Ronald Cass, Dean Emeritus of Boston University School of Law, has penned the best paper on antitrust regulation that you will read this year, especially if you’re interested in the relationship between antitrust and information technology sectors. His paper is entitled, “Antitrust for High-Tech and Low: Regulation, Innovation, and Risk,” and it makes two straightforward points:
- Antitrust enforcement has characteristics and risks similar to other forms of regulation.
- Antitrust authorities need to exercise special care in making enforcement decisions respecting conduct of individual dominant firms in high-technology industries.
Here are some highlights from the paper that build on those two points.
Antitrust Is Economic Regulation & Carries Many of the Same Risks
As I noted in my 2009 review of Gary Reback’s antitrust screed “Free the Market,” there are few things that frustrate me more than the myth that antitrust is somehow not a form of economic regulation. I hear this tired old argument trotted out time and time again, even by many conservatives. It’s utter bunk. Cass makes that abundantly clear in his paper. “Application of antitrust laws by government officials… has the same risks and problems associated with other forms of regulation, including other “fair play” regulations,” notes Cass. “It requires considerable information on how particular firms and particular markets work, on the effect of particular business practices, and on the costs and benefits of intervening to stop a particular practice as opposed to allowing market forces to limit its effects,” he says (p. 6-7).
Cass isn’t the only one who has made this point. As James Miller notes in this Federalist Society video (starting around the 18-minute mark), antitrust is not just a form of regulation but it often takes the form of a industrial policy scheme, complete with all its failings. Rick Rule agrees, noting how antitrust is a specialized form of regulation. Cass also appeared at that event and, starting around the 36-minute mark, makes his case for antitrust as just another form of regulation. If you want to watch the entire panel discussion, I’ve embedded the video down below.
Information Technology Markets are Highly Dynamic; Antitrust Can Hurt High-Tech Innovation
The more important takeaway from Cass’s excellent paper is that, precisely because antitrust regulation is haunted by many of the same problems as traditional economic regulatory controls, it is particularly ill-suited for fast-paced, rapidly-evolving information technology markets. “The problem arises in part because, while the concerns over network effects are dynamic, the principal tools for antitrust analysis – especially respecting definition of the relevant market – are static,” Cass observes. “These tools almost inevitably orient enforcers’ decisions toward excessive concern with one part of what, rightly understood, is a much larger competitive picture, even though the composition of the larger picture is difficult to predict. (p. 3) “Rather than demonstrating special caution in venturing into this set of cases, however, antitrust enforcers seem anxious to engage the leading high-technology firms while markets are evolving at a rapid pace,” he notes. (p. 2) Such intervention is particularly unwise, Cass argues, because:
These are markets where it is particularly difficult to maintain dominance, where sustained leadership over some time frame most likely indicates strong efficiencies (strong consumer value), and where innovations that are not yet recognized as significant can offer the strongest constraints on dominant firm behavior and the most important challenges to crafting a meaningful remedy that does more than disadvantage an individual contestant in a changing world. (p. 35)
The real danger of excessive antitrust is how it can force innovators to take their eye off the ball and spend more time trying to please policymakers than the general public. Cass notes:
If successful firms trying to stay on top in industries that can change rapidly and unpredictably often become targets for antitrust scrutiny, rational calculations of innovation costs (investments that help firms succeed) will necessarily include the (discounted) cost of contesting antitrust challenges as well as the costs of directly pursuing innovation. Antitrust inquiries can exact extraordinarily high costs from target firms, both in direct expenditures and in distraction from core business operations. That is true even for inquiries that do not result in suits, as enterprises facing the possibility of a long, expensive lawsuit (and, if the suit is lost, a potentially expensive and disruptive remedy) obviously will respond by trying both to persuade enforcement authorities that their conduct has been lawful and to avoid conduct that will increase the prospect of an action being filed. (p. 10)
Cass identifies IBM’s 13-year long antitrust ordeal as “the paradigmatic case for ill-conceived antitrust enforcement” where all these problems where on display. During the 13-year case, the government collected more than 750 million documents and required IBM to retain 200 attorneys at one point. (Read CNet staff writer Rachel Konrad’s summary of the fiasco from back in 2000). The DOJ finally abandoned the case in 1982 after it became clear how markets had evolved around whatever earlier “dominance” IBM had in mainframe markets. Namely, the desktop PC and software revolution had passed IBM (and clueless antitrust regulators) right by. “In the end,” notes Cass, “the case stands for the proposition that government officials, even with the benefit of extensive investigation and expertise, are unlikely to appreciate the most important sources of competition to enterprises that dominate a particular market and are especially prone to ill-advised interventions based on theoretical objections to market structure.” (p. 16) Worse yet, he notes, was the impact on IBM’s ability to innovate:
More significant than the draw on IBM’s funds were two other byproducts of the antitrust litigation: the distraction of its executives from planning and executing functions necessary to IBM’s long-term business interests, and the active discouragement of decisions that would have benefited the business but might have triggered further antitrust action. (p. 15)
As Peter Pitsch noted in his 1996 PFF book The Innovation Age, “In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company.” Pitsch noted that IBM’s manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, “in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion.” IBM has recovered and is a very different company today, of course. Yet, it seems clear that the DOJ’s antitrust industrial policy scheming decimated the firm’s chances of keeping pace with others digital technology leaders during the 80s and even 90s.
