Why Antitrust Laws Reduce Competitiveness

It takes more entrepreneurs than lawyers to create and preserve competition and tech giants are in the eye of a hurricane.

According to the Wall Street Journal, both the Federal Trade Commission and the Justice Department’s antitrust division are investigating whether Amazon, Apple, Facebook and Google are violating antitrust laws by squeezing out competition.

BBC News has announced that a coalition of states (Colorado, Florida, Iowa, Nebraska, North Carolina, Ohio and Tennessee) plan to use every investigative tool at their disposal to determine whether Facebook’s actions may have been reducing consumers’ choices.

This is the beginning of a new antitrust crusade. There have been notable past cases against IBM and Microsoft. But there is no evidence that any of these suits or other antitrust actions have made the market more competitive.

In fact, there is considerable evidence to the contrary. Entrepreneurship and innovation have the power to change the market, overturning dominant companies—the Steve Jobses and Bill Gateses of this world are much more effective against monopolies than any lawyer.

Antitrust: From Theory to Practice

In theory, antitrust policy is based on public interest. It attempts to prevent monopolies from raising prices in order to obtain excessive profits and from slowing the pace of innovation by hampering potential new players from entering the market. Public opinion largely agrees.

In practice, however, as Dominick Armentano points out, “antitrust policy is both harmful and useless.” If a firm is substantially more efficient than its competitors because it offers the best product or service for the lowest price, it is likely to become the dominant or even the only supplier in a well-defined market. This efficiency does create a barrier to entry—but it is always both a benign and a precarious one. It is benign because only inefficient competitors are excluded. It is precarious because it lasts only as long as the dominant firm remains more efficient.

I’m referring to free-market monopolies here. State-sanctioned monopolies, such as national companies, are based on legal coercion and, unlike the first, are harmful, since they require government protection precisely to compensate for their market inefficiency.

There is no point in attempting to break up free-market monopolies through investigations and lawsuits. These monopolists are simply business organizations that are producing and selling quality goods at the lowest cost. Their position at the top of the market can—and will be—challenged at any time, since other firms are free to compete, innovate and improve. In fact, dominant firms are natural targets for competitors and are constantly at risk of being dethroned.

Ironically, we can see this in play in the most notorious antitrust battles of the tech area.

IBM vs. a High School Dropout

Between the 1960s and 1990s, IBM was an undisputed giant in the technological field. For many years, it was the only tech company on Fortune’s list of the ten biggest American corporations, which is what brought it to the antitrust authorities’ attention. In 1969, the Justice Department filed charges against the company. The “largest antitrust case in history,” as the New York Times reported, dragged on until 1982, when it was closed “without merit.”

But this was not the end. As Todd G. Buchholz observes, for more than three decades, the Justice Department attacked IBM as an unchallengeable force in the computer business. That sounds laughable now, but, from 1970–1985, IBM enjoyed a virtual monopoly, with a global market share of approximately 60%.

Guess who overthrew IBM? It wasn’t a bunch of antitrust lawyers from Yale, Stanford or Harvard, but a young entrepreneur, who had dropped out of school, didn’t have a dorm room (he slept on the floor in friends’ rooms), returned soda bottles for deposits to buy food and crossed town every Sunday night to get his one good meal of the week at a Hare Krishna temple. This young man would become world famous. His name was Steve Jobs.

Alongside Steve Wozniak, his nerd partner, Jobs founded the Apple computer company in his parents’ garage in Los Altos in 1976. By the early 1980s, the company was already challenging IBM’s dominion. Over the following years, Apple would conquer Silicon Valley.

According to the Financial Times, Apple is currently the second most valuable brand in the world (after eight years as the most valuable). IBM is no longer on their top ten list.

Microsoft: The Underdog Attacks

In the mid 1980s, desperate to break into the personal computer market, IBM outsourced production of an operating system to Microsoft. However, in their hurry, Big Blue made a huge mistake: the didn’t include an exclusivity clause. Bill Gates and his gang were free to sell the operating system to any PC maker—and they did! Microsoft’s market share soared. Windows became the dominant computing platform for the following generations—which, naturally, made them the new target of antitrust legislation.

Microsoft’s decision to integrate Internet Explorer into Windows 98 became the keystone of an antitrust suit against the company. Authorities took it as unquestionable evidence of the intent to monopolize the market by exploiting the dominance of the operating system to force consumers to use Microsoft’s bundled web browser, thereby excluding competitors (particularly Netscape).

Apparently, bureaucrats took it for granted that, without their help, hapless computer users would be unable to download and install rival browsers. This argument had some plausibility while Internet Explorer still enjoyed almost universal use (it had a 92%   market share in 2004).

Nevertheless, soon Mozilla Firefox, Chrome and Safari appeared and proved that integration was irrelevant—Internet Explorer was simply a better application than Netscape, which had enjoyed a 90% share of the market until 1995 and then plummeted into insignificance in less than a decade. Nowadays, if users want the current leading browser, they have to download and install it—and they do. They generally choose Chrome (with 63% of market share) because it is better than Internet Explorer (with only 4%).

Once more, it was not lawyers, but highly skilled competitors, creative entrepreneurs, who were responsible for breaking the prevailing monopoly. Antitrust suits make a lot of noise, but what guarantees more intense competition is entrepreneurship acting within a market framework free from well intentioned interventions. This allows a better product or application to decisively change companies’ respective market shares. This is good for consumers, who take advantage of the fierce competition.

The Dirty Hidden Purpose

In spite of past disappointments, the interventionist establishment still supports the energetic enforcement of antitrust laws. The results are astonishingly anti-consumer and anti-competitive.

Consumers are harmed because they miss out on the advantages of genuine fierce competition. Competitiveness is harmed because efficient and innovative firms are punished, whilst less efficient ones are protected. The antitrust message is clear: business organizations must be efficient, but not too efficient. Antitrust policies have a covert meaning that is the opposition of their ostensible one. As Robert P. Murphy has pointed out, “Naive citizens might believe that disinterested regulators bring antitrust charges against large corporations, but real businessmen know the truth … Antitrust suits are usually filed by firms that lose in free competition.”

We must remain alert.

Don’t forget that Orkut, Nokia and Yahoo were leaders of their markets—until the arrival of Facebook, Apple and Google. By the time bureaucrats finish their present investigations and bring their potential lawsuits, perhaps the latter three companies will not even be dominant anymore.