Trust-Busting
The State of Antitrust
in the United States

Multinational Monitor: What have been the trends in industry concentration over the last decade?
Robert Pitofsky: In the last 10 years, we saw the greatest merger wave in the history of the country. But at the same time, the economy has been extraordinarily dynamic, and while many firms leave the market because of mergers, many other firms enter with new ideas and new products.

Second, there may be some increased concentration among domestic firms in the United States, but that is balanced by the expansion of global competition. More and more firms in Asia and Europe are selling in the United States.

The bottom line is: I don't think there has been a great deal of change one way or another in industrial concentration, despite this extraordinary merger wave that we have seen.

MM: Would you pick out any industries where there has been a trend toward concentration?
Pitofsky: Sure. Two examples most frequently cited are the airlines and newspapers.

MM: For both of those, that would be within the United States and globally?
Pitofsky: Yes.

MM: Are there counter examples, where there has been a real increase in competition in the last 10 years?
Pitofsky: I suppose application software would be an example with many new firms flooding into the market. This is the case generally for large portions of the high-tech sector of the economy.

It is true that one firm, Microsoft, dominates operational software; and a second firm, Intel, dominates microprocessors. But when you get past each of them -- and they are enormously successful and powerful firms -- that is a sector of the economy that is characterized by many small new entrants into the market.

MM: In many of the areas of the economy that have been dynamic -- software and biotech, to pick two -- the dynamism seems to be in the early stages, but within a relatively short period of time, there seems to be a move toward consolidation.
Pitofsky: You are going to see consolidation in any dynamic sector. Firms are trying to put together complimentary capacities. I don't think it is the kind of concentration that suggests monopoly or duopoly. Part of the reason is that these are firms that depend on intellectual property. If somebody comes up with a new idea, it can catch up and leapfrog the incumbent firm rather quickly.

But it is true that you are going to see lively merger and joint venture activity in these high-tech sectors.

MM: To what extent is intellectual property emerging as a fundamental issue for competition policy?
Pitofsky: It has always been an issue. There is always this area where the two tend to overlap. After all, the business of intellectual property is to give people limited monopolies. The business of antitrust is to make sure that firms do not abuse their market power. We've been trying to reconcile those two legitimate but overlapping policies for a long time.

In the 1960s, antitrust was dominant, and people were not paying as much attention as they should have to incentives to innovate. Now, in the 1990s and at the turn of the century, I do worry that intellectual property is trumping antitrust in areas in which it should not do so. Right now, protecting incentives to innovate seem to be uppermost in the minds of some courts, and maybe legislators as well.

MM: What is an example where intellectual property is trumping or outdistancing antitrust concerns?
Pitofsky: It is traditional antitrust law that if you have a dominant position, you can't say to your customers, "I will refuse to deal with you if you do any business with my competitor, or my potential competitor." If I own a newspaper, and my advertisers think they might profit from advertising on a new radio station, you can't say to those advertisers, "You have to choose between the two of us. Either you advertise with me, and only me, or I'm not going to carry your ads."

In the patent area, there are some decisions that suggest that the owner can say to its licensees, "You must deal with me, only me, and not my competitor."

I think the antitrust approach is the better idea.

MM: To what extent in reviewing a merger, or just generally in approaching antitrust issues, is it appropriate to look at the global market?
Pitofsky: You can't generalize about it.

If you are looking at a transaction between two U.S. cement companies, it would be ridiculous to think about cement that is produced in Norway or Australia. That production is not relevant.

On the other hand, if you are looking at the production of pharmaceuticals, or oil, or software, those really do compete in a global market. And if you tried to raise prices substantially on one of those products in the United States, imports would quickly come flooding into the U.S. market.

MM: There seem to have been a quite remarkable number of prosecutions in the last five or seven years of global cartels. Are these on the rise?
Pitofsky: I think they are on the rise. In the 1990s, the Department of Justice was immensely more effective in detecting, challenging and punishing cartels. I just published a an article noting that 90 percent of those cartels involved international trade. That is an amazing and unanticipated consequence of global competition.

Why is it happening? Part of the problem is probably that businesses in other parts of the world are not as accustomed to aggressive cartel enforcement as businesses in the United States. The result is they are a little more careless, both in entering cartels in the first place, and then in concealing them from the authorities.

MM: These are not technical violations. These tend to involve people sitting in rooms and drawing lines around markets. Is that right?
Pitofsky: Almost always. There are some that are in the gray area. But most of them are knowing, secret, conspiratorial, price-fixing agreements designed to extract money from consumers.

MM: Do you see the need to move toward some kind of global antitrust rulemaking or enforcement?
Pitofsky: I think there is a great need for international cooperation and sharing of information. I think one of the untold stories of the last 10 years is how much cooperation has improved among enforcement authorities in Asia, Europe and the United States, and also involving countries in the Southern hemisphere.

The next step is whether there ought to be a standard set of rules that all countries will abide by. There is one area where that is feasible, and that is cartels -- because cartels diminish everyone, large countries and small alike. Through the OECD [Organization for Economic Cooperation and Development, a grouping of industrialized nations] and other organizations, we've pretty much seen a uniform approach adopted.

