Dear Diary: There’s Still an Antitrust Law

A 7-0 decision by a U.S. appeals court in the Microsoft case is far from the final word for the litigation itself. But it should put to rest once and for all Microsoft’s arguments--and those of some of its free-market defenders--that the antitrust laws are obsolete and have no place in the “new economy.”

In upholding the district court’s key findings--that Microsoft has monopoly power and used it to harm consumers--the appeals court sided conclusively with those of us who have argued that antitrust laws can and should continue to play a role.

The Microsoft case has nowhere been more controversial than within the community of market-oriented conservatives. Some, like former White House Counsel C. Boyden Gray and American Enterprise Institute columnist James K. Glassman, have called the case “laughable.” In these circles, the case was most often explained in political terms: A liberal Justice Department inherently jealous of a big, successful company allowed itself to be used by scheming competitors seeking to accomplish in the courts what they could not accomplish in the marketplace.

As for free-market scholars and market-oriented think tanks like my own Progress and Freedom Foundation, which have found merit in the case, critics have often implied bad motives were at work. Some have suggested that anyone who failed to toe the libertarian/Microsoft line must have been bought.

When forced to debate substance, Microsoft’s defenders have proffered three arguments: There was no monopoly; Microsoft didn’t misuse it; and, there is no remedy that can make things better. On Thursday, the appeals court conclusively rejected the first two arguments and remanded the third back to the district court.

The existence of monopoly--or, more technically, market power--is at the core of any Sherman Act case. With market power, a firm can profitably engage in activities that harm consumers such as raising prices, delaying innovation and entering into contracts designed to deter competition. In competitive markets, consumers police such actions by taking their business to rivals who offer lower prices, better products and more attractive terms.

Market power exists where consumers have no practical alternative to the monopolized product and where conditions are such that it is impractical for potential competitors to offer one.

The first condition is typically associated with a high market share. The second requires the existence of barriers to entry, which is to say some condition that makes it difficult or impossible for new firms to make and market the monopolized product.

For Microsoft’s defenders, such conditions not only did not exist, but, because of the “uniquely dynamic” nature of the computer marketplace, never could. Windows really did have competitors, like Apple, for instance, and there were more on the horizon, like Linux and Palm Pilots, that would be replacing Windows any day now. Really. Soon.

Seven judges on the appeals court unanimously turned thumbs down on these New Age theories. There is no new cyber-reality in which Palm Pilots substitute for desktop PCs; a 95% market share still matters.

And, for all the theorizing about dynamic markets, there is, as the district court found, an “applications barrier to entry” that makes it difficult or impossible for new firms to enter. One by one, the court examined Microsoft’s points, and in the end demolished them in a single sentence: “Rejecting each argument, we uphold the district court’s finding of monopoly power in its entirety.”

As the court pointed out, however, it is not the existence of market power that matters but what Microsoft did with that power: “It is certainly true that Windows may have gained its initial dominance in the operating system market competitively through superior foresight or quality. But this case is not about Microsoft’s initial acquisition of monopoly power. It is about Microsoft’s efforts to maintain this position through means other than competition on the merits.”

For the most part, Microsoft’s defenders have tried to avoid getting specific about its illegal conduct, preferring instead to characterize the antitrust laws in general, or the district court, in particular, as being clueless about market realities. What looks like anti-competitive conduct to the court, they suggest, is just the rough and tumble of the marketplace; sharp elbows in a competitive free-for-all that benefits consumers in the end.

But today’s antitrust laws are no longer the blunt instrument their critics make them out to be. To be illegal, conduct must harm consumers, not competitors, and any harm caused must be weighed against the benefits of greater efficiencies.

The appeals court’s ruling leaves conservative critics of the Microsoft case with only one last argument: that any remedy would be too slow, too cumbersome and too regulatory to benefit consumers. Here, everyone admits, the solutions grow more difficult. And yet, there is no doubt that in at least one recent case--the 1984 breakup of AT&T--the; government was able to craft a remedy that replaced monopoly with competition and fostered the very innovation that made the Internet a reality.

Can antitrust law do it again? The jury on that is still out. But with the appeals court decision, the challenge at least is clear: We must restore competition to a market that for too long has suffered from the anti-competitive acts of an aggressive monopolist.

For conservatives, too, the debate must shift from whether the antitrust laws have a role in the new economy to what that role is and how best to carry it out.