Author Updates Author Updates
As part of the trend in the 1990s towards deregulation, Congress created and President Clinton enacted legislation to close the Interstate Commerce Commission on December 31, 1995. The Surface Transportation Board now operates in its place. To learn more about the Surface Transportation Board, an independent agency, visit the Department of Transportation. To learn more about how unions view deregulation, visit the International Brotherhood of Teamsters. Concerning railroads, visit Conrail.
Case: Airline Regulation and Deregulation
The Air Transport Association (ATA), founded in 1936, was the first,
and today remains the only, trade organization for United States
airlines. In that capacity, the ATA has played a role in all major
government aviation decisions since its founding, including the
creation of the Civil Aeronautics Board (CAB), the creation of the
air traffic control system, and airline deregulation. Visit the
ATA. Also visit the
Federal Aviation Administration(FAA).
The text states that producer groups seeking favorable legislation usually claim that the legislation is to aid consumers or society. Such claims are not new. An interesting incident is recorded in the Book of Acts in the Bible. A silversmith named Demetrius called other silversmiths together for a meeting. The city they lived in, Ephesus, was the site of a temple to the goddess Artemis (Diana), and the silversmiths made and sold silver shrines of Artemis. The Christian missionary Paul had been preaching in the area with such success that many were converting to Christianity. The converts no longer bought silver shrines of Artemis. The silversmiths were upset because of the loss of business and started a riot. When pressing their case before others, however, they argued that Artemis and the city of Ephesus were being discredited by Paul's preaching. (See Acts 19:23-41.)
Question to Think About: Can you think of groups today that use public-interest arguments when lobbying for special favors from the government?
Does Antitrust Legislation Protect Competition or Competitors?
Many economists claim that the antitrust laws have often reduced competition by protecting smaller competitors from their larger rivals. In 1911, the Standard Oil Company was found guilty of violating the Sherman Act because it competed unfairly. A few years later, U.S. Steel was found not guilty because competitors had not been harmed by the giant steel company. U.S. Steel had been charging a high price, which encouraged other steel companies to expand. All steel producers profited by U.S. Steel's actions, although consumers of steel paid higher prices than necessary. In 1945, the Aluminum Company of America (Alcoa) was found guilty of violating the Sherman Act because it sought to meet a growing demand with increased capacity and sought to take advantage of new opportunities. If Alcoa had merely charged a higher monopoly price and allowed other firms to enter and grow, it might have been found not guilty. The result of these cases was to encourage large firms to charge high prices rather than to compete vigorously with rivals.
Question to Think About: Would you rather have been a customer of U.S. Steel or Standard Oil?
As noted in the 6/18/98 update, the U.S. Justice Department and 20 state attorneys general filed lawsuits last May alleging that Microsoft engaged in the pattern of predatory conduct to protect its operating-system monopoly and to extend that monopoly into Internet software. They charged that Microsoft's integration of its browser into Windows was not, as the company claims, solely to make life easier for customers, but was aimed at boosting the browser's market share. Windows software is used on 90% of desktop computers. Microsoft disputes the charges and claims the government is interfering with its right to create new products that benefit consumers.
The trial is now in its seventh week. Frederick Warren-Boulton, an economist hired by the government, testified that Microsoft holds monopoly power because it has the ability to set prices for its products in a way that excludes competitors: "I believe Microsoft has raised prices over the competitive level" because of its lack of rivals. He said that Microsoft had engaged in predatory practices aimed at harming competitors (the company's actions would be considered illegal only if it is found to possess monopoly power). Warren-Boulton argued that Microsoft's actions were "predatory" because they were aimed not at adding revenue but at winning the browser war. For example, Microsoft's decision to give away its Internet Explorer browser sacrificed revenue but was viewed as a way of beating Netscape. With Microsoft's browser on more than 60% of new Internet users' computers, the company may become dominant in the browser market, he said.
Microsoft, for its part, characterized itself as an aggressive but legal player in a fiercely competitive industry. Lawyers detailed Microsoft's frequent efforts to improve its operating system software all the way from MS-DOS to Windows 98. They said that the product would not have such a huge share of the market if it failed to improve quality and value with each new version. They argued that high market share "does not begin to reflect the intense competitive dynamic in the software industry." Even such a lead is "susceptible to rapid deterioration should the market leader fail to innovate at a rapid and competitive pace." The company said it planned to invest $3 billion in fiscal year 1999 on research and development.
Bill Gates was not among the 24 witnesses scheduled to testify, though he was interrogated by government lawyers for 20 hours during deposition on video tape and that tape has been used to support the government's case. The federal judge presiding at the trial said, "I think it is evident to every spectator that, for whatever reasons, in many respects, Mr. Gates has not been particularly responsive to his deposition." The trial is ongoing. For a library of New York Times articles about the case and for a discussion forum on the case, see http://www.nytimes.com/library/tech/index-microsoft.html.
