The Asian Wall Street Journal
Op-Ed piece
July 3, 2001











Looking Glass Logic
by Bretigne Shaffer





Antitrust law doesn't necessarily have anything to do with economic reality


The Microsoft case at last has a silver lining. With the markets cheering last week's reversal of the court-ordered breakup, countries around the world who've considered adopting U.S.-style antitrust policy are getting to see what that policy has wrought.

The U.S. Appeals Court was severe in its condemnation of Thomas P. Jackson - the judge who had ordered the breakup. "The actions of the trial judge," the court said, "seriously tainted the proceedings . . . and called into question the integrity of the judicial process." At the heart of this costly debacle, however, lies not a biased and unprofessional judge, but a law that is itself both so fundamentally flawed and ill-defined that it invites abuse. Indeed, the appeals court itself ended up affirming some of the government's most questionable charges - although presumably because it felt forced to heed Judge Jackson's findings of fact.

To bring its case against Microsoft, the U.S. government relied on static equilibrium analysis - the theoretical foundation upon which antitrust law is based. The problem is that the world of static analysis bears little resemblance to the real world of constant flux. Instead, it assumes away some of the most essential elements of competition to create its ideal of "perfect competition." As Nobel laureate F.A. Hayek described it, this ideal state "means indeed the absence of all competitive activities."

Turning such a pie-in-the-sky theory into law has bizarre real-life consequences. In responding to Microsoft's appeal of the trial verdict, the government was unable to tell the court how the company could have acted legally to further its own legitimate business interests. Earlier, the U.S. Department of Justice had asserted that Microsoft would have been within the bounds of the law had it distributed a version of the Windows operating system with its built-in Internet browser disabled. The assertion illustrates how arbitrary the distinctions under antitrust can become. As one judge put it during the appeals proceedings, the government's theory could also have been used to require clock radios to be sold without the clocks.

There are obvious difficulties involved in trying to conduct business in such a legal environment. The lack of clear-cut standards as to what constitutes illegal behavior turns the law into a potentially powerful weapon for businesses to use against their competitors. In the Microsoft case, the U.S. government was able to convince both the trial judge and the appeals court to define the relevant market to exclude several actual competitors - most absurdly Apple's Macintosh - allowing it to claim that Microsoft had a monopoly in operating systems.

The drive to prosecute came in large part from Microsoft's competitors who banded together to lobby Washington for relief. Earlier competitors like Novell hired lawyers and economists to "assist" the Federal Trade Commission in the early 1990s. As journalist John Heilmann chronicled in "Pride Before the Fall: The Trials of Bill Gates and the End of the Microsoft Era," Netscape began pushing Justice to act even before Windows 95 was released. And in early 1998, Sun put together "Project Sherman" - a group of experts that drafted a case against Microsoft under the Sherman Antitrust Act to present to the government.

The government's case was riddled with looking-glass logic. The charge of monopoly maintenance, for instance - upheld by the appeals court - rests in part on the accusation that Microsoft had hindered Netscape from distributing its browser. Yet at the time Microsoft was supposedly keeping Netscape's Navigator software from distribution, users downloaded some 60 million copies of Navigator from the Internet. They obtained another 100 million from Netscape's partners on the Internet. Together, this was more than enough to supply the entire Internet-using population, which at the time numbered no more than 100 million.

The appeals court chose to live with Judge Jackson's decision to ignore this inconvenient fact and agreed that Microsoft had illegally made it more difficult for Netscape to distribute its product, through its exclusive licensing agreement with OEMs. The reality - that consumers who wanted Netscape's Navigator browser could not only get it, but get it for free - seemed of little relevance in determining Microsoft's guilt.

The court has remanded the finding of unlawful bundling back to the District Court. Whatever the outcome of this next trial (or the more likely settlement), the question will remain as to who is any better off as a result of this costly and time-consuming exercise. It is unlikely that consumers will top that list. Antitrust law has always rested on shaky economic footing - footing which rapidly turns to quicksand in the New Economy. Other countries should study the lessons of the Microsoft case before following in America's footsteps.

Ms. Shaffer is a U.S.-based writer who also works for National Economic Research Associates.

Copyright Dow Jones & Co. 2001