Enter the Leviathan

It’s good to be a monopolist. But it’s not without a downside. Lest we forget, just about the time that a monopolist’s party gets good, the market cops show up. Competitive businesses don’t have to worry much about antitrust enforcers.

Of course, it’s never quite clear when an oligopolist moves from first among equals to first and only. And even with perfect hindsight, it’s not possible to know precisely when it happened to Microsoft. But the market cops arrived permanently somewhere around 1990. The company had become a monopolist, and normal market forces could no longer constrain its behavior.

So what can we expect from a monopolist? Economic theory rests on the belief that people—or corporations—behave rationally. And corpo­rations are much easier to analyze than people because their values are much less complex. Human rationality tends to incorporate love, com­passion, power, sex, religion, tribal attachment, and whatnot (mostly whatnot). Corporations don’t (or at least aren’t supposed to) worry about any of those things. The raison d’etre of the corporation is the maximization of profits, but maximizing profits is a tough job. Corpo­rate decision makers need to balance short-term concerns against long­term prospects, they need to remain constantly vigilant of developments in their industries and of their competitors’ actions, and they need to manage their reputations among both their customer base and the public at large. No single formula is always appropriate. These sorts of concerns, in different combinations, motivate all corporate behavior, whether the corporations in question are small competitors, key oligop­olists, or dominant monopolists.

IO reveals a number of truths about monopoly markets.

Good IO experts would tell you that none of this is necessary, and they could point to instances of monopolized industries in which fairly little of it did happen. But none of the bullying is unusual, and all of it is predictable. We fully expect a rational monopolist to raise its prices, to slow innovation to the point at which it can manage appropriately timed upgrades, to reduce its emphasis on customer service and con­sumer relations, and to work hard to deter potential competitors from entering its markets. Is this behavior appropriate? Well, some of it is. In fact, conventional wisdom agues that in many industries we need to promise possible monopoly rents just to motivate up-front innovation.

But such motivation hardly means that anything goes. Monopolists have much power, and their fear of competition can lead them to abuse it. Our modern economy is complex. As hard as it is for a new company to develop a new product capable of dethroning a monopolist, it’s even harder to imagine such a company working in a vacuum. Any entrant needs access to distributors, to advertisers, to co-contractors, and to consumers, almost all of whom already have a relationship with the monopolist. And that means that the monopolist can flex its muscles. Some companies, for example, might be skeptical of a monopolist’s chal­lenger but willing to give the challenger a chance to prove itself. But if the monopolist is aware of the situation, it can give them an ultimatum and force them to choose between it and the entrant. And if the entrant develops an exciting new product that consumers want, the monopolist could develop a knock-off, give it away, and use a vaporware announce­ment to promise that later generations of its knock-off would be supe­rior. Besides, the monopolist can always point to a longstanding relationship with its customers; there’s no way of knowing whether the entrant’s products would cause system failure, cancer, or plagues of locusts. And if anything does go wrong with the competitor’s product, the monopolist is likely to blame consumers who used the entrant’s prod­ucts for their foolhardy disregard of the monopolist’s many warnings not to do so (if not the even more problematic disregard of the fine print in some license or contract).

That sort of behavior is completely unacceptable. And it’s particularly insidious for two reasons. First, if the monopolist is entrenched and its industry is central to the economy, market forces are unlikely to con­strain it, and the breadth of such behavior’s impact can be astounding. Second, consumers shorn of options tend to forget that options could exist. They tend to think that things are the way they’re supposed to be, even the only way they could be. The thought of change to some unknown setup makes them nervous, and they don’t see the problem with having only a single provider. That’s how most of us deal with our local phone company, our local cable company, and many government offices. It’s also how most of us think of our local platform-software monopolist. And it explains the tremendous public support that Microsoft was able to garner during its trial.

Most of us don’t think hard about infrastructure. We like it when it improves, bitch constantly when it breaks, but become very nervous when anyone threatens to shake things up and to inject a little creativ- ity—which, admittedly, may cause disruptions before it makes improve­ments (and could even fail). But in all honesty, we prefer not to think about it. Pity. For as The Economist noted in November 2002:

What is striking is how little innovation there has been in the bits of the market that Microsoft dominates, and how much where it has little influence. Operat­ing systems, web browsers and word-processing software all look much as they did five years ago. But not many people are using five-year-old mobile phones, handheld computers or music-sharing software.¹⁸

Microsoft may have given us a good platform standard, but that hardly means that we couldn’t have done better.

