Tuesday, September 18, 2007

Technology and Antitrust

I taught Bell Atlantic v. Twombly to my civil procedure students yesterday and encountered a fact that was astounding to me and reveals that the underlying antitrust dispute was about something of decreasing importance. For those not familiar with the case, it involved a class action against the successors to the "baby Bells," claiming that they had engaged in a conspiracy to carve up the market for local telephone service so that each maintained a monopoly in its own region. The suit was dismissed on the ground that it contained insufficient factual allegations to support an inference of a conspiracy (as opposed to merely uncoordinated but individually rational behavior), and has become an important (and perplexing) precedent regarding the sufficiency of a complaint under the Federal Rules of Civil Procedure. (See my FindLaw column on the case here.)

As we were discussing the facts, I asked how many of the students used their mobile phones as their only phones. The answer that stunned me (but probably shouldn't have): 28 out of the 31 have no land line. This is not a scientific survey, obviously, and students are probably especially unlikely to have land lines if they have reliable mobile phones, but I strongly suspect it represents the wave of the future. Older and middle-aged folks like myself will continue to have land lines, but with each passing year, we will become more of a niche, like the market for network tv news or printed books.

This, in turn, may provide at least some partial vindication for those who want to minimize the role of antitrust law in areas of rapidly changing technology. While it is no doubt true that a monopolist can slow down innovation (as Microsoft's practices with its operating system and related apps have allegedly done), monopoly pricing will prove self-destructive in the long run if it encourages consumers to switch to substitute technologies outside the monopolist's control.

I'm not saying I completely buy this argument. For example, I'd want regulatory scrutiny of a proposed local phone company purchase of the cable company in its area, giving it control of the two principal land line methods of delivering signals. I'd want to see even more such scrutiny if that phenomenon were combined with severe concentration in the mobile network provider market, especially if the mobile networks are owned by the same companies that provide phone and cable lines.

Still, the overall pattern in both the OS market (as discussed in a NY Times story on European antitrust litigation against Microsoft here) and the market for voice and data communications, suggests that by the time antitrust litigation catches up with monopolists (and oligopolists), competing firms may have created substitute technologies that generate effective competition.

16 comments:

Luis Villa said...

n the markets, of course, is that in the phone market, you lose nothing by switching to mobile- you can still talk to people with landlines. In operating systems and software more generally, switching entails high costs- not only do you have to learn new interfaces, in many cases your old data may not carry over- to say nothing of new data obtained from friends or co-workers still using the previous operating system.

Not that I think that antitrust can actually succeed (I really need to finish my own blog post on the ruling)- but the problem is real, and very different from the problem in the telephony space.

Luis Villa said...

Urgh, that should start with 'the difference between the markets...'

egarber said...

And don't forget about VOIP phone options. They may technically be landlines, but they have certainly altered the traditional control structure among providers. There are also voice hubs that enable start-ups to avoid long distance charges through a type of peer to peer communication.

Further, rather than simply become dinosaurs, the traditional phone companies are getting their hands on video -- laying fiber and offering television services in direct competition with cable and satellite. Even further, desktop and mobile podcasts give consumers an a la carte option not available just a few years back.

Given the furious pace of all this, it seems to me that modern antitrust law in the area of technology should define "markets" broadly. Of course, there still are vertical and horizontal integration points that are too far, but with so much change and no real sense for how it will turn out, maybe the law should be a little more hands off than in the past.

As an example, does it really matter that much if your local cable operator decides to raise rates? I realize the exclusive cable franchise agreement with municipalities creates its own legal frame, but even so, there are many more choices now for consumers.
In this example, it seems to me one could argue that the market (for anti-trust purposes) is video programming generally, not simply traditional television.

Justin said...

Meg McArdle isn't exactly my favorite blogger, but she made a point today (not her main point, and different lesson, but hang with me). The problem with antitrust law is not that it is unneccessary, but that it is slow. Rather than immediately correcting for the economic costs of price fixing or monopolization, it responds years down the line - where the economic costs have already been borne, and the market has finally responded.

