Anti-Trust Legislation's Impact on Web-Based Businesses

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=== Microsoft v. U.S. Department of Justice (1998) ===
=== Microsoft v. U.S. Department of Justice (1998) ===
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In 1998, the U.S. Department of Justice (DoJ) filed an antitrust lawsuit against Microsoft, accusing them of illegally seeking a new monopoly for its internet browser by offering it for free with its Windows operating system (OS). Many say that this ultimately caused the downfall of their biggest competitor, Netscape.
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In 1998, the U.S. Department of Justice (DoJ) filed an antitrust lawsuit against Microsoft, accusing them of monopolizing the internet browser market by offering Internet Explorer for free with its Windows operating system (OS). Many say that this ultimately caused the downfall of their biggest competitor, Netscape.

Revision as of 22:46, 1 December 2019

Contents



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Antitrust

Anti-trust laws are also called competition laws, specifically in Canada. Their main purpose is to prevent large, influential businesses from becoming a monopoly that will restrict competition by taking over the entire industry. [1] A company being a monopoly does not mean they are breaking the law. However, if they are purposefully bulldozing through the other competitors then they are causing an unnatural shift in the market. Thus, anti-trust laws are in place to provide an equal playing field while also protecting consumers.

Consumers are protecting from companies charging ridiculously inflated prices just because they are the only option a consumer has. Of course, if there were more competitors in the market, the more power a consumer would have to go from one option to another. This power is missing when there is only one competitor. Thus, anti-trust laws ensure that consumers are not being taken advantage of by taking the potential to misuse the power out of the hands of monopolies.

An equal playing field is created with the enforcement of anti-trust laws which is essential. Businesses have the ability to run with an idea and not fear being unable to even enter the market because one company has all the power, all the customers and are rich enough to completely obliterate them. With these laws, all companies at the very least have a fair chance at success.

More specifically, anti-trust laws stop anti-competitive behaviours such as:

  • price rigging
  • bid rigging
  • mergers and acquisitions
  • monopolization


Price Rigging

This is an illegal action that occurs when two or more powerful competitors come together to fix or inflate prices in order to earn a higher profit and have the ability to take out the rest of the competition. This usually occurs when two of the main competitors in the same industry join forces and make the competitors have to come to them as they are the only source. With consumers not having many other choices, they are forced to accept the inflated price no matter how ridiculous, depending on the importance of the product and its demand in the market.

Walmart and Sobey's did exactly this. Knowing their position in the market, they decided to work with one another. They increased the price of bread by $1.50 to increase their profits. This may not seem like a large shift however, it cost the average Canadian family an average of $370/year more than before. Both companies were able to rig the price of bread because of it being a basic necessity overall.


Bid Rigging

This takes place when there is an illegal pre-negotiated contract made between two or parties regarding the results of a bid. The deal will entail a guarantee of one party purposefully losing the bid by low balling the offer so that the other party can win. Of course, a contract needs to have consideration, meaning both parties must get something out of it.

Thus, the contract is usually made with the intent that the losing party will be the winning party the next time that there is a bid in which the winning party will now lose on purpose. Companies team up to do this so that both can keep winning one after the other, back to back. They can take advantage of all the benefits while restricting all other competitors from winning a bid.


Mergers & Acquisitions

Mergers and acquisitions can be differentiated based on the type of way companies unite. Mergers take place when two or more companies come together and form one. Acquisitions take place when one company purchases another company and takes it under its umbrella. The two most common types of mergers and acquisitions are vertical integration and horizontal integration.

To visualize what integration looks like picture a ladder. For vertical integration, imagine the ladder being up-right. If a company were to move to a different step of the ladder, either up or down, they are vertically integrating. For horizontal integration imagine the ladder being sideways. If a company were to shift left or right, they are not moving to a different level and are horizontally integrating.

Thus, vertical integration means merging and acquiring a company on a different level of the supply chain but within the same industry. Horizontal integration means merging or acquiring a company on the same level of the supply chain while which industry the other company was in, does not matter.

An example of vertical integration would be a car manufacturer that builds the body of the car and buys the tires from another company but now merges with or acquires that tire company. The car manufacturer is on a different level of the supply chain than the tire company. A current example of horizontal integration is from when Facebook acquired Instagram because they are both on the same level of the supply chain and within the same industry.


