Ignoring Antitrust Laws Breeds Bullies and Bailouts

Last Updated Dec 8, 2009 4:20 PM EST

For decades now, through both Democratic and Republican administrations, antitrust enforcement in the United States has been virtually nonexistent. Companies have been gobbling up competitors in industries ranging from oil (Chevron buying Texaco) to software (Oracle buying PeopleSoft, which had already purchased J. D. Edwards) to banking (NationsBank merging with Bank of America) to pharmaceuticals (Pfizer's purchase of Wyeth). The reason for such lax oversight: a perspective out of the University of Chicago maintaining that there are relatively few real monopolies, markets are largely self-correcting, and government regulators and policy makers are not to be trusted to make economic decisions.

Numerous bad consequences flow from this misguided policy - or absence of policy. One is higher prices. There just might be some connection between the rise in pharmaceutical prices and the fact that this industry has seen mega-mergers among the major players for years.

Another is the recent financial meltdown and the taxpayer funds that have been expended to address it. How did so many financial institutions become "too big to fail" without imposing unreasonable systemic burdens and risks? Because no antitrust oversight precluded the numerous mergers and takeovers that created a financial landscape in which a few behemoths held most of the deposits and made most of the mortgages. And the "solution" to this problem, caused in part by having institutions too big to fail? Combine those entities with other, larger financial organizations - leaving mortgage markets, deposits, commercial loans, and investment banking even more concentrated than before.

Other negative effects on innovation and entrepreneurship have implications for the long-run competitiveness of the U.S. economy. To oversimplify somewhat, businesses can compete in basically two ways:

  • Offer a superior value proposition in the marketplace - the bundle of product and service features coupled with the price.
  • Use size and market power to bully or bribe your customers and forestall competitive entry.
The first competitive dynamic produces innovation, the second, stagnation, as potential new technologies and services get unfairly shut out.

All too many companies use their size and market power to intimidate or bribe customers into not pursing new offerings that may be beneficial. Intel recently paid an antitrust settlement of more than $1 billion. Although the company denied any guilt, the allegations were that Intel gave money to customers that would stop using AMD's chips. Oracle's strategy of using its vast cash hoard to "consolidate" the software industry - acquiring companies that make competitive and complementary products - provides it the market power to forestall customer defection even if the customers are unhappy, because they have few to no options left.

And then there is IBM. According to one knowledgeable industry source, more than half of IBM's profits still come from its mainframe business - and some of you thought mainframe computers were relics of the past! This fact is scarcely surprising when you think about how many mainframe competitors are left in the marketplace - approximately none - how many legacy applications and systems still run on large mainframes, and how long, costly, and difficult it is to migrate to new platforms. IBM will do anything to protect its mainframe business and margins. As Ashlee Vance details in her New York Times blog post, it's threatened customers with legal action for considering software that saves processing power and time, such as that provided by Neon Enterprise Software, and it's threatened other retaliatory moves, such as withdrawing support from customers' mainframe operations.

Fortunately, the European Union's antitrust authority has seen fit to be somewhat more active than its U.S. counterpart. The E.U. has given Intel, Microsoft, and now Oracle (with its proposed acquisition of Sun Microsystems) trouble. Instead of complaining about the EU and its "bureaucrats," as many of my high-tech friends do, people should appreciate the importance of antitrust enforcement.

Markets provide numerous benefits in the allocation of resources and in stimulating invention and the renewal of companies and industries. But markets need competition to work properly. Competition requires competitors and a game that is not rigged in favor of the large, powerful, and politically well-connected incumbents. The importance of getting this policy right is huge, both for the companies adversely affected and for the economy as a whole.

  • Jeffrey Pfeffer

    Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Stanford Graduate School of Business, where he has taught since 1979. Pfeffer has authored or co-authored 13 books on topics including power, managing people, and evidence-based management. He has lectured in 34 countries and has been a visiting professor at London Business School, Harvard Business School, Singapore Management University, and IESE in Barcelona. Pfeffer has served on the board of directors of several human-capital software companies, as well as other public and nonprofit boards.