Antitrust Cases Can Hurt (Even Those that Get Dropped)

The antitrust lawsuit against IBM was dropped, and that against Microsoft result in the imposition of only minor legal remedies.  So some may conclude that IBM and Microsoft bore little ill effects from the suits.  But such suits can reduce morale, result in loss of talent, and restrain the efficiency, innovativeness and competitiveness of the prosecuted companies. 

In the case of IBM, Lou Gerstner has made some strong, and plausible, comments on the deleterious effects of U.S. antitrust action:

 

(p. 118)  The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration.  The suit was ultimately dropped and classified "without merit" during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup.  One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture.  While IBM was subject to the suit, terms like "market," "marketplace," "market share," "competitor," "competition," "dominate," "lead," "win," and "beat" were systematically excised from written materials and banned at internal meetings."  Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor.  After a while, it goes beyond what is said to what is thought.

 

The reference to the book, is: 

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York:  HarperCollins, 2002.

 

Mellon Allowed Great Innovation By Restraining Intrusive Government

(p. W4) Though scarcely known today, Andrew W. Mellon was a colossus in late 19th-century and early 20th-century America.  He would come to play a major role in the management of the American economy, but first he built one of the country’s great fortunes, one that would rank him today with Bill Gates and Warren Buffett.  He is now the subject of a comprehensive, if slightly grudging, biography by David Cannadine, the distinguished British historian.

Mellon is not associated with any single industry, in the way that Andrew Carnegie and John D. Rockefeller are.  He was a venture and equity-fund capitalist, one of the first to function on a major scale.  He and his younger brother, Dick, took over their father’s Pittsburgh-based investment and coal-mining business and expanded it into many fields, including copper, oil,  petrochemicals and aluminum (Alcoa).

No banker was as gimlet-eyed; Mr. Cannadine shows Mellon shrewdly and coldly calculating every investment prospect.  Yet few venture capitalists were as daring.  In the 1890s, when Rockefeller was ruthlessly monopolizing the petroleum industry, Mellon didn’t flinch from setting up a competing refinery.  When Mellon finally sold out to Rockefeller, he did so at a considerable profit.  Several years later he came back to oil and eventually built Gulf into an industry giant.

Original Supply-Sider

But Mellon was more than an entrepreneurial industrialist.  In his mid-60s he became a famous — and infamous — public servant, performing as Treasury secretary under three presidents, from 1921 to 1932.  He was the original supply-sider, pushing tax cuts under Presidents Harding and Coolidge.  He argued that the high tax rates left over from World War I were depressing economic activity; that lower rates would turn the economy around; that high-income earners would end up paying more and that low-income earners would be removed from the tax roles entirely.

His program was a fantastic success.  The top rate was cut to 25% from 77%.  The rich did indeed pay more, while low- and middle-income earners saw their tax bills shrink to nothing or next to nothing.  The economy boomed.  The U.S. outstripped more heavily taxed nations, such as Britain and France.  Mellon also pushed painstakingly for the creation of an international monetary system to replace the one shattered by World War I.  The big challenge was huge Allied war debts to the U.S. and onerous German reparations.  Mellon negotiated the easiest terms that were politically possible so that trade and economies could revive.

We sometimes forget just how dynamic the 1920s were in America.  The automobile became a commonplace item for working Americans; labor-saving devices, such as the washing machine, grew ever more common as well; movies and radio provided mass entertainment as never before (an experimental television broadcast was carried out in 1927); and stock ownership widened to include more members of the middle class.

It was a time of great innovation and inventiveness, and in a sense Mellon presided over it all by allowing it to happen without intrusive government policies.

 

For the full review, see:

STEVE FORBES.  "BOOKS; The Man Who Made the Twenties Roar."  The Wall Street Journal    (Fri., October 6, 2006):  W4.

 

Reference for the book:

David Cannadine.  MELLON.  Knopf, 2006.  779 pages, $35

 

 MellonBK.jpg  Source of book image:  online version of the WSJ article cited above.

