Brussels is Right to Restrict Dominant Companies
From the September 12, 2007 Financial Times
September 18, 2007
by Irwin Stelzer
With the courts due to rule next week on Microsoft's appeal against the European Commission's fine, it is no surprise that its defenders have taken to your pages to plead the company's case (Alec Burnside and Lars Liebeler, September 5). Their concern that public policy should not stifle competition is well taken. Competition forces companies to innovate or be consigned to the dustbin of history; it forces companies to pass the benefits of economies of scale and cost-cutting on to consumers; it contributes to social mobility by allowing newcomers to start businesses secure in the know-ledge that they will be able to compete on the merits, and not be crushed by muscular incumbents using tactics that have no relation to efficiency.
We are indeed in an age when mater-ial progress depends on a rapid rate of innovation. This puts a premium on what the great economist Joseph Schumpeter called "creative destruction". We need what he called "new men" to challenge incumbents, to push new ways of doing things, new products, new ideas.
These challengers cannot match a dominant incumbent's sheer muscle - its ability to coerce customers into refusing to deal with new suppliers, to price its products in a way that makes it impossible for new entrants to make attractive offers to potential customers, to threaten to cut off supplies to any customer who welcomes the salesmen of a new competitor.
Only if competition authorities make sure that the race will go to the efficient can we be certain that the economic and social advantages of dynamic capitalism will not be replaced by an ossified economy, in thrall to companies that can bar the door to progress.
Neelie Kroes, European competition commissioner, comes to her job from long experience at the top of the private sector. She harbours no animosity towards successful companies that have garnered large market shares merely by building and marketing the best mousetraps. Like US antitrust authorities, she recognises that success is not a punishable offence - if based on efficiency and managerial ingenuity.
But she knows, too, that a dominant company, free to adopt anti-competitive practices, will scare off the venture capitalists on which newcomers often rely, and raise the risks and the cost of capital of companies that might have gained a toe-hold in markets dominated by an entrenched rival. This is not to say that the Commission is infallible: it most definitely is not, and over the years I have been among those criticising it for excessive regulatory zeal. But when it comes to dominant companies, it has painfully developed policies, after wide consultation, allowing it to ask the right questions. Those who criticise its decisions concerning Microsoft would do well to consider just how much leeway a dominant company can be given without destroying the competitive process.
This brings me to the Commission's latest controversial action: its investigation of Intel, one that parallels moves taken by authorities in Japan and under consideration by the South Korean authorities and the US's Federal Trade Commission. Although I do some consulting for Advanced Micro Devices, Intel's competitor, I have not studied the details of the Commission's complaint against Intel and therefore am in no position to offer a view on the impending litigation. So I confine myself to this observation, one I have been repeating in classrooms and articles for more than 50 years: it is indeed possible for a company with an 80 per cent market share so to structure its pricing schedule as to make it economically imprudent for its customers to choose among competing products based only on their technical attractiveness and price. It is important for authorities to make certain that such practices are nipped in the bud.
Although it might seem difficult to distinguish tough competition on the merits from such predatory and exclusionary behaviour, in the real world it is not: company documents, testimony of customers and solid economic analysis can combine to separate hard from illegal competition, no-holds-barred but lawful competition from innovation-stifling anti-competitive practices.
Whatever the outcome of the Microsoft appeal, it is to be hoped that the Commission continues to recognise that the competitive race must go to the swift, not the muscular, and that although big is not bad, and a dominant position can indeed be won fairly, dominant companies are capable of anti-competitive actions - even those in high-technology industries.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.