The Civil Non-Merger Enforcement Program
The Antitrust Division's civil non-merger enforcement program has been addressing one of the most timely questions about antitrust enforcement: Are the antitrust laws adequate to protect consumers from anticompetitive harm that may arise during a period of unprecedented technological change? During this period, the Antitrust Division has filed complaints challenging a wide variety of both unilateral and multilateral conduct in industries that are important to consumers, such as personal computer operating systems, credit cards, and airlines, to ensure that consumers are not denied the full benefits of competition. The Antitrust Division has simultaneously continued its competitive advocacy efforts before Congress and federal administrative agencies to urge reliance on competition, rather than regulation, as the means to maximize consumer welfare.
Recent years have seen unprecedented technological change in many industries, particularly those involving information technology. While some people have contended that the rapid pace of change obviates the need for antitrust enforcement on the ground that new entrants can easily supplant dominant incumbents that try to exert market power, the Division believes that such a generalization is mistaken. Under certain circumstances, network externalities and first-mover advantages associated with information technology systems pose special risks that markets will "tip" very quickly in favor of a dominant incumbent. In such cases, timely and effective antitrust intervention may be even more important than is normally the case if we are to ensure that the eventual market winner prevails on the basis of competition on the merits.
Network effects, a phenomenon of various computer and communications systems, arise when the value of a product or service to a user increases with the number of other users or as products compatible with the service increase. Network effects arise directly where communication with other users is important; for example, in telecommunications or sharing of computer files. Network effects can also arise indirectly where a product's value depends heavily on complementary products (such as application programs compatible with a computer's operating system), since a larger customer base tends to attract a greater variety of such complements. Where network effects are substantial, the market success of a competitor's product will depend not only on its inherent attributes (such as price or ease of use) but also on its ability to interface seamlessly with the dominant firm's products or with complementary products tailored for those products. Installed-base compatibility advantages can give the dominant firm a competitive edge also in related markets, as well as help defend its core market power against rivals whose offerings are otherwise superior. Antitrust concerns arise when a dominant firm's advantages derive from contrived incompatibilities (that is, not from genuine efficiencies) or other exclusionary practices against rivals that restrict efficient access.
The most significant of the Antitrust Division's enforcement efforts of this type has been its action against Microsoft. In 1998, the Antitrust Division filed a complaint charging Microsoft with violating Sections 1 and 2 of the Sherman Act in connection with its efforts to use exclusionary practices to protect its monopoly in personal computer operating systems and to extend its monopoly power into the Internet browser market. Trial on the liability issues was completed in 1999, and the District Court issued extensive findings of fact on November 5, 1999.
Concerns about innovation in services important to consumers led the Antitrust Division to file suit in another case involving collaborative conduct by competitors. In October 1998, the Antitrust Division charged Visa and MasterCard, the two dominant general-purpose credit card networks, with failing to compete against one another and adopting rules to prevent their member banks from dealing with other card networks, all of which retarded innovation. The case, which is scheduled to go to trial in June, will highlight the importance that the antitrust laws attach to preserving competitive incentives and opportunities for exiting and potential rivals.
During the year, the Antitrust Division also filed suit charging American Airlines with monopolizing routes emanating from its Dallas/Ft. Worth (DFW) hub in violation of Section 2 of the Sherman Act, through predatory practices designed to drive low-cost carriers out of DFW routes. The complaint charges that American added uneconomic flights and reduced fares in DFW routes served by low-cost carriers until the low-cost carriers were forced out of the market; American viewed such conduct as an "investment" to protect its ability to charge high fares on DFW routes. This is the first predation case brought against an airline by the Division since the industry was deregulated in 1979.
The Antitrust Division has also continued its long-standing policy of being an effective advocate for the cause of competition in various legislative proceedings. The Antitrust Division testifies regularly to Congress on various proposals with competitive implications. In recent years, significant segments of the American economy, subjected to economic regulation for half a century or more, have been substantially deregulated by statute. Where public restraints have been lifted, proper application of the antitrust laws ensures that the benefits of competition will not be impaired by private restraints.
Even in industries that have not been deregulated by statute, regulatory agencies often retain substantial discretion to promote competitive behavior. The Antitrust Division works closely with many federal agencies, including the Department of Transportation, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, and the Federal Communications Commission, to urge that they rely in their decision making on competitive principles to the maximum extent consistent with the other statutory goals.
Thus, through antitrust enforcement actions, direct overtures to Congress for regulatory reform, and communications with federal regulatory agencies, the Antitrust Division remains the government's foremost proponent of competition.
(Description of photograph: Attorney General Janet Reno and Assistant Attorney General Joel Klein visit the Microsoft war room to learn about new technology used in the trial.)