 

United States Cardiologists Fail to Prescribe Fish Oil, Despite Low Cost, Safety, and Evidence of Efficacy


  Source of graphic:  online verison of the NYT article quoted and cited below.


United States cardiologists are reluctant to prescribe fish oil, wanting more definitive data on efficacy.  But a lack of definitive data on efficacy doesn’t stop them from performing costly and risky procedures such as the application of stents.  Possibly relevant:  installing stents is much more lucrative for cardiologists, than prescribing fish oil.  Doctors are not bad people, but like most of us, they respond to financial incentives.


(p. D5) ROME — Every patient in the cardiac care unit at the San Filippo Neri Hospital who survives a heart attack goes home with a prescription for purified fish oil, or omega-3 fatty acids.

“It is clearly recommended in international guidelines,” said Dr. Massimo Santini, the hospital’s chief of cardiology, who added that it would be considered tantamount to malpractice in Italy to omit the drug.

In a large number of studies, prescription fish oil has been shown to improve survival after heart attacks and to reduce fatal heart rhythms.  The American College of Cardiology recently strengthened its position on the medical benefit of fish oil, although some critics say that studies have not defined the magnitude of the effect.

But in the United States, heart attack victims are not generally given omega-3 fatty acids, even as they are routinely offered more expensive and invasive treatments, like pills to lower cholesterol or implantable defibrillators.  Prescription fish oil, sold under the brand name Omacor, is not even approved by the Food and Drug Administration for use in heart patients.

“Most cardiologists here are not giving omega-3’s even though the data supports it — there’s a real disconnect,” said Dr. Terry Jacobson, a preventive cardiologist at Emory University in Atlanta.  “They have been very slow to incorporate the therapy.”


For the full story, see:

ELISABETH ROSENTHAL  "In Europe It’ s Fish Oil After Heart Attacks, but Not in U.S."  The New York Times  (Tues., October 3, 2006):  D5.


Markets, Not Courts, Should Decide Intel Market Share

Intel executives, coming up on a pre-trial conference in a case that could decide their company’s fate, should be looking with envy and admiration at Tiger Woods, and wondering how to make their business more like his.

If golf followed the same path as other businesses, Tiger could expect to face a lawsuit contending that his dominance of professional golf is based on unfair competition.  And in fact,  a few years back Sergio Garcia whined that Tiger got better practice times, favorable treatment around the course, more protection against distracting fans — little things that could, Mr. Garcia intimated, explain Tiger’s edge.  Sportswriters responded swiftly, deriding Mr. Garcia for looking to blame others for his being outcompeted.  They understood that sports contests belong on the field, not in the media or the courts.

The same should be true of business.  Market-based economies thrive on competition.  The competitive economy doesn’t yield an infinite number of equally successful firms producing indistinguishable products, but lets winners and losers emerge from marketplace competition.  The (inevitably) temporary dominance of one product or one firm spurs others to compete harder.  Today, however, many businesses — especially American ones — find it easier to restrain a dominant competitor through the courts than to beat it in the market.

Take the case of Advanced Micro Devices and Intel, the dominant chipmaker for PCs and servers.  AMD for years played the role of Phil Mickelson to Intel Corporation’s Tiger Woods — the talented rival who keeps coming up short in head-to-head competition.  Last year, it decided to model Mr. Garcia rather than Mr. Mickelson, filing an antitrust action against Intel, charging it with a variety of unlawful actions.

. . .

AMD finds fault in Intel’s continued market dominance:  Because Intel has had 80% or more of the x86 chip processor market for many years it must be doing something illegal to keep rivals out.  Yet, George Stigler, among others, long ago debunked the significance of market share as a measure of competition.  Duopoly markets, like the market for large commercial aircraft, can be fiercely competitive.  Ask anyone working at Boeing or Airbus.