Monopolization

Monopolization is when a company is attempting to become the single, sole firm in an industry with significant and durable market power that inhibits competition. This in comparison to the other market structures which include Oligopoly, Monopolistic Competition and Perfect Competition.

Oligopoly is a few dominant firms that have differentiated products so there is not much competition (not much more different that a monopoly). Monopolistic competition is getting a little bit closer to what anti-trust laws try to promote. It is a market structure in which there is a large number of small firms that sell similar, but slightly differentiated products so they have market power. There's a little bit of competition here. Perfect competition is the market structure that anti-trust laws push towards which means there are a large number of small firms that have no power over one another.


maybe insert bar chart here



SWOT Analysis

Strengths

Anti-trust laws encourage healthy competition. This provides an equal playing field for all companies in which power is not a factor. All companies, no matter their size have a fair shot at getting consumers to come their way. This also means that anti-trust laws give consumers options. They will have many different companies to choose from to buy the same or similar product and do not have to pay outrageous prices to one company because they are the only company that can cater a specific need.


Weaknesses

However, the fear of being a monopoly and being hit with an anti-trust lawsuit discourages healthy growth of companies. Companies do not have an incentive to grow bigger because you could potentially be dissembled and punished. Additionally, anti-trust laws could potentially be taking away the convenience a company can provide consumers should they be legally allowed to monopolize. For example, there has been a shift from physically shopping in retail stores to online shopping. Thus, a company like Amazon that provides the opportunity to buy just about everything online provides convenience. However, they may be hit with an anti-trust lawsuit soon as they soar through dominating more and more industries.


Opportunities

As customers' needs evolve and shift, this presents an opportunity for authorities to change the law in regards to anti-trust. This would help to make it more applicable to today's trends and perhaps to target the big tech companies. The big tech companies consist of Apple, Facebook, Amazon, Google, etc.


Threats

The threat that anti-trust laws present have to do with the vague and broad language that the laws are written in. This creates loopholes. Large corporations are getting away with breaking the law because they are not breaking the portion of the law which says that consumers must be protected. Consumers are approving of the behaviour and thus, the companies are scathing by untouched. Like mentioned before, Amazon would be the perfect example of this.

History of US Antitrust Laws

Want a simplified explanation of the history of antitrust? Watch this video: https://www.youtube.com/embed/IcghGCBROR0  

1870-1890s: The "Trust" Movement

Following the Civil War (in the 1960s), the US underwent a period of rapid industrialization. [2] Human labor was replaced by machines in many manufacturing companies and the new nationwide network of railways improved speed of distribution finished goods throughout the country. This opened many opportunities for financial gain, and wealthy business leaders and investors were able to profit off of economic activity and amass huge fortunes, creating big businesses and giant corporations.

What are Trusts?

Visual Representation of Trust Laws[3]

Trusts are legal entities used to transfer a property from an individual (trustor) to a second party (trustee) for the benefit of a third party (beneficiary). [4]

However, during this time period, corporations began using trust law to legally combine companies in order to create monopolies and enjoy greater economic power and control over the market. [5] The use of trusts caused a trend of rapid consolidation within the market. From 1895 to 1904, more than 1,800 manufacturing firms in the U.S. combined into 157 corporations. [6]


This created a growing disparity between the rich and the poor. There was too much power in too little hands. Big businesses were able to influence the prices of goods, forcing consumers to pay high prices for things they needed on a regular basis (price rigging). [5] Labourers also did not benefit from the economic growth, working long hours at the low pay of 20 cents/hour and with no fringe benefits. [2] Small organizations were put out of business due to the anticompetitive practices of the trust. A sentiment of discontent was growing among the public towards the trusts.

While trusts are rarely used in modern times, the term “antitrust” is still commonly used to refer to U.S. competition laws.

1890-1930s: Breaking up the Trusts

Sherman Act (1890)

In response to the public unrest regarding trusts, the Sherman Act was passed in 1890 to break up these big firms and redistribute power within the industry. It was named after Senator John Sherman, who famously stated “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life.