Not sure what to do about that - obviously you can go both ways.

Paul said...

Mac OSX, Windows and Linux (run on an Intel/AMD box) are at this point effectively interchangeable with little effort. The market responded far more rapidly to Microsoft's OS monopolization tactics than did it to AT&T's. As things stand right now, as long as high-end graphic games are not your intended use (there Microsoft still holds an effective OS monopoly) then the OS does not really matter. In my own home, in fact, I have all three OS's running all the time. My "main" box is Windows XP, my second and one is Linux and my Laptop is OSX. These run seamlessly with each other and all share data on all essential programs. The only thing keeping the OS monopoly alive is habit/fear and marketing.

Frank said...

As Keynes said, In the long run, we're all dead.

In the short run, it looks like a lot of incumbents are leveraging power from the old oligopolies into lobbying pressure that lets them substantially protect new ones:

http://www.concurringopinions.com/
archives/2007/08/lessons_from_ja.html

I highly recommend the new Frischmann and von Schewick paper for a fuller sense of the need for regulation in many of these areas.

Yonatan said...

Who would have thunk it - Prof. Dorf adopting a page out of the Schumpeter book of economics!!

In any case, one point may have been overlooked here: it is hard, in real time, to decide whether an industry is about to undergo rapid technological change. The Sherman Act, we should recall, was enacted to fight the monopolistic power of the "robber barons" who controlled railways - an industry that reigned supreme for about a century, but then rapidly declined in the face of newer technologies and improved infrastructure. The telecommunications industry discussed in Twombley underwent amazing changes since the advent of the cellular phone (and, more recently, VoIP); before then, however, at&t enjoyed monopoly power for about a century. Microsoft - the Times piece notwithstanding - enjoys a virtual monopoly in operating systems for well over 20 years, and the end of that monopoly is not yet in sight (and no, Paul - Windows, OSX and Linux are NOT perfect substitutes, at least not for 90% of the population; just ask any of Prof. Dorf's students who own a Mac and have to find a machine that runs Windows if they want to write their exams using a laptop rather than by hand).

So yes, when change finally comes, it can be swift and sudden; it can also make antitrust regulation seem anachronistic. In many cases, however, this is clear only in hindsight; in real time, the change that's around the corner just isn't that easy to spot.

Justin said...

Yonaton,

But if economic theory is correct (and as Leiter says, thats a pretty big if), then the market will make some kind of additional response, over time, to the existence of monopoly profits. It's very sweet fruit, even if its not low-hanging, and the market eventually corrects for it (with the above caveat).

The problem is just that the market is really slow at times, and of course that market imperfections can slow down the process further, or even stall it completely pending some technological revolution. The question is whether antitrust can act quicker as a administrative remedy, rather than just some punitive measure, the high-stakes equivalent of the $2000 highway littering fine.

Michael C. Dorf said...

Good comments all. As my original post says, the changes we're now witnessing are, in my view, only "partial vindication" for the antitrust deregulators. I've only taken a small sip of the Kool-Aid.

Luis Villa said...

Mac OSX, Windows and Linux (run on an Intel/AMD box) are at this point effectively interchangeable with little effort.

They really aren't, though. The basic bits are- until you need to open, say, a .doc file which must render perfectly, or go to your company intranet site that uses quirky IE-only data formats. This is why (I think) the EU badly screwed up the Windows Media portion of the ruling- they should have followed suit and demanded that Microsoft freely document and liberally license the Windows Media format, and allow people to compete that way, instead of trying to encourage people to buy crippled versions of XP (which unsurprisingly has been a flop.)

(Before I started law school, my day job was trying to sell Linux to customers, and to build a version of Linux they were more likely to buy- and trust me, they see significant differences, most of them tied to data formats and interoperability with Windows.)

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