Cass notes that this same thing played out for Microsoft following its antitrust ordeal as the firm was forced to become extra cautious about how it innovated with regulators always staring over their shoulder. Yet, “it is plain that the real competitive threat to the company came from innovations that lay outside the market as government officials saw it,” Cass notes, since few were talking about search and social networking in the late 90s as a serious threat to Microsoft’s hegemony.
Lessons: Appreciate Dynamism and Be Careful about Market Definition
Cass leaves us with several lessons from the history he recounts. I’ll just cite a few passages here, but generally his lessons can be boiled down to: (1) before intervening, appreciate just how dynamic these information technology markets can be; and, relatedly, (2) be very careful about how you define markets for purposes of antitrust analysis. He notes, for example:
- With this in mind, the overarching caution to antitrust enforcers that emerges from the cases reviewed above is against presuming that the obvious, common-sense boundaries around a market… appropriately set the field of vision for antitrust enforcement (much less the artificially circumscribed market definitions that enforcers will urge when a case has been initiated). The market boundaries that so often are taken for granted frequently fail to capture the most important sources of competition. That is true even in markets as “old-line” and seemingly simple as the auto market, but it is even more likely to be true in high-technology industries where, almost by definition, new innovations will revise established assumptions about how things are done. The market definition problem reflects more than the fact that officials so frequently cannot see changes coming that will dramatically alter competitive conditions in an industry. Almost no one, even those most intimately engaged in the industry itself, is apt to make good predictions about which technologies will succeed or what the ultimate scope of a new technology will be. (p. 28-9)
- The more trenchant flaw in antitrust enforcement is not officials’ failure to identify specific market changes or specific companies that will dramatically rise or fall in value. Rather, the larger problem is that it is exceedingly difficult for government officials to discern the critical factors that explain what actually makes a particular firm dominant, the factors that affect the durability of dominance, or the kinds of change in the market (either on the demand side or the supply side) that could dramatically erode that dominance. (p. 28)
- Despite the networks they have established, each of these businesses also is notable for the relative ease with which consumers can switch from one provider (or one technology) to another – allowing consumers to substitute one product or service for another or, in many cases, to add additional products or services from multiple providers at minimal or zero cost. (p. 31)
These lessons and themes have motivated all my thinking about how information technology policy should be formulated and the (very limited) role that antitrust regulation should play. Just about every other installment of my weekly Forbes column has dealt with such issues, including most notably these essays:
- “Tech Titans & Schumpeter’s Vision,” (8/22/11)
- “No One Owns A Techno Crystal Ball” (10/2/11)
- “The Rule Of Three: The Nature of Competition In The Digital Economy” (6/29/12)
- “Bye Bye BlackBerry. How Long Will Apple Last?” (4/1/12)
- “Regulatory, Antitrust and Disruptive Risks Threaten Apple’s Empire” (4/8/12)
- “Searching In Vain For An Antitrust Case Against Google” (6/30/12)
- “Sunsetting Technology Regulation: Applying Moore’s Law to Washington” (3/25/12)
Anyway, please make sure to read the entire Cass paper. It’s a keeper. I know I will be citing it in virtually everything I write on the topic in coming months and years. In a follow-up post, I will offer a list of other important papers on antitrust and high-tech markets that you want to have on your reading list.