- The Washington Times - Tuesday, September 13, 2011

As the U.S. economy struggles with zero job growth, high unemployment and tight credit, Rule One for government regulators should be “do no harm” - avoid any step that threatens job creation, investment and expansion.

Regulators especially should steer clear of intruding into parts of the economy that are working well, most obviously the high-technology sector. Smartphones, tablets, software and the ubiquitous “cloud” that now is home to so much of what Americans do, are evolving at breathtaking speed, with U.S. firms helping lead the way. Antitrust officials, however, seem poised to try to reorganize this sector based largely on their predictions of what is in store for the market, evident most notably in their contemplation of a suit against Google. This is almost guaranteed to turn out badly. It is a special risk for a flailing economy and a throwback to antitrust mistakes past.

The simple notion at the core of antitrust law is that businesses should compete in the marketplace, not collude with one another to raise prices, reduce output or restrain competition in other ways that harm consumers. The law is predicated on the understanding that market competition benefits consumers and promotes economic growth and that government intervention is appropriate only in extraordinary cases. Congress made violation of the core provisions of the basic U.S. antitrust law, the Sherman Antitrust Act, a crime precisely because it targets extreme cases of anti-competitive conduct, not ordinary, aggressive competition.

The trick for regulators is to decide whether cases they are asked to look at involve ordinary competitive behavior or behavior that truly subverts market forces - whether intervening will hurt markets and consumers or will protect consumers from extraordinary acts that undermine competition. Businesses always have incentives to portray weaker performance in the market as the result of illegal behavior by their most successful competitors and to assert that only regulatory intervention can set things right. Regrettably, regulators all too often believe them.

The history of antitrust enforcement should serve as a cautionary tale about the ability of regulators to see where markets are headed and to discern when antitrust intervention will do more harm than good - especially when competitors charge that one firm dominates a market because it isn’t playing fair, rather than because it has a better product, more efficient production, more attractive marketing, or something else common to market competition. That is when the regulators have been at their worst, not only in deciding what is driving market results - on which competitors will be only too happy to provide a self-interested, if distorted, view - but also in deciding what will happen in the markets if regulators stay their hand.

Regulators routinely have underestimated the effects of other forces at compensating for whatever - good or bad - has put one company temporarily in a dominant position. Typically, firms adapt to changing tastes, technologies and strategies of their competitors, and no business stays on top for very long. The spur to market competition for the most successful businesses is fear that something else will come along to replace them. Regulators tend to give up on that process just before its impact is clear.

Consider some antitrust cases that U.S. enforcers thought were a good idea based on what they knew at the time. In the late 1960s, regulators at the Department of Justice (DOJ) thought IBM would forever dominate computing, which would remain the province of huge, mainframe computers. Regulators also bought competitors’ arguments that IBM’s dominance gave it unlimited power to impose its will on consumers, forcing them to buy other IBM products and services. The case consumed a decade of IBM’s and the department’s resources and deflected IBM from aggressively competing in new markets for desktop and personal computing - the unforeseen technologies that quickly came to dominate the industry.

A few years later, DOJ regulators decided AT&T needed to be broken up to remedy its perpetual dominance of telephony - just before the cellular telephone revolutionized that industry. Antitrust officials spent decades pursuing Microsoft on essentially the same assertions behind the IBM case. The theory was that Microsoft’s dominant operating system gave it power over consumer choices on everything else associated with computing, despite copious evidence that consumers didn’t buy everything Microsoft was selling, no matter how hard the company pushed. Just as with IBM and AT&T, the regulators didn’t see the looming threat cloud computing posed to Microsoft’s position.

Likewise, in the 1960s, DOJ regulators seriously considered bringing a monopoly case against General Motors, a company regulators thought would sit permanently astride the American car market. That was just before imports provided a jolt to that industry that still reverberates, part of the evolution that landed GM in government hands and on the brink of bankruptcy a generation later. Once again, antitrust regulators did not see or appreciate changes that were over the horizon.

As regulators now consider what to do with other high-tech companies such as Google (the latest firm to sit where IBM and Microsoft once did in the eyes of competitors and regulators), they should look to the ghosts of antitrust mistakes past - and be cautious in their predictions that markets won’t evolve, that new technological advances won’t unseat current leaders, and that antitrust lawsuits are better for consumers than letting investors, businesses and competition determine the industry’s fortunes. Reining in successful firms helps weaker competitors, but it isn’t good for consumers, workers or anyone else - especially not now.

Ronald A. Cass, dean emeritus of Boston University School of Law and former vice-chairman of the U.S. International Trade Commission, is a fellow at the International Centre for Economic Research.

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