CEI's C:Spin - The Oracles of Antitrust: Prophecy of Heresy?

[Dave Farber <dave () farber net>]

Delivered-To: dfarber+ () ux13 sp cs cmu edu
Date: Fri, 02 Apr 2004 15:14:44 -0500
From: Braden Cox <bcox () cei org>
Subject: CEI's C:Spin - The Oracles of Antitrust: Prophecy of Heresy?
To: farber () cis upenn edu

CEI C:\Spin

This issue:  The Oracles of Antitrust:  Prophecy or Heresy?

By 
<http://cei.org/dyn/view_expert.cfm?expert=217&Submit2.x=6&Submit2.y=10>Braden 
Cox
Technology Counsel
<http://cei.org/>Competitive Enterprise Institute
April 2, 2004


The prophecies of Antitrust have spoken. The Department of Justice filed a 
<http://www.usdoj.gov/atr/cases/f202500/202587.htm>lawsuit in February to 
block the proposed merger of enterprise application software makers Oracle 
and PeopleSoft. This action is at odds with the realities of the 
<http://www3.gartner.com/5_about/press_releases/pr18june2003a.jsp>market 
for enterprise application software. Unfortunately, antitrust regulators, 
as mere mortals, cannot predict the future­so their judgments often create 
more harm than good, especially when applied to dynamic industries.

Antitrust law attempts to predict the effect of a merger upon future 
economic performance. Such a prediction requires a vision of how specific 
markets work, now and in the future. Fast-paced industries are complicating 
the basic inquiry of merger analysis:  are consumers better off as a result 
of the merger or, on balance, are they harmed?

Divine Information

The mantra of the digital economy is that “information wants to be free.” 
Rapidly changing technologies and industry structures make it easy for data 
to escape economic forecasts based on artificial, static models. Antitrust 
authorities compensate for their lack of information by creating an 
economic “Polaroid moment” – a low-tech snapshot of the market using 
theoretical assumptions like “perfect information” or “zero transaction costs.”

Businesses do the same type of forecasting for sure. Mergers are like 
marriages – entered into with the belief they will yield positive benefits. 
Sometimes both end up in messy divorces – but, generally the parties 
involved are best able to decide their fate. And antitrust review is an 
institutional arrangement that provides the incentive for all of a firm’s 
competitors to lobby regulators against a proposed merger. Too often 
antitrust action has occurred to protect competitors from competing – 
straying from the law’s stated purpose to ensure consumer welfare. We have 
seen PeopleSoft attempt to influence the full gamut of decision makers – 
DOJ, state attorneys general, and consumers.

Market Intervention

Businesses are also opportunistic in their motivations to merge. Mergers 
can create a unified firm that provides some form of advantage over the 
competition or their customers. But this is where dynamic and innovative 
industries thrive. Any advantage possessed by the merged entity is 
fleeting, as firms already in the market adapt and new firms enter to 
compete. Firms know that it is not sensible to raise prices and attract 
competitors who would otherwise be passive.

Innovation that derives from the response of customers and competitors to 
the merged entity is rarely considered by antitrust authorities. Because it 
involves many parties and even those that are potential market 
participants, this “market innovation” is harder for an economist to value 
than the innovation or efficiencies coming from the merged firm itself. But 
market innovation is the key to understanding a merger’s effects on 
competition and consumers in the digital economy.

Imprecise Antitrust Dogma

Robert Bork’s The Antitrust Paradox and Richard Posner’s Antitrust Law have 
helped explain that the real dangers of mergers are almost always 
overstated. Efficiency gains benefit consumers, and often a merged entity 
can better serve consumers. This law and economics analysis has positively 
influenced the intellectual tools of current antitrust action. Still, 
antitrust authorities assume that they can accurately predict the future, 
despite the disclaimer in the 
<http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html>merger 
guidelines of the DOJ and FTC that “information is often incomplete 
and…historical evidence may provide an incomplete answer to the 
forward-looking inquiry of the Guidelines.” Merger prognostication often 
speaks in such uncertain terms – leaving it up to lengthy and expensive 
judicial proceedings to resolve antitrust issues. A merger delayed is often 
consumer welfare denied.

Efficiency and innovation are the hallmarks of the high tech world, yet 
antitrust law does a poor job at valuing these significant life-enhancing 
characteristics. At a recent merger workshop jointly held by the FTC and 
DOJ, many participants questioned how to consider a merger’s positive 
efficiency and innovation gains. Until we receive a good answer from the 
regulators, there is no antitrust oracle that can prophesy merger effects 
in a dynamic digital economy.




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