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Free the Market! Why Only Government Can Keep the Marketplace Competitive.

By Gary L. Reback, 2009. New York, NY: Portfolio (Penguin Group). Pp. 416, $26.95 hardcover

Business Economics (2010) 45, 297-299. doi:10.1057/be.2010.26

In Free the Market!, antitrust attorney Gary L. Reback shepherds the reader through some of the most important U.S. antitrust cases of the last quarter century, involving such information age mega corporations as Apple, IBM, Microsoft, Oracle, Thomson Corporation, and the new AT&T. Reback, one of the most highly regarded private antitrust attorneys in the United States, has a unique vantage point--he was professionally involved in litigation both for and against these industry leaders since the early 1980s. Although he was not always successful in getting the results that his clients hoped for, these antitrust cases (and related business negotiations) provided a vehicle for some of the author's most interesting insights about the dominant Chicago School approach to antitrust policy.

As a backdrop to these cases, Reback describes the ascendancy of the Chicago School of antitrust policy in the U.S. Department of Justice, Antitrust Section, under the leadership of William F. Baxter during the first term of Ronald W. Reagan's Presidency. The Chicago School approach--named so because many economists and law professors who were proponents of this antitrust philosophy were academically affiliated with the University of Chicago--argues that by limiting interpretation of the U.S. antitrust laws (and subsequent antitrust enforcement) to that which is based on sound economic reasoning (meaning optimal resource allocation and firm productive efficiency) encourages the free market to maximize the production of goods and services from available resources. Through the first decade of the 21st century, the Chicago School approach has continued its dominance as the antitrust philosophy embraced by both the executive and judicial branches of the Federal government.

Reback argues that the Chicago School approach is relevant to encouraging competition in older, "smokestack" industries but has been disastrous for competition (and consumers) in the new information economy that embodies a very different set of economic characteristics influencing business strategy. According to Reback, the simplified Chicago School economic models of perfect competition and complete monopoly ignore strategic decision-making, as analyzed through modern game theory. In the real world, even a monopoly is concerned about rivals, and it can employ a myriad of business strategy tactics (many of a legally questionable nature) to protect its monopoly. Thus, an important role for an active Federal government, that is the U.S. Department of Justice and Federal Trade Commission, is to encourage competition in the dynamic American economy. Reback proposes that the "outmoded Chicago regime" must now be rejected in favor of "more modern and beneficial [antitrust] policies." Throughout the book, he illustrates the weaknesses inherent in applying this "smokestack"-industry-oriented Chicago School approach to judicial decisions involving information age market competition.

In the case of retail price maintenance, Reback explains how information-age products, such as personal computers, have a need for price controls in the distribution chain to the consumer. He explains how many technology-oriented product manufacturers (and their full-price dealers) can be undercut by retailers who are able to charge consumers lower prices by "free riding" on the marketing and point-of-sale service provided by the product manufacturers and their full-price dealers to interested customers, who then proceed to purchase the same product from a discount dealer. Although the Chicago School approach would encourage such price competition among dealers (an example of an "efficient market") and call for a "rule of reason" analysis applied on a case-by-case basis, in the new American economy built on technology, Reback argues that some antitrust policy accommodations must be made for encouraging technology innovation (and the profits that support it), and thus require a prohibition of free-riding pricing by discount dealers at the expense of technology manufacturers and their full-service dealers. In antitrust cases involving copyright protection of computer code considered de facto product standards offered by IBM in the 1980s and Lotus in the early 1990s. Reback explains how the Chicago School approach protected these entrenched companies in self-reinforcing markets, by not allowing innovators the ability to develop commercially compatible products (to the established industry standard of the time), and thus not offering consumers the benefits of market choices.

In the so called "trial of the century" involving the Microsoft Corporation as the defendant, and the U.S. Department of Justice as the plaintiff, Reback argues that the prohibitions of anticompetitive practices embodied in the original antitrust statutes continue to be relevant in the 21st century information age economy. In the opinion of Judge Thomas Penfield Jackson, Microsoft violated Section Two of the Sherman Act by illegally maintaining its operating system monopoly and by attempting to monopolize the Web browser market (in which it held an 86 percent market share at the time of Jackson's decision), and Section One, by unlawfully tying its Web browser to the sale of its personal computer operating system. Although the appellate court overturned Jackson on his rulings on less significant issues, it ruled in favor of the U.S. Department of Justice on the most important charge: monopoly maintenance, therefore supporting the position that the Sherman Act applies equally to threats against emerging technologies and well-developed market substitutes. In the case of Federal government oversight of mergers and acquisitions, the Chicago School's reliance on the ease of entry by new competitors as a natural palliative for overwhelming market power is based in ideology, and not empirical research, as subsequent economic research reveals that after mergers and acquisitions take place, resulting price increases are often insufficient to induce new entrants.

In conclusion, Reback has written an informative book, offering an accessible window into the arcane world of antitrust policy--no easy task. While gently introducing the reader to the nation's antitrust laws and the economic philosophies underlying their judicial and executive branch interpretations, he reveals the equally important, and often ignored, political aspects of federal antitrust enforcement and the nature (and details) of business strategic decision-making emerging from antitrust cases. He further advocates effectively for the "new industrial organization" perspective on antitrust issues, contrasting its static and dynamic efficiency approach (and implicit concerns about innovation and incentives to develop new products and production processes), with the static efficiency, price-focused approach championed by the Chicago School. What is certain, however, is that this battle for the economic foundation of antitrust enforcement (and some might say, the future structure and competitiveness of the American economy) will be playing out over the new decade.

Thomas A. Hemphill

School of Management, University of Michigan-Flint, Flint, MI, USA
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Comment:Free the Market! Why Only Government Can Keep the Marketplace Competitive.
Author:Hemphill, Thomas A.
Publication:Business Economics
Article Type:Book review
Date:Oct 1, 2010
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