Then you can go the next step, and start asking, "Shouldn't mergers be illegal at the same point, with the same market share, in Brazil as in the United States, in South Africa as in the EU?" The answer is: we are a long way from that. There is no likelihood that you are going to have uniform substantive rules across the board in the many countries that are part of the World Trade Organization.

MM: So you are skeptical about efforts to try to bring antitrust into the WTO?
Pitofsky: I think there are things that can be accomplished in the WTO, like commitments to transparency, commitments to due process -- procedural matters. But to imagine that you could come out of the WTO with a single rule as to what constitutes an attempt to monopolize? I just don't think that is in the cards for the foreseeable future.

MM: What has been the trend toward the use of joint ventures in the United States in recent years?
Pitofsky: There are an enormous number of them. They are symptomatic of a dynamic economy. They occur most frequently in new and high-tech sectors of the economy. We never have been very tough on joint ventures in this country, comments by some in the private sector to the contrary. The federal government brought one research-and-development joint venture case in 110 years.

As far as sales joint ventures, I would say the law today is more generous than it was 30 or 40 years ago. We've eliminated automatic per se types of violations. Virtually all joint ventures, I might say all, are subject to an extensive rule of reason analysis.

MM: What is a per se violation?
Pitofsky: Per se means that a certain kind of practice is illegal regardless of the market power, purpose, effect or justification of the transaction. You just take one quick look at it, and you say, "That is unacceptable." A cartel is an example of a per se violation. There was a time when judges in this country suggested joint sales ventures should be treated just like cartels. But I don't think there is a chance that that would be the result in courts today.

MM: Do you think that framework is right, or should there be a more aggressive approach on joint ventures?
Pitofsky: It is hard to say. There are joint ventures that the government should challenge. And there have been periods of our history when it wasn't just that the law was lenient; it was that the foul line was virtually erased with respect to enforcement against joint ventures. I don't think that is the right way to go. But I think a generally lenient approach to joint ventures makes sense.

MM: What fueled the merger trends in the 1980s and the 1990s?
Pitofsky: Most people today would say the merger trend in the 1980s was stock market manipulation. Buying companies and then breaking them up. Buying them with the intent of selling them. Leveraged buyouts of various kinds. It was the Michael Milken era of American merger activity. We begin now to see scholarship showing that a large number of those mergers that took place fell apart within five or 10 years.

The merger trend of the 1990s, which was, incidentally, vastly greater than the 1980s or 1960s, is hard to understand. One explanation that I find sensible is that it was the result of the vast inflation of value of stocks in the 1990s stock market. Many companies found themselves in the position where the value of their stock was vastly greater than even they thought was justified. They then came around to the view that maybe the sensible thing to do was take this inflated stock and use it to buy something else, which wasn't so inflated. It has been described as the funny-money explanation for the 1990s mergers.

That was surely not the whole story. Globalization of competition was part of the reason for the merger wave. Firms in Europe that wanted to do business in the United States felt they had to have a partner. Deregulation was part of it. Firms that had been under the regulatory energy umbrella were turned loose and felt they had to be larger or differently structured.

Like anything else, there were many reasons, but I think one of the reasons probably was the inflated value of the acquiring companies' stock.

MM: Do you think it would be a better world if, on balance, most of those mergers had not taken place?
Pitofsky: No. I think it is a better world that most of them did take place.

The number of mergers that is a problem is a small percentage of the total mergers that occur. During the 1990s, which people have described as a fairly aggressive period of antitrust enforcement, the Federal Trade Commission thoroughly investigated 3 percent of all the mergers that occurred, and challenged a little over 2 percent.

The 97 percent that sailed through probably served consumers well, or they were neutral. Most of them are neutral, they don't make much difference to consumers one way or another. But a large number of them are very efficient, and result in the production of better products. A small number are designed to increase market power, and exploit that market power to the disadvantage to consumers. The important thing is to be on the alert to block those mergers, that 3 percent.

MM: Would you agree that apart from the concern about market power, and whether or not the government should intervene to stop a merger, a merger may be not beneficial for society, even if there are no grounds for government intervention? For example, it is hard to see how the AOL-Time Warner merger has contributed anything to a better society.
Pitofsky: The way the statute reads, there are no grounds to challenge a merger because it does no good, or has no pro-competitive or pro-consumer effect. You could write a different statute, but we never have.

The merger has to have an anti-competitive or anti-consumer effect before you do anything about it.

In AOL-Time Warner, there was a threat of anti-competitive and anti-consumer effects, and therefore the deal was only allowed to proceed when it was significantly restructured.

To go back to the more general question, I wouldn't be surprised if most of the mergers do not contribute to efficiency or better management or anything worthwhile, but that is no reason to strike them down. Eventually, if they are inefficient and lead to worse management, they will fall apart anyway. That is what the scholars have found in looking back at the 1970s and 1980s.

