Antitrust might be the worst thing since A-Spec. Empirics go aff.

If firms in free markets can really monopolize in restraint of trade, the empirical evidence should reside in the many classic antitrust cases brought over the last 100 years. Yet an examination of some of the most famous of these classic antitrust cases reveals that the firms indicted and (mostly) convicted were generally increasing market output, lowering market prices, and innovating.

Standard Oil of New Jersey (1911)

One of the most famous (and misunderstood) antitrust cases in history is US v. Standard Oil of New Jersey (1911).

The popular explanation of this case is that Standard Oil monopolized the oil industry, destroyed rivals through the use of predatory price-cutting, raised prices to consumers, and was punished by the Supreme Court for these proven transgressions. Nice story but totally false.

First, Standard never even monopolized petroleum refining, let alone the entire oil industry (production, transportation, refining, distribution) which would have been an impossibility. Even in domestic refining, Standard’s share of the market declined for decades prior to the antitrust case (64% in 1907) and there were at least 137 competitors (firms like Shell, Gulf, Texaco) in oil refining in 1911.

Second, although predatory practices were alleged by the government at trial, Standard offered rebuttal on all counts. Neither the trial court nor the Supreme Court ever made any specific finding of guilt on the conflicting charges of predatory practices.

Third, petroleum market outputs increased and prices declined for decades during the alleged period of “monopolization” by Standard Oil. For example, prices for kerosene (the industry’s major product) were 30 cents a gallon in 1869 and fell to about 6 cents a gallon at the time of the antitrust trial.

Finally, the Supreme Court broke up the Standard Oil holding company not because of any demonstrable harm to consumers (there was none) but because it discerned some vague “intent” to monopolize through Standard’s many mergers, an “intent” that just as clearly never succeeded in producing any monopoly. Yet generations of economic and legal commentators have been misled about monopoly and the alleged efficacy of antitrust policy because of the “facts everybody knows” concerning the Standard Oil antitrust case.

American Tobacco (1911)

The antitrust case against the American Tobacco Company (US v. American Tobacco, 1911) is similar in many respects to Standard Oil. American Tobacco put together a large diversified tobacco company through merger with smaller specialty companies. Yet they were never able to monopolize the tobacco industry as the government alleged, nor were they able to raise prices of tobacco products. Outputs increased and prices fell for decades prior to the antitrust suit. Many thousands of cigarette, smoking tobacco, snuff, and cigar companies competed against the American companies and ease of entry and availability of raw materials (leaf tobacco obtained at auction) made vigorous competition inevitable. The American Tobacco holding company was broken up by the Supreme Court because of some vague intent to monopolize (again, as evidenced through mergers) but, like Standard Oil, there was a total absence of demonstrable (economic) injury to consumers of tobacco products.

Alcoa (1945)

US v. Aluminum Company of America (1945) is one of the most egregious anticonsumer antitrust cases on record. Modern trustbusters are forever offering apologies for Alcoa. And with good reason. The government pursued Alcoa in court for 13 years (between 1937 and 1950). Yet after a long and laborious trial that ended in 1939, Judge Caffey dismissed almost 150 separate government charges against the defendant Alcoa, including allegations that they monopolized waterpower sites (for producing electricity) and monopolized the raw material bauxite, from which aluminum ingot is made. Caffey also determined that Alcoa innovated rapidly, expanded aluminum refining capacity and outputs continuously, and had lowered aluminum ingot prices for 50 years, while taking a very modest return on its investment.

Yet an appellate court in 1945 (acting in lieu of the Supreme Court) decided that expanding outputs and lowering prices illegally excluded rivals from the opportunity to compete and thereby violated antitrust law. (Translation: if Alcoa had been less efficient in serving its customers there would have been more “competition” — read competitors — less exclusion, and no antitrust violation.) The Alcoa appellate decision confirmed that antitrust was hell bound: economic efficiency now counted as illegally exclusionary and ultimately a violation of law.

American Can (1949) and United Shoe (1954)

This trend was confirmed in US v. American Can (1949) and in US v. United Shoe Machinery Corporation (1953). In American Can, the trial judge determined that American Can held its dominant market position because it “coerced” its customers into signing long-term leases. How, in a free market, did it do that? Why, by offering generous and attractive terms to its customers such as generous price discounts for large orders of cans. So, as a part of his final decision in the case, the judge ordered American to raise prices to its can customers so that there could be more competition with less efficient can producers and can-closing machinery makers. Consumers of cans ultimately paid for this contrived increase in “competition.”

