Microsoft Ruling Just First Step

Published July 1, 2001

June 28 marked a milestone in the history of antitrust law. By ruling unanimously against a lower-court decision that would have broken up Microsoft Corp., the U.S. Court of Appeals for the District of Columbia tossed many (but not all) of the old rules of antitrust into the dustbin of history.

The decision was long overdue.

Shareholders and consumers nationwide–indeed, worldwide–will benefit by the court’s clear refusal to allow itself to be manipulated by inefficient companies to handicap their more innovative and successful competitors.

There is a special poignancy in the decision for Chicagoans. The movement to adopt antitrust laws was born in Chicago’s stockyards in the 19th century, and the criticisms now causing their demise were first voiced by scholars at a university on the city’s South Side.

The 1870s and 1880s saw widespread protests in primarily agricultural states over falling agricultural prices. Farmers and ranchers were stung by falling prices, for which they blamed Chicago’s increasingly large and centralized food and meat processors. In fact, farm prices were falling for a number of reasons, including lower costs for shipping commodities to market and increased productivity stemming from new farm technology. But agrarian spokesmen rightly perceived the key role played by Chicago institutions.

The dominance of Chicago slaughterhouses and other agribusinesses was caused by their ability to find and commercialize superior technologies, raise capital efficiently, and capture economies of size that firms in smaller cities could not. Like Microsoft today, Chicago-based companies such as Swift, Hammond, and Armour delivered the goods more efficiently than their competitors, and consumers rewarded them accordingly.

Agrarian interests, often led or financed by smaller and less efficient food processors using deceptive antibusiness rhetoric, were able to persuade the legislatures of 24 primarily farm states to adopt state antitrust laws. In 1890, they succeeded in getting Congress to pass the Sherman Antitrust Act. In the decades that followed, the act was used again and again to defend the interests of inefficient producers against larger, more efficient competitors. Despite the populist rhetoric then and now, consumers suffered from this “antimonopoly” policy.

Now turn the clock forward to 1966. That year, in an article published in the Journal of Law and Economics, University of Chicago economist George Stigler first raised the possibility that antitrust policies were not being used in the public interest. Four years later, University of Chicago law professor (now federal judge) Richard Posner assembled a database of 1,551 antitrust cases filed between 1890 and 1969 with which to test Stigler’s hypothesis. His own rudimentary test of the data was inconclusive, but three years later, a team of economists conducted a detailed statistical analysis of Posner’s database and found no relationship between antitrust cases that were prosecuted and industry concentration–a measure of monopoly power.

Subsequent research found that all the industries targeted by antitrust prosecutors in the United States were experiencing rising output and falling prices, just the opposite of what monopolists are accused of doing. The vast majority of cases were brought by competitors, not injured consumers, and none of the most famous antitrust cases–Standard Oil, Alcoa, and others–produced any proof of harm to consumers.

Viewing the Microsoft case in the light of this record is revealing. Microsoft’s competitors, not consumers, campaigned noisily for prosecution. Many of those competitors themselves have huge market shares of their own: Cisco Systems, for example, recently held an 89 percent share of the market for high-end routers, while its nearest competitor had just 5 percent. Microsoft’s competitors failed to produce a single consumer witness willing to testify that he or she was harmed by Microsoft.

The Court of Appeals ruling on June 28 makes numerous references to the crumbling intellectual foundation of antitrust, though it ultimately did not challenge the lower court’s finding that Microsoft met the legal definition of a monopoly. But by overruling the lower court’s remedy, which would have broken Microsoft into two companies, and by rejecting entirely the claim that the company acted improperly by integrating its browser and its operating system software, the court dramatically raised the threshold for future antitrust claims.

Further steps to rein in antitrust law necessarily await congressional action; the Sherman Act itself needs to be repealed or significantly amended. But June 28 marked the beginning of the end for one of the most anti-business and anti-consumer laws ever enacted in the United States. And Chicago, ironically, can take credit for ending what it helped start.

Joseph L. Bast is president of The Heartland Institute, a: nonprofit research organization based in Chicago. He can be reached at [email protected]. This commentary appeared in the July 2, 2001 issue of the Chicago Sun Times.