By Glenn Oppel
The spread of regulatory activism in
our government, and in the Department of Justice in particular, is threatening to
hamstring our free-market economy and crush the entrepreneurial spirit of the American
Under the guise of protecting Americans from unfair business practices, also known as antitrust laws, the Department of Justice has embarked upon a dangerous course of action that will extend the ability of the government to regulate commercial innovation and competition. In order to understand how this threatens American consumers, it is helpful to examine the sad history of our governments regulation of successful business ventures.
The birth of antitrust came with passage of the Sherman Antitrust Act of 1890, which granted power to the federal government ostensibly to break up monopolies to ensure competition and protect consumers from high prices for goods and services. The law is still on the books and is rigorously applied by the federal government, and invoked by business lobbyists who want to use the political process to thwart their competition. Even though the law has survived for more than a century, its impact on business and consumers should a thorough reevaluation by the public.
Currently, the Department of Justice is accusing Microsoft Corporation of violating the Sherman Antitrust Act, and asserts that Microsoft is using its supposed monopoly power to engage in aggressive business practices deemed anti-competitive by the government. In other words, Microsoft is facing punishment from the federal government for being too competitive, and therefore too successful.
Punishing success is nothing new when we consider the history of antitrust prosecution by the federal government. One of the first victims of trustbusting was Standard Oil Company, which was broken up into separate oil refining and pipeline companies in 1911. Standard Oil was formed in 1865 by John D. Rockefeller and quickly became known as a marvel of economic efficiency, a fact which even its competitors conceded. Standard Oil was so efficient that it caused the prices of refined petroleum to fall from over 30 cents per gallon in 1869 to 5.9 cents by 1887. During the same period, Standard Oil reduced its average costs from 3 cents to 0.29 cents per gallon.
Standard Oil was nothing more than an efficient competitor. It did not, despite the claims of the federal government and competitors, possess the primary attribute of a monopoly a large market share coupled with a lack of competition. In fact, Standard Oils market share declined from 88 percent in 1890 to 64 percent in 1911. Because of fierce competition from Associated Oil and Gas, Texaco, the Gulf Company, and numerous independent refineries, the companys oil production as a percentage of total market supply declined from 34 percent in 1898 to 11 percent in 1911. Standard Oil never came close to capturing a large enough share of the market to be considered a bona-fide monopoly.
It made no economic sense, therefore, for the federal government to break up Standard Oil. So, why did it do so? One explanation is the anti-business animus that pervaded government in the wake of the Industrial Revolution championed in large part by President Theodore Roosevelt and his Progressive cohorts. Roosevelt and his trust-busters believed that big businesses like Standard Oil were greedy corporations intent on making themselves filthy rich, exterminating competition and shafting the consumer in the process. To the federal government, Standard Oil was the perfect first target because its owner, Rockefeller, could be portrayed to the public as the quintessential robber baron for everyone to hate and envy.
Another explanation for the breakup of Standard Oil is rooted in the efforts of less efficient competitors who, having failed to achieve competitive success in the marketplace, turned to their powerful allies in the government to go after the Standard Oil juggernaut. Standard Oils competitors first actively pushed for the passage of antitrust legislation, then, once the Sherman Antitrust Act was passed, aggressively lobbied for prosecution of Standard Oil.
Now, almost one hundred years later, Bill Gates is living the experience of Rockefeller almost to the t. Like Rockefeller, Gates is being attacked for his ability to innovate, expand, and rapidly reduce prices even while increasing quality. In other words, he is being punished for being too competitive and too successful, just like Rockefeller. Like the antitrust lawsuit against Standard Oil, the antitrust lawsuit against Microsoft was initiated by less efficient competitors namely Netscape, Sun Microsystems, and Novell who sought to achieve through political means what they could not in the marketplace, i.e. market parity with Microsoft.
The Sherman Antitrust Act was detrimental to consumers back in the days of Standard Oil and remains so today. For large companies, the possibility of antitrust prosecution discourages many aspects of entrepreneurial activity. Paradoxically, antitrust undermines competition because it discourages large corporations from developing a better product at lower cost for fear that it may outdo its competition, thereby increasing its market share and attracting the attention of trust-busters. This means that consumers will be denied more innovative products with better quality and at lower prices.
Furthermore, with the pall of antitrust prosecution hanging over their heads, large corporations may forego advertising for fear, once again, that a successful advertising campaign may encourage consumers to purchase its products at the expense of its competition, thereby disrupting the governments notion of balanced market share. Advertising is the consumers primary means of learning about a corporations product its price, quality, availability, aesthetic characteristics, and the like. Product advertisement is crucial to empowering consumers with the information they need to make informed purchases.
In addition to the impact on entrepreneurial activity, antitrust prosecution has a corresponding broader impact on the general economy. Because antitrust laws are basically anti-competitive, a non-competitive companys ability to remain in the market is in direct proportion to its political clout i.e. its ability to exploit antitrust laws to its own advantage. Large companies like Netscape, Sun Microsystems, and Novell have a lot of political clout and have invoked antitrust laws to hamstring Microsoft so that their position in the market remains intact.
But what does allowing less efficient companies to remain in the market mean to the economy? First, inefficient companies invariably overestimate both their efficiency and their market share, setting themselves up for failure when a capable competitor enters the market. Such companies will have to cut their losses by taking such measures as reducing their workforce or using capital for debt reduction instead of research and development for product innovation. Correspondingly, antitrust discourages the maximization of profit for efficient companies. Profit allows for expansion which generally produces more jobs and more products at cheaper prices.
The historical inability of antitrust laws to safeguard competition and protect consumers from high prices should incite those who are pro-business and pro-consumer to talk to their members of Congress about correcting the anti-business bias of the Sherman Antitrust Act. Moreover, consumers should applaud and defend Bill Gates and Microsoft for providing consumers with the best possible computer products for the best possible price.
Glenn Oppel is the Policy & Research Manager of The Seniors Coalition
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