MM: What would you think about a proposal to set an absolute cap on the size of a merger?
Pitofsky: There was a proposal like that, by Senator Hart, in the 1960s. He didn't suggest an absolute cap. He suggested that, at a certain point, in order to grow larger, the acquirer must spin off assets it already holds of an equal size. That was the proposal. It was debated very seriously at the time and got nowhere. I don't think it even got out of committee.

The answer is: the same thing would happen today. It wouldn't get out of committee.

MM: But what about the proposal on the merits?
Pitofsky: I'm not sure the problem with capitalism in this country is that companies are too large.

If you are concerned about that, it would be for reasons that don't have anything to do with competition. You would be concerned about whether companies grow to such a vast size that they have too much influence in Congress, that kind of consideration.

I'm not sure that great companies, even the Microsofts of the world, have more influence in the Congress than associations of doctors, lawyers and gasoline station owners.

I just don't think it is a problem. I don't think companies are larger today, compared to their share of the gross domestic product than they were 30 or 40 years ago.

MM: Do you think that it makes sense, as a matter of policy, to try to anticipate the political consequences of either economic concentration generally, or concentration in particular industries, or combinations that might lead to certain kinds of political influence?
Pitofsky: I'm in a different place from many of my colleagues on this subject. Yes, I believe the antitrust laws are more than economics, and that political considerations were in the mind of Congress when it adopted antitrust statutes.

I think you use them prospectively in deciding what kind of rule you want to have. I don't think it is fair to apply political considerations to a particular deal, after the deal has been announced.

MM: What kind of rules would you look to implement in this area?
Pitofsky: Mostly they would be strict scrutiny-type rules.

I think when you are dealing with transactions that affect the First Amendment marketplace of ideas, or when you are dealing with transactions that affect the defense industry, you would look more carefully at a merger, joint venture or long-term contract than you would if you were looking at a merger of two breakfast cereal manufacturers.

Because the consequence in political terms is so much more significant.

MM: The FTC acted in the late 1990s to block or restrict some drugstore mergers. At the same time, it is very hard to find a locally owned drugstore. Is that something that should be a concern of antitrust authorities? And if so, what could they do about it?
Pitofsky: I don't think it is a matter of concern, and I don't think there is anything you can do about it.

It is not private behavior that has driven small grocery stores and small drugstores out of business. It is the marketing revolution of the last half of the twentieth century. The simple fact is the prices and quality of products in these small, local pharmacies -- not always, but frequently -- cannot keep pace with the quality, price, assortment and inventory in a large drug chain.

There are areas of the economy where the small stores do reasonably well, like bookstores. Barnes & Noble is doing brilliantly, but they are not driving all of the small bookstores out of business.

It depends on what consumers want. If they want their drugs in a large, supermarket chain, then it is their call. They vote with their money.

And antitrust couldn't do anything about it.

MM: Could you or should you do anything about it, outside of the realm of antitrust, using other policy tools?
Pitofsky: I don't think so. That is a kind of industrial planning that has failed in almost every part of the world.

MM: What is the incipiency doctrine?
Pitofsky: There are certain kinds of violations of the antitrust laws that only become violations after the transaction has occurred and the effect is clear. Treatment of joint ventures are an example of that.

But there are other kinds of violations where Congress has decided that the trend is so threatening that illegality kicks in where the effect may be -- not is -- but may be to substantially lessen competition.

MM: To what extent is the doctrine employed?
Pitofsky: I think its most important application is in merger analysis. Mergers are different than other kinds of transactions because you review them before they happen. Therefore, you are looking in a probabilistic way at what is likely to occur. There is no question that mergers have been struck down as illegal, long before any anti-competitive effects occurred.

The same is true of certain kinds of contracts -- tie-in sales, exclusive dealing contracts -- where the statute talks about incipiency, rather than actual, completed anti-competitive effects.

MM: Does it encompass the possibility that a merger itself doesn't lessen competition impermissibly by traditional mergers, but might be expected to kick off a wave of mergers?
Pitofsky: Yes, that is in the legislative history.

MM: Is that analysis done? Are there examples of mergers that have been stopped or restructured because of that?
Pitofsky: It is very difficult to apply that rule. Suppose you have 14 firms in a sector of the economy. Two of them, mid-sized firms, say they are going to merge. The challenge would be, if we let these two merge, there will be two more and two more and two more. It is very difficult to predict that way. Also, one possible reason there are two more and two more and two more, is that the mergers are so efficient.

The idea that blocking the first merger in a series is that it is going to trigger a wave of mergers -- it's in the legislative history that the government has the authority, but it is very rare that it would be used.

On the other hand, after the first and the second and maybe the third, fourth and fifth merger, and now a sixth comes along, and now you don't have 14 firms left, you have only six -- if the next one had been the first, you would have let it go through, but the next one has indicated fairly clearly that there is no stopping point unless the government intervenes -- you may have a challenge to a merger under those circumstances.

Many companies found themselves in the position where the value of their stock was vastly greater than even they thought was justified. They then came around to the view that maybe the sensible thing to do was take this inflated stock and use it to buy something else, which wasn't so inflated. It has been described as the funny-money explanation for the 1990s mergers.