Policy Papers

Antitrust in High-Tech Industries

by and

A large share of the recent growth in the United States economy has been in high-technology industries or service industries that use high-tech services. Information and communications technologies have developed very rapidly, generating productivity growth throughout the economy. The firms developing many of these technologies—such as Oracle, Intel, and Microsoft—have achieved a dominant position in the marketplace and thus attracted the attention of competition authorities. But successful innovation, with or without patent protection, is often accompanied by a position of market power. Transitory or even not so transitory monopoly profits are the reward for successful innovation and may be required to promote a dynamic economy, as Joseph Schumpeter explained decades ago. As a result, successful innovators often find themselves in conflict with competition policy authorities.

In this paper, we analyze the impacts of recent United States Section 2 Sherman Act cases brought against three major information and communications technology sector firms in the last half of the 20th century: IBM, AT&T, and Microsoft. These cases provide a particularly interesting set of case studies because they all involve major players in the high-tech sector, but each case had a different legal outcome. One—IBM—was dropped after 13 years; another –AT&T—was settled after 8 years of litigation; and the third—Microsoft—resulted in a court decision that was a clear victory for the government. But what was the effect of each case‘s resolution on the relevant markets? Has the remedy that was imposed in the two latter cases actually worked to produce a more competitive industry structure? Could the remedy proposed by the government in IBM have improved the performance of the computer industry?

We will argue that, unlike earlier landmark antitrust cases against steel, oil, tobacco, or aluminum, a successful outcome in these Section 2 cases brought against high-technology firms would not simply be an expansion of output and lower prices of a relatively homogeneous commodity, but rather the development of new products to replace or to compete with the dominant firm‘s product or service. Is it conceivable that antitrust authorities can design remedies that obtain such results?

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