Setting Microsoft aside for a moment, the games monopolists play look like they should be effective. So why do only some monopolists play them? After all, if they can do it, and it tends to work, why don’t all monopolists at least try it? Aren’t these games rational steps toward max­imizing profits? The answers lie in an analysis of risk. Remember that once the market cops identify a monopolist, they move in to monitor its behavior. And they let everyone else in the industry keep an eye on the monopolist for them, too. Market cops are always willing to listen to inside dirt. They do tend to listen with a bit of skepticism—after all, com­petitors want to knock down the monopolist, whether its behavior is appropriate or not—but tips could actually lead to something. Market cops can move to enforce the antitrust laws, and at least in the United States, everyone else in the industry can bring private lawsuits to try to do the same. If competitors are sitting on the fence, we let them treble their damages and add on their legal fees when assessing what the monopolist might owe them—all to convince them to help the market cops enforce the antitrust laws. And these suits aren’t mutually exclu­sive. The government and private parties can both sue a monopolist for the same antitrust violations. As a result, getting caught violating the antitrust laws can be expensive. Even entering the gray area at the periph­ery of the law can be expensive. After all, none can know where “ques­tionable” behavior will fall. The decision to skirt the law thus combines high reward and high risk. Get away with it and you’ll rule the world. Get caught and you’re screwed. Monopolists must weigh the likely costs and benefits before deciding to push the law to its limits.

Sometime in the early 1990s, Microsoft became a monopolist. From that day on, the market cops were responsible for scrutinizing Microsoft’s behavior. They found a savvy, rational monopolist unafraid to take the risks inherent in skirting the law, which told them that in the case of this new platform monopolist, they needed to pay particularly close attention.

The market cops that entered the fray have many faces and speak many languages. Most developed nations—often at the behest of the United States in years gone by—have a government agency charged with enforcing antitrust law. Over the years, Microsoft has raised eyebrows at several agencies not typically known as brutal enforcers—say the Fair Trade Commissions of Japan and Taiwan—as well as at some that are developing a reputation for careful scrutiny and zealous enforcement, notably the European Union’s DG Comp (formerly known as DG IV). In fact, though the events of Microsoft’s U.S. trial are much better known, the EU has been the primary focus of antitrust scrutiny of Microsoft since at least late 2002. In the United States, two government agencies share antitrust enforcement authority: the Federal Trade Com­mission (FTC), an independent agency, and the Antitrust Division of the Department of Justice (DoJ), part of the executive branch. Both agencies have had the dubious pleasure of working with Microsoft.

Of course, scrutinizing a monopolist’s behavior is one thing, but bring­ing charges against it is another. Antitrust lawyers know that it’s not illegal to be a monopolist. Sometimes companies violate the antitrust laws on their way to becoming monopolists, and sometimes their posi­tion as monopolists gives them the ability to violate the antitrust laws after they’ve achieved their lofty status. But just being a monopolist? No problem at all. Being a monopolist is an existential state, not a crime against consumers—at least not in the United States.

The market cops scrutinizing Microsoft weren’t supposed to do much unless and until they detected a specific way that Microsoft’s behavior might have violated the antitrust laws. Once they saw something suspi­cious, they could launch an investigation. And if the investigation revealed what they believed to be an actual violation, they could file a lawsuit; they then could try to convince a judge or a jury that the monop­olist had violated the antitrust laws and harmed consumers. Then, no matter the trial’s outcome, the losing side—or, in more cases than you might want to believe, both sides—could file an appeal, and ask another court to review the trial judge’s conduct and conclusions. Then, depend­ing on this appellate review’s outcome, the case could continue to bounce around the courts for a while, possibly leading to another trial and further appeals.

Sometimes, of course, these matters do end, and some court or another issues a final judgment either telling the monopolist what to do or telling the government to back off. Most of the time, though, exhaustion sets in, and the monopolist and the government reach an agreement. In the resulting “consent order” (an oxymoron if I ever heard one), the monop­olist agrees to modify its future behavior in some way or another, and the government agrees that if the monopolist performs as promised, it will consider the issue on the table resolved.

But wait! There’s more! Somewhere along the line, someone realized that some corporation large and rich enough to be nettlesome monopo­list might also be able to exert undue influence on a government agency, and there’s no telling what an unduly influenced agency might do. And so, we require the government and the monopolist to convince a federal judge that the consent order serves the public interest. The overwhelm­ing majority of these Tunney Act proceedings are straightforward. The monopolist and the government go to the judge together, and both argue for the consent order. No one argues the other side. So unless the judge sees something egregious in the order, she okays it. Rubber stamp. Next case. The consent order then becomes a binding contract between the monopolist and the government. If the monopolist violates the contract, the government can sue the monopolist under contract law—never mind the antitrust laws. Contract cases are much more straightforward than antitrust cases. They move faster, they involve fewer complicated issues, their trials are simpler, and they actually end!

That’s the general story of antitrust battles. Microsoft, somehow or another, managed to make every step of the process unusual.