In a related development, Federal Reserve Chairman Alan Greenspan, testifying before Congress about antitrust policy, expressed skepticism about the need for antitrust intervention and argued that changes in market conditions and technologies tend to undermine monopolies over time. He called for "a higher
degree of humility when enforcers make...projections" about the effects of monopoly power. At the same hearing, the antitrust chief for the Justice Department said "we reject categorically the notion that markets will self-correct and we should sit back and watch." (Updated 6/18/98)
Author Updates
Topic: Microsoft on Trial
(Updated 12/1/98)
Topic: Windows 98 Sells With Microsoft Browser
Microsoft's long-awaited release of Windows 98 is under a cloud. The U.S. Justice Department and several state attorneys general filed lawsuits in May alleging that Microsoft engaged in the pattern of predatory conduct to protect its operating system monopoly and to extend that monopoly into Internet software. They
charge that Microsoft's integration of its browser into Windows was not, as the company claims, solely to make life easier for customers, but was aimed at boosting the browser's market share. Windows software is used on 80% of the world's desktop computers. Microsoft disputes the charges and claims the government is
interfering with its right to create new products that benefit consumers. In the trial, set to begin September 8th, the judge hopes to finish testimony in about a month and promises a ruling "as quickly as possible." Prior to any judicial ruling on the suit, Microsoft's choices are (a) to separate its Internet browser from Windows 98, a task the company says would take "months if not years;" (b) ship their major rival's browser, Netscape, along with their own with Windows 98-a task Bill Gates likened to "requiring Coca-Cola to include three cans of Pepsi in every six-pack it sells;" or (c) release Windows 98 with Microsoft's browser bundled in the software. Microsoft has chosen (c), but if the judge finds against them in the fall, Microsoft would be in a real mess.
Topic: FTC Rejects Proposed Merger of Staples and Office Depot
In April the Federal Trade Commission (FTC) voted 4-1 to seek a court injunctio n blocking the proposed $4 billion merger of two office-supply discounters. As discussed in earlier updates, Staples planned to buy Office Depot, thereby creating a chain of 1000 stores with $10 billion in annual sales. FTC officials said that even if Staples sold some stores to rival
Officemax, the merged firm would still dominate the superstore segment of the office-supply market and would thereby drive up prices in many regions across the country. For example, in more than 40 metropolitan areas, the merged firms would dominate. The FTC argues that in markets where Staples, Office Depot, and Officemax now compete, "prices are significanlty lower that in two-chain market." If the judge approves the FTC's request for an injunction, Staples can still appeal the decision of can seek to argue the case before a FTC administrative law judge. The share price of Office Depot dropped by one-third after the FTC ruling. Staples's share price was little changed. As explained in earlier updates, share prices of Office Depot are more sensitive because Staples was offering an extremely attractive price for Office Depot.(Updated 4/20/97)
Topic: Update on Proposed Merger of Staples and Office Depot
Early this week the Federal Trade Commission voted to ask a federal court to stop Staples' proposed acquisition of Office Depot, arguing that the resulting firm would violate federal antitrust laws and result in higher prices for office supplies. The FTC decision jolted the price of Office Depot stock, causing the price to drop by one-fourth. The stock price of Staples also dropped, but by only 5%. The merger would create a chain of 1,149 stores that had annual sales of $10.7 billion in 1996. The only large rival is Officemax, with about 500 stores and annual sales of $3.3 billion. Just two days after the FTC vote, Staples and Office Depot agreed to sell 63 stores to Officemax at what was considered to be a bargain price. Some said that this proposal would satisfy FTC concerns, though FTC officials said they would have to study the deal. After the proposed sale was announced, the price of Office Depot shares jumped 20%, but the price of Staples shares dropped another 5%. Share prices of Office Depot are more sensitive to circumstances surrounding the deal because Staples would buy Office Depot from that company's stockholders, and Staples was offering an attractive price for the shares. (Updated 3/13/97).
Topic: Staples and Office Depot Merger
The planned acquisition of Office Depot by Staples for $3.4 billion may be
challenged by the Federal Trade Commission unless the two companies can
persuade antitrust officials that the merger will not result in higher
consumer prices, according to a report by Bloomberg News. Because Staples
and Office Depot are the two largest office supply companies in the
nation, the FTC is concerned the merger would reduce competition and
increase prices. FTC lawyers claim that prices are lower in markets where
both companies have stores than in markets with only one store. The
acquisition, announced last September, would result in 1,100 stores with
annual sales of more than $10 billion. The closest rival would be
Officemax, which has 560 stores and $3 billion in annual sales. If the FTC
is unconvinced that the merger would not harm competition, the agency
could sue to prevent the acquisition or seek a negotiated agreement that
Staples sell some stores. (Updated 2/17/97)
Topic: The Proposed Merger of Aerospace Giants
Three giant aerospace firms supply the world with large commercial
aircraft: Boeing and McDonnell Douglas in the United States and the
European rival, Airbus Industrie. In December 1996, Boeing proposed a
$13 billion takeover of McDonnell Douglas to create a huge firm and
leave the world market with just two suppliers. Antitrust officials
generally frown on mergers that reduce an industry to only two
competitors. But the firm resulting from the merger would make this
American firm more competitive with its European rival. Proponents of the
merger also argue that lately McDonnell Douglas hasn't been that
competitive anyway, accounting for only 10% of new airplane sales and
recently losing out in a race to build the next generation of defense
aircraft. The Clinton administration must decide whether to object to
the proposed merger. (Updated 12/20/96)