In United Shoe, United had manufactured shoe machinery and leased its many machines to hundreds of domestic and international shoemakers. Its market share was always high (85%) because (as the trial court found) its machines were technologically superior to those of competitors, its leasing rates were reasonable, and it repaired machines promptly and at no extra charge to the customer. As a consequence of this superior economic performance, customers were extremely loyal and tended to renew leases when old ones expired; less efficient rivals had great difficulty convincing shoe companies to switch their business since the shoe companies were generally satisfied with United’s terms. Several shoemakers testified for the defendant United Shoe at the trial.

Yet the trial judge spied the illegality inherent in superior economic performance provided over many decades: smaller rivals were thereby “excluded” from competing and that fact violated the antitrust laws. The trial court then saddled United with restrictions that, it reasoned, would destroy its unique economic advantages and put it back in the same (less efficient) class as its competitors. But when the legal sanctions failed to really hamper United Shoe’s efficiency, the Department of Justice appealed the lower court decision to the US Supreme Court (1968), which divested (and eventually wrecked) the company.

The wrong-headed theory being actualized in all of these cases is the notion that free consumer choice and business efficiency somehow restrain trade and violate the antitrust law, the exact opposite of the truth. Efficient firms such as Alcoa and United Shoe innovated new products and production techniques and lowered prices; they always did more business (while less efficient rivals did less) in order to keep and even expand their dominant market position. But this is precisely how free markets are supposed to work, such that scarce resources tend to maximize consumer value. Yet consistently throughout business history, antitrust regulation has been employed (by both government and business rivals) as a legal weapon to bludgeon aggressively competitive firms that innovate and lower costs and prices.

Microsoft (2001)

Despite so-called regulatory reforms, this pernicious trend in antitrust enforcement has continued. The best and most recent example is, of course, US v. Microsoft (2001). The heart of the antitrust case brought by the Department of Justice and 19 state attorney generals in 1998 was that Microsoft’s decision to integrated its Web browser, Explorer, into its Windows 98 operating software system illegally excluded competitive browsers, such as rival Netscape’s Navigator, and evidenced an intent to “monopolize” in violation of the Sherman Act.

Since Microsoft allegedly held a “monopoly” in operating systems and employed its monopoly power to exclude competitors unfairly, trial court judge Thomas Penfield Jackson, having agreed with the bulk of the government’s argument, found the company guilty of illegal monopolization and ordered the firm regulated and divested. On appeal, however, important parts of this decision, in particular the divestiture order, were overturned and the lower court judge rebuked.

The government’s charges were always baseless. The plaintiffs first argued that Microsoft held a monopoly in operating systems (a near 90% market share) and that they had leveraged that market power into the browser market to crush Netscape. But the government’s market share numbers were grossly inaccurate. To arrive at a so-called monopoly market share, the trial court accepted a definition of the relevant market (”single user desktop PCs that use an Intel-compatible chip”) that conveniently excluded all of the computers and networking software made by Microsoft’s major rivals such as Apple, Sun, Novell, and a host of other companies. In addition, counting only licensed systems allowed Judge Jackson to exclude arbitrarily all of the operating systems sold at retail, those downloaded from the Web, and all “naked” computers shipped without any operating system installed at all. These factual errors narrowed severely the actual competitive market and simply turned Microsoft into the “monopolist” the government required for its antitrust violation. If market share is meaningful at all in antitrust analysis (extremely doubtful), Microsoft’s actual share of any realistic relevant market was less than 70% and not enough for any monopoly designation.

But if Microsoft had no actual monopoly, then its battle with Netscape over the browser market takes on a totally different perspective. When Microsoft first integrated its browser into its operating system software, it was Netscape that held the bulk of the browser sales. It was Netscape that held the “dominant” market position in browsers and it was Microsoft that was attempting to better compete by improving the terms of exchange for PC consumers. Microsoft proceeded to fully integrate its browser and effectively reduce its price to zero and consumers responded favorably; Microsoft’s browser did more business and Netscape’s browser did less. Nor was the Netscape browser ever unfairly “foreclosed” or “excluded” from the market; PC users downloaded millions of copies of Netscape’s browser during the period of alleged exclusion by Microsoft. Thus, the entire government’s case was an attempt to regulate innovation and consumer choice at the behest of ambitious attorneys and disgruntled competitors. That Microsoft eventually emerged victorious in this particular case at the appellate level (after a decade of litigation some of which involved the FTC) does not mitigate the absolute folly of this persecution.

CONCLUSIONS

Antitrust theory and history are both a myth and a hoax. The laws were never intended to help consumers (Robert Bork’s protestations to the contrary) and their long historical track record is that they have not helped consumers. They have, instead, punished innovative and efficient business organizations while protecting less efficient competitors and every state-sanctioned monopoly. They have tended to make consumers poorer and the overall economy less efficient and they deserve to be repealed, not reformed. That the antitrust paradigm still can find support among a majority of economists, lawyers, and the public is a testament to intellectual laziness, to the power of special interest, and to decades of successful myth making.