Antitrust Prophesying

You wouldn’t think that an article about toilet paper would provide insights into the antitrust case against Microsoft. But it does. And ironically, it appeared in the Wall Street Journal alongside an article on the case itself.

Recently, the Journal reported on the surprising failure of Kimberly-Clark’s new moist toilet paper. Despite the company’s sterling reputation for introducing new products, despite development and advertising expenditures of more than $135 million, and despite protection by more than thirty patents, moist toilet paper wiped out. Kimberly-Clark tried its best both to foresee and to influence the details of the future. It failed.

The article dealing directly with Microsoft highlighted Judge Colleen Kollar-Kotelly’s recent comment that crafting any antitrust remedy “by necessity involves predictions and assumptions concerning future economic and business events.”

This comment pleased the nine state governments who are plaintiffs in the case. After all, they claim that while it might be difficult to identify consumers harmed by Microsoft up to now, such harm will be immense in the future. Like Kimberly-Clark, the plaintiffs are prophesying the details of the future by predicting which particular firm and products will be profitable and which will fail.

Kimberly-Clark’s experience counsels the court to reject this prophesying. Consumer tastes, competitors’ reactions, entrepreneurial innovations, and technological changes are all impossible to foresee in any detail. No one has more ability and incentive to peer accurately into the future of an industry than do firms whose managers are specialists in that industry and who bet their own and their company’s own money on their forecasts. No one knows their firm and industry better than they do. If they forecast the future correctly they gain personally, while if they forecast it incorrectly they suffer personally. Yet even they get it wrong with surprising frequency. (Kimberly-Clark’s experience isn’t unique. Eight of ten new products fail.)

Judges and politically motivated attorneys general enjoy no special advantages at foreseeing the future details of the information-technology industry (which, it’s worth remembering, is far more dynamic than the toilet-tissue industry). They specialize in law and politics, not in competing for consumers’ software dollars. And they have fewer personal assets at stake in the case. If they harm the industry with a mistaken ruling or misguided lawsuit, their wealth will not shrink any where near as much as will the wealth of the owners and managers specialized in this industry.

And yet, predictions of the future are unavoidable. Judge Kollar-Kotelly is correct that antitrust law requires her to assess the likely future impact of Microsoft’s current actions.

The way out of this dilemma is for the judge to forecast the future only at a general level, and to be guided by history. Judge Kollar-Kotelly should ask the plaintiffs to present one real-world example of a firm whose aggressive pursuit of consumers and markets turned it into a monopolist that harmed consumers.

No such example exists. No firm can be identified that, without enjoying special government privileges and relying only on its aggressive pursuit of markets and consumers, became a monopolist that raised and sustained prices, reduced outputs, and stymied innovation.

It’s easy and tempting for rivals of successful firms to allege predatory pricing and other so-called “exclusionary” practices. And it’s easy for economists to build blackboard models showing that price cutting here or exclusive-dealing contracts there will result in monopoly power. But the predicted monopoly power never happens.

Economists are smart, but they have no crystal ball. They are expert model-builders, not specialists working in the industry who have high personal stakes in the success of their predictions. Their models capture few of the nuances and none of the countless unpredictable future changes that inevitably affect any industry. There is no reason to suppose that economists building models (and lawyers propounding them in court) are any less fallible at foreseeing the detailed future of an industry than are owners and executives, such as those at Kimberly-Clark who bet their own money on their predictions.

What we do know is limited but important – namely, that monopoly power is astoundingly elusive. History teaches that it requires active government prohibition of competition. Perhaps no one now can foresee just how a currently dominant firm such as Microsoft will be held in competitive check by the efforts and creativity of existing or future rivals, but history assures us that it will be. By far, the best bet is that consumers do not need antitrust to protect them from monopoly.