Moreover, markets can change rapidly, especially high-tech markets, often in ways unanticipated by antitrust suits.  Witness the changes in computing that caused the government’s antitrust case against IBM to implode.

 

For the full commentary, see: 

RON CASS.  "RULE OF LAW; Tigers by the Tail."  Wall Street Journal  (Sat., September 23, 2006):  A7.

 

Big Business Is Often Bashed, But Is Not Always Bad

(p. 4) BUSINESS bashing by politicians in America has a long history, including rhetoric far more inflammatory than the denunciations being directed at Wal-Mart this year by some Democrats, who sometimes sound as if they are running against the company instead of another politician.

. . .

The company may not appreciate the honor, but its place in the political debate reflects its revolutionary effect on the American economy.

Put simply, the big winners as the economy changes have often been scary to many, particularly those with a stake in the old economic order being torn asunder.

“Twice as many Americans shop at Wal-Mart over the course of a year than voted in the last presidential election,” said H. Lee Scott Jr., the company’s chief executive, in a speech to the National Governors Association in February.

Wal-Mart’s success reflects its ability to charge less for a wide range of goods.  That arguably has reduced inflation and made the economy more efficient.  It has introduced innovations in managing inventory and shipping goods.

. . .

But the fact that Wal-Mart has more shoppers than any politician has voters shows that many of those workers — and many people higher on the income scale — find its prices irresistible.  That group no doubt includes some of the company’s critics.

Previous business targets of politicians have similarly been both popular and reviled.  The railroads enabled much of America to prosper, but to many people in the late 19th century they were viewed as villains.

They upset old economic relationships by making it possible to ship goods over much longer distances, thus introducing competition for local businesses and farms.

 

For the full commentary, see:

FLOYD NORRIS.  "THE NATION; Swiping at Industry From Atop the Stump."  The New York Times, Section 4  (Sun., August 20, 2006):  4.

(Note:  ellipses added.)

 

   Illinois protesters bashing Wal-Mart during the summer of 2006.  Source of photo:  online version of the NYT article cited above.

 

Economic Efficiency Arguments Mattered in Clearing Whirlpool to Acquire Maytag

A few weeks ago, the Justice Department cleared Whirlpool’s $1.7 billion acquisition of Maytag even though the new entity would have a dominating share of the marketplace, controlling about three-quarters of the market for some home appliances.

The department justified its decision by a combination of evidence and law.  That included confidential commercial information that the department says it cannot make public; a very broad definition of the marketplace to include foreign companies, some of which have yet to make a bigger push in the United States; and an expansive reading of the economic efficiency defense for permitting such deals.

The decision demoralized the career ranks of the antitrust division at the Justice Department, officials there have said.  And it left private antitrust practitioners in Washington wondering whether, in light of the decision and the flurry of corporate dealers, there are could really be any mergers that this administration would challenge.

 

For the full commentary, see:

Stephen Labaton.  "STREET SCENE: LEGAL BEAT; New View of Antitrust Law: See No Evil, Hear No Evil."  The New York Times (Friday, May 5, 2006):   C5.

 

Prices Can Be Lower When Few Firms in Industry

TabarrokAlex.jpg   Alex Tabarrok.  Source of image:  http://www.gmu.edu/centers/publicchoice/faculty.html

 

Price gouging can work only if firms have monopoly power — so if gouging is the explanation for higher premiums, we would expect to see higher premiums in states with less competition. My student, Amanda Agan, and I tested this hypothesis in a study released two days ago by the Manhattan Institute. Contrary to the gouging hypothesis, we found that a 10% increase in industry concentration reduces premiums by $2,200. The result makes sense if we remember that, to increase market share, firms don’t raise prices but rather lower them. Wal-Mart has grown into the nation’s dominant retailer by lowering prices, not raising them.

 

For the full commentary, see: 

ALEX TABARROK. "Rule of Law; Price Gouging Is Bad Medicine." The Wall Street Journal (Sat., May 20, 2006):  A9.