Bench Memos

Regulation by Antitrust?

There is almost nothing worse you can call a federal agency than a “regulator.” Those are fighting words. I committed that transgression in 1975, while on the staff of the Council of Economic Advisers when I recommended that both the Antitrust Division of the Department of Justice and the Federal Trade Commission be included as regulators in the Economic Report of the President. Their response to my draft was swift and clear: We are not regulatory agencies; we are law-enforcement agencies!

But that’s a distinction without a difference. Public antitrust enforcement can alter the direction of an industry as well as its composition. A government antitrust lawsuit can divert a firm’s resources and constrain its efforts to innovate and introduce new products. The mere threat of a lawsuit can have similar effects. Even an investigation, especially when prompted by competitors with congressional support, can lead to the same result.

In short, wielded with effect and with prior design, antitrust policy may be used to orchestrate what used to be called “industrial policy”: encouraging economic activity here, discouraging it there — government control of business, in other words. And we all know how well industrial policy has worked in advanced economies. Recall the “Japanese Superstate?” Despite forecasts that Japan would overtake America imminently, that did not happen. In fact, most of the industries the Japanese government championed, such as steel and shipping, faded from view. And those it opposed, such as automobiles and electronics, succeeded spectacularly.

The lesson is that if the free market — that is, the amalgam of consumers — is allowed to choose, it will make better choices, even though at times our tax, monetary, and international policies may be somewhat out of kilter. My particular concern here is that those in the administration and those in Congress who have tried without success to secure control over the Internet and other aspects of the IT space may be accomplishing their objectives through antitrust policy.

Just consider the current array of antitrust cases, investigations, and rumors of investigations. Google is being investigated by the FTC for its search engine and for its social program, Google-plus. Reportedly, DOJ has told Apple and five publishers they will be sued for price-fixing of e-books. It is safe to say the DOJ investigation of Microsoft set back that firm’s development a number of years.

Control of the IT space is not limited to antitrust, but patents as well. Microsoft has complained to the European Union that Google and Motorola are misusing patents. Google has complained that Microsoft, Oracle, Apple, and others are attacking Android by way of bogus patents.

And don’t forget that in Congress there was an immense fight over so-called net neutrality, and that the Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA) are still kicking.

Of course, there is something to the notion that antitrust authorities should not stand still when companies violate the antitrust laws. But two cautions are in order. First, it is not at all clear that much of the behavior being challenged is a clear-cut violation of antitrust law. In particular, the alleged violations in the IT space tend to be based on theories that are out of the mainstream and are not at all certain to sustain judicial challenge. And in cases where there is little reason to believe that the alleged perpetrators knew or should have known they were violating the law, for the antitrust authorities to take precipitous action is to cast a pall over all entrepreneurial activities in that sector of the economy.

Second, even in cases where the violations are reasonably clear-cut, there is still the matter of prosecutorial discretion, and the enforcers’ choice of what to do should be based on a benefit-cost test, with the goal being competition and thus consumer welfare, not successful litigation.

The latest focus of public antitrust scrutiny — the IT space — is clearly the most dynamic, competitive area of our economy. Quality-adjusted prices are falling precipitously. New, improved hardware and software are being introduced at a rate that takes your breath away. The churning that is taking place is exactly what Joseph Schumpeter had in mind by the term “creative destruction.”

For the U.S. government to impose its discipline on this market through antitrust policy would not only be misguided, it could very well make one of America’s leading industries one of the World’s laggards.

— Jim Miller served as President Reagan’s chairman of the FTC, 1981–1985. He is an adviser to Google; the views he expresses are his own.

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