This article appeared in Upside (February 1993)
Fortunately, President Clinton pledged to review America's antitrust laws--principally the Sherman Antitrust Act of 1890 and the Clayton Act of 1914--to assess their impact on the global competitiveness of American companies. If this review is open-minded, he will see how laws which codify economic theory of the 19th century undermine an economy entering the 21st. To make good on his promise to strengthen U.S. competitiveness, Clinton will have to rethink the received wisdom about the nature of economic competition and propose new laws cognizant of Information Age reality.
According to traditional economic theory, time and technology stand still. This fact always shocks non-economists, but the reasons for these static assumptions are simple. No one knows how to build an accurate mathematical model of an incredibly complex, fast-evolving system like the real economy. Modelling the earth's weather is far easier, and no one's solved that either. And so, rather than admit defeat, economists have confined themselves to building ever fancier static models; ones that pointedly ignore the spasmodic advances of technology. Consequently, the best conventional economics can offer antitrust lawyers and judges is a moment-in-time "snapshot" of a market. Providing law makers with a full-motion "video" simulation of a market's evolution is simply beyond the present limits of the discipline.
In the static game, the basic antitrust idea is to prevent strong companies from killing off the weak. Since technology is unchanging and competitors can't do much to lower their unit costs, their only possible motive for knocking off competitors is to corner the market and jack up prices. In short, conventional economics says that allowing an industry to consolidate can only lead to consumer exploitation--higher prices for the same old products. They want competition, but it must be gentlemanly, not cut throat.
By contrast, bionomics sees competing organizations locked in an unforgiving Darwinian struggle on a fast-changing technological landscape. Particularly in the post-microprocessor era, bionomics recognizes that instead of facing stable technologies, well-defined markets, and rising marginal cost curves, companies actually confront unpredictable technology shifts, fluid markets, and costs that decline on downward-sloping learning curves. To compete at a world-class level, firms must accumulate production experience as fast as possible and keep cutting unit costs even as they enhance product performance.
Since companies can only learn by accumulating production experience, allowing the strong to drive out the weak is crucial to rapid technological progress. Before a "shake-out," an industry's volume is divided up among too many sub-scale players. To expand production rapidly enough to sustain the fastest possible pace of learning, the survivors must grab the market share released by fallen adversaries. This is why Japanese officials encourage industry consolidation. They understand that world-class organizations emerge from vicious struggles for survival, not friendly games of croquet.
Does a bionomic approach mean that every competitive tactic is legitimate? Of course not. Stealing trade-secrets and torching your competitor's factory--ideas that may dance through a desperate executive's mind--are crimes. But these crimes are prohibited by other statutes. When it comes to antitrust law, the only relevant question is: What purely economic behavior should be forbidden? The answer: price-fixing.
In the economic ecosystem, free prices are the system's most critical information feedback loops. The damage done by price-fixing is not merely measured by excessive prices. Distorting price signals also leads to under-investment in some areas and over-investment in others. Once committed, scarce capital cannot be fully recovered. Price-fixing is a crime against society, because it diverts the economic ecosystem from its natural evolutionary path, delaying better performance/price and higher living standards.
Pared back to a vigorous attack against price-fixing, antitrust law would be effective in the only situation where competition rules are needed. After a market has consolidated down to three or four competitors, the temptation to collude on prices becomes overwhelming. Prohibiting this behavior without interfering in the consolidation process that precedes it would be the best of both worlds. Unbridled competition yields better technologies and lower prices faster than restrained competition. Preventing price-fixing reduces resource waste in the industry's mature phase, when the final survivors are coining money and waiting for their cozy market to be obliterated by some new technology.
Reportedly, neither of the FTC's two complaints against Microsoft involve price-fixing. Instead, both charges allege what in antitrust parlance are called "exclusionary practices." Though they've tried, the courts have never clearly distinguished improper "exclusionary practices" from legitimate, aggressive competition. Why? Because, in the real world, there is no such distinction. The very purpose of aggressive competition is to exclude your competitors from the market.
For example, the FTC's first allegation will complain that Microsoft gave price breaks to PC makers who bundled MS-DOS with every machine they shipped. If business were a boxing match, this would be hitting below the belt. But in a Darwinian struggle, exploiting a temporary advantage to drive your opponents out of the niche makes perfect sense.
Although Microsoft's original 1980 deal with IBM gave the tiny Seattle company what turned out to be insurmountable advantage over then rival Digital Research, Microsoft had no guarantee that MS-DOS would become the de facto worldwide standard operating system. Bill Gates grasped the value of dominant market share and designed Microsoft's pricing to win it. Nothing more, nothing less.
The FTC's second allegation--that Microsoft's Windows applications exploit undocumented features of the Windows operating system--is just another instance of Microsoft's "take no prisoners" campaign. Strategically, the whole reason for betting enormous sums on Windows' development was to overcome the huge market share leads of its key rivals. Now that Microsoft's fantastic growth and 50% share of the Windows applications market has propelled it past Lotus and WordPerfect, everyone has forgotten that not long ago these companies held hammerlocks on spreadsheets and word processors.
For a decade, every competitor has known that even if Microsoft bent over backwards to explain the features of its forthcoming operating system releases, there was no way it could fully convey the behavior of its code. The only way to know an OS is to work with it. Because of this, Microsoft would always hold a crucial lead time advantage over applications competitors. Betting huge sums on a next generation OS to create an "unfair" lead time advantage has been the very heart of Microsoft's strategy. But as the OS/2 fiasco showed, even this brilliant strategy could have proved disastrous.
What would have happened if Apple's John Sculley had realized, way back in 1988, that the Macintosh system software was Apple's central strategic asset? Where would Microsoft's Windows and its Windows-based applications strategy be today if Apple had ported the Mac system onto Intel microprocessors and aggressively licensed it while Windows was still in the lab? Would the FTC have even started its investigation? Should Bill Gates be punished for a strategy that happened to work, or should John Sculley be pilloried for making the most colossal blunder in PC industry history?
Looking ahead, Microsoft will soon find its Windows NT locked in a death struggle with Novell/AT&T's UNIX, Sun's UNIX, and IBM's OS/2 for dominance of the 32-bit OS market. No one can predict the outcome. But one thing is certain. By the time the FTC or the U.S. Supreme Court finally decides on the current charges against Microsoft, the software industry will look completely different. In the Information Age, the fluidity of technology markets makes the legal system's latest ruling seem as dated as some archaeological find.
If Bill Clinton wants American companies to be world beaters, if he wants upstarts like Microsoft to grab market dominance in Japan and Europe, and create thousands of high-pay, high-skill jobs here at home, then we've got to stop telling our companies to compete hard but not too hard. As the great jurist Judge Learned Hand once wrote: "The successful competitor, having been urged to compete, must not be turned upon when he wins."