosters innovation and efficiency over the long run. For that reason, among others, this nation has committed its public policy for over a century to the view that antitrust enforcement promotes, rather than impedes, innovation. Innovation itself, of course, can and does take many forms. The term is applied to basic scientific breakthroughs, important commercial inventions, product modifications and new production techniques. All are important to society. Innovation, whether in the form of improved product quality and variety, or production efficiency that allows lower prices, is a powerful engine for enhanced consumer welfare. By prohibiting private restraints that impede entry or mute rivalry, antitrust seeks to create an economic environment in which the entrepreneurial initiative that is the hallmark of the U.S. economy can flourish, and opportunities for bringing innovations to market can continue to be exploited by the multitude of private actors in this freest of free market economies.

Acknowledging that an occasional natural monopoly may arise, and that enormous economies of scale may inevitably lead to few rivals in some markets, we remain skeptical about any general policy of eschewing rivalry in favor of collaborative research and development. This nation's experience teaches that innovation comes from unpredictable sources -- from individuals and small firms as well as giant conglomerates. And this diversity in the sources of innovation is not limited to the 19th and early 20th centuries, when change arguably occurred less rapidly.

If you compare the major firms in the computer and telecommunications industries in the 1950s, '60s, and '70s with the major firms today, you will see that rapid technological change can create opportunities for new entrants and individual achievement. It is not difficult to make a list of large U.S. firms who once possessed some degree of market power, only to fall back when confronted by more innovative rivals. It includes IBM, GM, big steel, major airlines, Citicorp, and you would undoubtedly think of additional examples. Happily, a number of those firms have demonstrated the ability to rebound, but their improved performance unquestionably was stimulated by the rivalry they have encountered.

The task of antitrust is not to prejudge winners but to make sure that private restraints do not narrow the potential sources of innovation. By preserving an economic climate that allows efficient sources of innovation to prosper, be they small or large, antitrust promotes the economic and socio-political values that have been the backbone of the success of the American economy.

An effective antitrust enforcement program promotes innovation by, among other things, reducing barriers to entry. When antitrust enforcement is a reality, potential entrants have less reason to fear market exclusion by existing firms. Antitrust enforcement can also act to prevent horizontal or vertical mergers that create non-efficiency based advantages for incumbent market leaders. For these and other reasons, potential entrants are more likely to invest the capital and effort needed for innovation when they have a "fair" chance at success, that is, when they have a chance to compete on the economic merits of their products or services.

We have brought two major cases in recent months to guarantee exactly this result. The first was against Pilkington, a British company that has maintained a monopoly throughout the world over the past three decades in float glass technology, the lowest cost method of manufacturing float glass used for automobiles and buildings.

While Pilkington may well have achieved its monopoly position fair and square -- through patented innovations -- it later cemented and abused its float glass technology monopoly through unfair and unlawful means. Among other things, Pilkington entered into patent and know-how license agreements with its principal rivals, which discouraged the very firms most likely to develop and use their own innovations in float glass technology. Pilkington continued to enforce against those would-be competitors very restrictive license provisions to thwart competition long after its patents had expired. As a result, Pilkington's major competitors -- including such leading U.S. float glass manufacturers as PPG, Guardian and Ford -- were largely foreclosed from the important international float glass technology market, and consumers were deprived of the benefits of more efficient production techniques and higher quality glass.

In May, the Department reached a settlement and proposed consent decree now before the U.S. District Court for the District of Arizona, that will end Pilkington's unlawful practices and thus free up the market in world float glass technology. We estimate that the settlement will not only stimulate innovation in this industry, but will generate anywhere from $150 million to $1.25 billion in exports through the year 2000 of American goods and services used to build new float glass plants coming on stream throughout the world. The Pilkington case is a paradigm for how U.S. antitrust enforcement can foster innovation and open export markets previously closed by anticompetitive practices.

On July 15, the Department filed a Complaint against, and a proposed settlement with, Microsoft for engaging in practices that we believed stifled innovation in another technology market: the market for operating systems used in personal computers.

Based on an extensive investigation, the Complaint alleges that Microsoft had gained a dominant position in its market by marketing operating systems that the public clearly wanted; but, as in Pilkington, Microsoft then chose to employ various unlawful practices to cement its dominance and thwart innovation.

In particular, the Microsoft Complaint challenges a combination of provisions used by Microsoft in its license agreements with PC manufacturers -- "per processor" royalties that taxed competing operating systems, lengthy terms, and huge minimum commitments, strictly enforced -- that had the effect of locking competing operating systems out of the market. While impeding competitors' access to the PC manufacturing channel, the Complaint further alleges that Microsoft also tried to get developers of applications programs to sign non-disclosure agreements that would have had the effect of preventing them from writing programs for those competing operating systems.

Our proposed consent decree, now before the United States District Court in the District of Columbia, will end each and every one of these challenged practices. It will also prevent Microsoft from engaging in other practices, such as charging licensees on a lump sum basis or tying the sales of its operating systems to other products -- all practices that could produce anticompetitive effects similar to the unlawful practices in which Microsoft had previously engaged.

In short, the proposed Microsoft consent decree does precisely what the antitrust laws are designed to do: provide a level playing field so that all competitors have a fair shot at success on the merits.

Antitrust actions in previous Administrations have been central in promoting innovation and growth in the U.S. economy. The best, and most important example in U.S. history is the challenge and eventual breakup of AT&T -- still an ongoing saga in Congress and before the United States District Court for the District of Columbia.

Prior to the Antitrust Division's challenge in that lawsuit, most of the nation was served by an integrated monopolist that faced little or no rivalry in the various telecommunications markets in which it operated. The quality of service provided by that integrated monopolist was not terrible; indeed, it was considered to be good, at least when compared to that provided in other countries by their monopoly providers. However, consumer choice was hardly the hallmark of the integrated AT&T system. For the most part, improvements appeared at a pace dictated by AT&T and its lengthy depreciation schedules, not by the needs of business or residential customers, and certainly not by competition.

The divestiture required in the Modified Final Judgment in U.S. v. AT&T separated the local telephone companies from AT&T's long-distance service and equipment manufacturing firms. The newly independent local phone companies were required to provide access to AT&T's long distance rivals that was functionally equivalent to that provided to AT&T. Other equipment manufacturers now had an opportunity to sell their wares on the basis of quality, cost and efficiency to the divested local operating companies, AT&T's emerging long distance rivals, and users of telecommunications services.

In terms of innovation, the results have been spectacular. Fiber optic cable was promoted by Corning to Sprint and MCI. Advantages over the older cable technology for certain purposes are sufficiently clear that it is now widely deployed in local as well as long distance phone companies. The advances in fiber optics triggered responsive unexpected improvement in coaxial cable, through digital compression and other techniques. At the same time, satellite and other wireless technologies have advanced to offer still more options. How will these technologies be deployed in the Information Superhighway of the future? In what proportions will they be used? Which will be dominant? Which will be complementary? Which will be rendered obsolete? Nobody can speak with certainty on such issues. But one thing is clear -- intelligent antitrust enforcement action served as a catalyst to technological innovation in telecommunications that is extraordinary by any measure. And the best technology is most likely to succeed in a competitive environment.

Antitrust has an important role in preserving the rivalry that spurs innovation.