The problem with Obama's antitrust plan

The Obama administration recently signaled a new, tougher antitrust policy.

The assistant attorney general, a former Federal Trade commissioner, argued last week that "vigorous antitrust enforcement must play a significant role in the government response to economic downturns."

Breaking sharply with the relatively laissez faire antitrust policy under President Bush, Christine Varney hinted that so-called dominant firms that engage in "improper business practices" to stifle their competitors will be likely targets of the new antitrust enforcement. Several key senior aides who worked in the Clinton administration have been recruited to investigate and/or litigate new cases.

Here we go again.

The free market does not need more strict antitrust policy; it needs simple protection from fraud. The problem is that, in the 119 years that antitrust laws have existed, there is little empirical evidence that "vigorous enforcement" of them can promote the interests of consumers. And it was for the alleged benefit of the consumers that the laws were created.

Indeed, antitrust history is riddled with silly theories and absurd cases that themselves have restricted and restrained free-market competition and hampered an efficient allocation of resources. A look at a few examples is reason to believe that President Obama's antitrust regulation won't be any different.

The wrongheaded prosecution of efficient dominant firms goes back to at least 1911, in US v. Standard Oil of New Jersey. Neither the trial court nor the Supreme Court ever determined that Standard Oil had employed predatory practices to destroy rivals and raise prices. Standard earned its high market share through efficient operation and low prices and always had competition. (In 1911, there were 137 suppliers in oil refining and no monopoly.)

Yet Standard was convicted, despite its economic performance, since the formation of its Trust ended "competition" between its own subsidiaries.

A very similar scenario played out in the 19th-century tobacco industry. The American Tobacco Company had earned a substantial market share through merger, internal efficiency, and low prices. Yet despite its economic performance, and despite the fact that there were thousands of rival suppliers of various tobacco products, the high court determined that the acquisitions that had created American Tobacco were themselves a violation of the Sherman Act (the first major antitrust law in the US).

The 1945 suit against Alcoa and the 1954 suit against United Shoe Machinery are two of the most egregious anticonsumer monopoly cases of all time.

In Alcoa's case, the trial judge dismissed 150 separate government charges concerning alleged monopolization. He also determined that Alcoa had expanded aluminum ingot production and lowered prices for 50 years. Yet an appellate court in 1945 reversed the ruling and decided that expanding ingot outputs and lowering prices was itself "exclusionary" of rivals and potential rivals that just could not compete with Alcoa's efficiency. (Translation: If Alcoa had been less efficient, there would have been more competition and no violation of the law. Totally absurd.)

United Shoe Machinery's case contained the same tortured antitrust logic. United had earned and held its dominant market position by offering long-term, low-price leases to its customers and by innovating new shoe-machine technology.

Yet the trial court judge spied the illegality inherent in superior economic performance provided over many decades: Smaller competitors were at a disadvantage, competition allegedly diminished, and the antitrust laws violated. The Supreme Court in 1968 – engaging in cutting-edge Soviet-style planning – regulated, divested, and eventually wrecked the premier US shoe-machine company – all in the name of consumer welfare.

The recent decade-long antitrust assault on the Microsoft Corporation demonstrates that not much has changed over the years in dominant firm antitrust cases. The government's argument was that Microsoft's decision to integrate its Web browser, Explorer, into its Windows 98 operating system, illegally excluded competitive browsers (such as Netscape's Navigator) and thereby evidenced an intent to monopolize in violation of the Sherman Act.

But Netscape, not Microsoft, held the dominant position in browsers when the rivalry began; nor was Netscape ever "foreclosed" from the market since PC users were able to download millions of copies of the Netscape browser. The entire case – the bulk of which was dismissed by an appellate court in 2001 – was an attempt to regulate innovation and consumer choice at the behest of ambitious state and federal attorneys and disgruntled Microsoft rivals.

Based on this history, why should we think the Obama antitrust regulators will get it right this time? In her recent speech, Ms. Varney, the antitrust chief, said that "there is no adequate substitute for a competitive market." Absolutely correct.

But competitive markets are legally open markets where all firms, including dominant firms, are rivalrous on their merits and where consumers – and not government or judges – decide winners and losers. Free markets may need protection from fraud (think Bernard Madoff), but they don't need antitrust intervention.

Dominick T. Armentano is professor emeritus in Economics at the University of Hartford, Conn., a research fellow of the Independent Institute in Oakland, Calif., and the author of "Antitrust and Monopoly: Anatomy of a Policy Failure."