Clinton's Brave New Business World: The Bush Administration Must Decide Whether to Continue Its Predecessor's Efforts. (Antitrust)

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AN AGGRESSIVE EFFORT TO USE antitrust law to regulate the economy took place almost unnoticed in the last four years of the Clinton presidency. The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) set implicit tests for anticompetitive behavior that effectively assumed many successful companies engaging in aggressive business practices were guilty of antitrust violations unless they proved themselves innocent. The federal agencies also took the position that business practices could be unlawful even when there was no specific evidence that the practices harmed consumers. That perspective shaped key antitrust cases in which the enforcement agencies sought restructuring and ongoing court-administered regulation of critical industries.

So far, the Clinton attempts to make antitrust a more powerful regulatory tool have fared poorly in litigation. The Supreme Court rejected the FTC's efforts to shift the burden of proof to the defendant in the 1999 California Dental Association decision. The FTC settled its case against Intel without getting the sweeping regulation over Intel's relationship with hardware makers that the FTC sought. A federal district court in Wichita dismissed the DOJ's antitrust case against American Airlines, noting, "The government's theory... represents a whole new mid-game spin on time-honored rules." The D.C. Circuit Court of Appeals found that "most" of the trial court's findings that Microsoft committed antitrust violations did "not withstand appellate scrutiny." The appeals court rejected the trial judge's decision to break-up Microsoft, prompting the Justice Department to move away from pursuing some of the sweeping regulatory remedies that it had previously sought.

Clinton's Justice Department nevertheless has left a full antitrust plate for the incoming Bush administration. The new administration will have to weigh the virtues of policy continuity against the possibility that the courts will defer to a level of agency interventionism that runs counter to Bush's business philosophy.

HANDS-ON VS. HANDS-OFF ANTITRUST

The answers to just two questions separate students of antitrust into what I call the "hands-on" and "hands-off" schools:

* Apart from price-fixing and similar behavior, are anticompetitive practices common?

* Apart from price-fixing and other sorts of cartel behavior, can the courts distinguish anticompetitive from pro-competitive practices with sufficient accuracy, and design remedies with sufficient precision, to ensure that regulation will make consumers better off?

Answering "yes" to both questions, the federal enforcement agencies in the Clinton administration came down squarely on the interventionist "hands-on" side.

Prevalence of anticompetitive practices In the last quarter-century, game theorists have developed models that imply that a wide variety of business strategies can harm consumers. That is especially so in industries with few firms or with firms that make differentiated products -- a common real-world phenomenon. For example, firms may exclude rivals by tying complementary products, adopting strategies that raise their rivals' costs compared to their own, and investing in innovation that destroys rivals.

Theory also buttresses the view that the invisible hand may work poorly in "network" industries wherein the product becomes more valuable as more people use it. Academic work from the late 1980s and early 1990s shows that (a) network industries tend toward monopoly, (b) the resulting monopolies may use inferior technologies, and (c) inefficient monopolists may be very difficult to dislodge.

To counter those charges, members of the hands-off school argue that such anticompetitive outcomes occur, in theory, only under very specific and often unrealistic assumptions. Moreover, they believe that, in the real world, it rarely is possible to differentiate anticompetitive from pro-competitive strategic behavior. …