The trustbusters' new tools economist.com
Also new at www.economist.com, a summary page of past articles, many of which I've cited here, now accessible for free.
The Microsoft case economist.com
Ok, if you guys are going to keep discussing policy, I will contribute this piece from Bill's former favorite magazine, May 2 issue. Here, the much dreaded Chicago School is taken on in somewhat broader terms than network effects. I certainly wouldn't try to judge the merits of these arguments, but they sound. . . interesting.
First, a little snippet for the local expert on antitrust and all other matters, who of course is never wrong.
Surprisingly perhaps, the controversies surrounding Microsoft plough little new intellectual ground. Although technophiles are prone to assert that advanced technology has changed everything, few new antritrust problems are posed by Microsoft's purported sins, which involve mostly predation against competitors in a supposed effort to monopolise parts of the software industry. If advanced technology has changed competition policy, it is for another reason entirely: that computers have greatly enhanced economists' ability to crunch numbers and model behaviour. The pages that follow describe these new techniques and the thinking that lies behind them.
Of course, it's all new and different to the Mind of Reg(TM), where history begins with Bill, and everything is based on the necessity of a proprietary lock, aka monopolistic death grip, in business. Taught in first year B-school, you know. Bill's former favorite magazine is just selling advertising here. But enough gratuitous sarcasm, on to the meat of the article. A long exerpt here which seems to go to the heart of the matter.
The belief that firms would find clever ways to hinder competition was one of the original motives for anti-monopoly laws. This was a threat that the Chicago theorists did not take seriously. Their predilection was that firms do business in whatever way they find most efficient. Other motivations such as harming rivals are not likely to maximise profits, and are therefore improbable. Robert Bork, a Chicago-trained legal scholar, was one of the most influential antitrust thinkers of the 1970s. He argued that vertical restraints, such as "tying" (requiring the purchaser of one product to buy another) and "resale price maintenance" (in which a manufacturer tells retailers what they may charge) are unlikely ever to lead to higher prices and should therefore always be legal.
Mr Bork says his views have not changed-even though he is now an adviser to Netscape, a software firm that has accused Microsoft of predatory behaviour. What has changed is the sorts of models game theorists employ, which are far richer and more complex than those used two decades ago. "The Chicago theories assume perfect competition or perfect monopoly, and nothing in between," says Steven Salop, an economist at Georgetown University Law School in Washington, DC. "The post-Chicago school is based on models of strategic competition among oligopolists." . . .
Predatory behaviour also looks less innocent through the lens of sophisticated game theory. Following the Chicago lead, most economists until recently viewed it as pro-competitive. In its most obvious form, one firm charges unrealistically low prices to drive another out of the market. Low prices benefit consumers, went the thinking, and the predator rarely sustains monopoly profits for long.
This reasoning is correct-in some cases. Enforcers "really do have to worry about scaring off real competition," says Jonathan Baker, chief economist at the FTC. However, by simulating complex interactions among firms, economists are able to show that predatory pricing may be highly profitable. Authorities in both Europe and America are studying allegations that big airlines slash fares and add seats when a discount airline starts service on a given route. Such predation would pay off if, by establishing a reputation for aggressive counter-attacks, a carrier could deter competition on other routes. This argument has yet to be tested in American courts, the economics of predatory pricing is still fairly underdeveloped, and there are few theories to distinguish desirable price competition from undesirable predation.
In addition, the academics of the Chicago school failed to identify some other kinds of predatory behaviour:
Raising rivals' costs. When America's Justice Department moved to block the merger of two aerospace companies, Lockheed-Martin and Northrop Grumman, on March 23rd, among its concerns was the firms' role as components suppliers for other defence contractors. After the merger, might not those subsidiaries offer higher prices or less advanced products to Lockheed's rivals? In a highly competitive industry, the rivals could simply find other suppliers. But in an oligopolistic industry, the government fears, a dominant Lockheed might be able to get away with predatory behaviour, forcing up prices for competitors and thus squeezing their profits. The case is now in court.
Reducing rivals' revenues. A different sort of predation was behind a Microsoft strategy that obliged computer makers to pay it a royalty on each machine they sold, whether or not it carried Microsoft's software. Frederick Warren-Boulton, a Washington-based economist and former Justice Department official, labels this a "tax" on competitors: customers will be unwilling to pay much for other firms' software, as they must already pay for Microsoft's. Microsoft changed its policy in 1995, but a current court case, dealing with its efforts to undercut Netscape by giving away its Internet browser, raises similar issues. "This is a class of problem that has not been analysed before," Mr Warren-Boulton says.
Connected markets. The Chicago school held that if markets are linked, a firm with a monopoly in one cannot boost profits by monopolising another. That is no longer accepted. If Microsoft monopolises browsers, economists now argue, it could prevent competitors such as Netscape from using browsers to challenge its dominant position in operating software. The European Union is examining similar issues in broadcasting, on the theory that if a firm obtains market power in, say, sports programming, it can leverage that into an even more profitable market position in pay-TV. Martin Cave of Brunel University, near London, believes that this idea could open up whole new areas of investigation for the antitrust authorities.
None of these types of predation, it is worth pointing out, can succeed in a highly competitive environment of the kind the Chicago theorists assumed. However, economists have concluded that matters are different if a firm has already gained a dominant position in a market. In that case, predation may strengthen the dominant company's position and generate more profits at the consumers' expense.
Very interesting I say. I especially like that last line about the Chicago theorists assuming a highly competitive environment, contrasted with all the past talk of how it's impossible to compete with Microsoft. Of course, that last is always in a different context, in the antitrust context the line is "the whining crybabies should just compete", even if it's impossible. Naive high school civics guy disagrees on who the whining crybabies are, of course.
Cheers, Dan. |
