Anti Trust Laws and Policy
- Statutes developed by the U.S. Government to protect consumers from predatory business practices by ensuring that fair competition exists in an open-market economy
- Also referred to as “competition laws“
- Since the government’s rules inevitably affect industry participants, no executive in the network economy can afford to be ignorant of government information policy
Policy overview
We have developed three major themes in this book, each of which raises questions for government policy
- Differentiation of products and prices
- Lock-in
- Positive feedback
1)Differentiation of products and prices.
The high first-copy costs of information and information technology inevitably lead to price and product differentiation. Strategies involving mass customization, differential pricing, personalized content, and versioning are natural outcomes in such industries.
However, these strategies raise antitrust issues about fair competition.
- Is it discriminatory to charge different users different prices for essentially the same product?
2)Lock-in
Since information products work together in systems, switching any single product can be very costly to users. The lock-in that results from such switching costs confers a huge competitive advantage on firms that know how to take advantage of it.
This leads to concerns about the nature of competition.
- What tactics are counted as “fair” and “unfair” competition with lock-in?
- Will you be branded an aftermarket “monopolist” under antitrust law if you are the sole supplier to some locked-in customers?
- If you are such a “monopolist,” how will your strategic choices be limited?
3)Positive feedback.
- Winner-take-all competition and standards battles are common as rivals fight for temporary market control.
- If you agree to cooperate with your rivals to establish standards, you run the risk of violating laws against cartels.
- Alternatively, if you compete and win, you may be guilty of monopolization, depending on the tactics you employed to gain or keep control over the market.
- Even if you avoid antitrust entanglements, you may have to deal with regulatory agencies.
Price differentiation
Robinson – Patman Act of 1936 says
–Price discrimination is illegal if it “effectively lessens competition,”
Many antitrust cases have been brought on these grounds.
- For example, a group of pharmaceutical drug manufacturers has been facing a massive antitrust action the past several years in part because they each set drug prices lower for hospitals and HMOs than for retail drug stores.
There are three primary legal arguments that render the vast majority of price differentiation immune from successful legal challenge:
- You are allowed to set lower prices that result from lower costs.
- You are allowed to set differential prices to meet the competition.
- Differential pricing is only questionable if it “lessens competition.”
Differential pricing itself should not be taken as primary evidence of anticompetitive behavior. Price discrimination for information goods is often positively beneficial to groups receiving discounts.Price discrimination may be a necessary strategy to recover costs.
Differential pricing allows the producer to sell to markets that otherwise would not be served
- If film producers had to set one price for first-run movies in all countries, only the high-income countries could afford to go to the movies
Competition policy
- The Sherman Act (1890) makes it illegal to “monopolize” a market.
- The Clayton Act (1914) prevents mergers likely to “substantially lessen competition.”
- FCC regulations refer to the “public interest.”
- The underlying principle guiding antitrust law is the protection of competition as a process.
- Congress’s judgment in passing the Sherman Act in 1890 was that this competitive process would ultimately be best to spur economic growth and protect consumers‘ interests.
But how does the government and legal system respond when our cherished free market economy spawns a powerful monopolist?
- First, the government can sit back and do nothing
- Second, the government can attack the monopoly as illegally obtained
- Third, the government can directly regulate the monopoly. This is the approach that has been taken for decades to the local telephone business as well as other utilities such as electricity
Implications for Strategy
unpleasant surprises that firms operating in information technology businesses commonly face:
- Virtually any acquisition or merger will be reviewed by the antitrust authorities. If you are joining forces with a rival, making your case will require careful planning, antitrust lawyers, and detailed economic analysis.
- Antitrust sensitivities are raised whenever you meet and talk with your rivals—for example, for standard-setting purposes.
- You may be accused of being a monopolist, especially if some of your consumers are locked in :- To defend yourself, you will need to establish either that you lack genuine and lasting monopoly power or that your conduct was legitimately competitive,not exclusionary or predatory.
Mergers and Joint Ventures
Mergers and joint ventures that “may substantially lessen competition” are illegal.Mergers involving direct rivals are typically subjected to antitrust review by the Justice Department
There is no antitrust immunity for software mergers
- –Threat of high consumer switching costs and the intellectual property rights of incumbents
- –Adobe/Aldus in graphics software, Microsoft/Intuit in personal financial software