The Sherman Act was made to protect trade and commerce by making anticompetitive agreement and monopolies illegal and by establishing the Department of Justice as a regulatory body for antitrust. [5]

Clayton Act

Even though it was successful in breaking up several large monopolies, such as Standard Oil, who had around 90% market share of the oil production market, the Sherman Antitrust act was actually barely used after its creation. This was because the act was designed as a reactionary measure and only existing monopolies could be regulated. There were no conditions in place to prevent businesses from becoming monopolies through mergers and acquisitions and through certain anti-competitive actions (such as price discrimination) that pushes other companies out of the market. The Clayton Act was established to overcome this short falling. It is more specific than the Sherman Act and focuses on the prevention of monopolies by prohibiting companies from merging or acquiring other companies in a way that is anticompetitive.

FTC Act

The same year, the FTC Act was enacted, establishing the Federal Trade Commission as a regulatory body.

Antitrust regulations were barely used for many years until Teddy Roosevelt came into office. A real advocate for antitrust, he pursued an aggressive crackdown on big companies, which lasted up until the World Wars, where it made more sense for the big businesses and government to work together to fix the bigger problem of war.

1930-1940s: World War II

However, as a result of war, many industries such as chemistry and steel, consolidated further to become more efficient with production of war supplies and so when the war ended, there was again this issue of a few large players dominating their respective markets. Because of the war, there was a big fear of communism and the belief that competition must be strengthened to prevent another instance of the war. The secretary of war, Kenneth Royall, stated “it was the monopolies that brought Hitler into power, gave him control of Germany and caused the 2nd world war”.

1940-1970s: Peak Antitrust

The 20 years following the World Wars formed “the peak antitrust era”, where there was an extreme scrutiny over almost every merger.

1970s-Present Time: Modern Antitrust & the Current Landscape

Because of the aggressive nature of the antitrust investigations, it caused some backlash by academic scholars who believed that breaking up companies based on size along isn't necessarily good for the market. The University of Chicago influenced a piece of literature, called the “Antitrust Paradox” which shifted the focus from the size of companies to a focus on consumer welfare, and that’s the standard that is currently used today. As a result, antitrust has died down over the last 40 or so years and gone dormant. There has been very few cases, and only around 50 vertical mergers out of thousands have been challenged. And so as a result, again we see this trend of consolidation, with the number of firms on the stock exchange halving from 1996 to 2016.


In particular, big tech companies have seen large and unregulated growth in recent years, allowing them to have significant influence over the market. Whereas only one tech company (Microsoft) make list of the biggest companies by market capitalization in the US in 2006, all companies at the top in recent years are tech. As well, many of these firms have made increasingly sizeable and frequent acquisitions. Some acquisitions involve companies that are direct competitors. For example, Facebook acquired Whatsapp for around $19 billion.

Microsoft v. U.S. Department of Justice (1998)

In 1998, the U.S. Department of Justice (DoJ) filed an antitrust lawsuit against Microsoft, accusing them of monopolizing the internet browser market by offering Internet Explorer for free with its Windows operating system (OS). Many say that this ultimately caused the downfall of their biggest competitor, Netscape.


The Netscape Advantage

In the early 1990s, Netscape offered its relatively developed browser Netscape Navigator for $49. At the time, it was the most effective software for browsing the web. So why would consumers still be willing to pay to use Netscape when Internet Explorer (IE) was offered for free? Navigator was compatible with multiple OSes, whereas IE, with it in its beginning stages, was only restricted to Windows. Additionally, almost all webpages could be viewed with Navigator, whereas IE may not be able to render sites properly, so content may appear misaligned. Because of this portability, website creators were more likely to cater their webpages to Navigator. [7]

1990s Browser Wars [8]

Browser War

There were drastic changes in the internet browser market from the early 1990s to the mid 2000s. Netscape (orange line) has had some success in the market due to the advantages noted above, peaking at 90% market share in 1996. However, a couple months earlier (mid 1995), Microsoft launched Windows 95 and IE (blue line). They were able to gain 10% market share after being in the market for only one year. Although Netscape still had its advantages over IE in the mid 1990s, IE continued to heavily innovate and gain market share at an astounding rate. Eventually, Netscape’s advantage could not be sustained as consumers found IE more convenient and worthwhile to use. By 1998, IE overtook Netscape as the leading internet browser. A few years later in 2005, Netscape virtually disappeared from the market.

Antitrust Lawsuit

In Microsoft’s eyes, they were not violating antitrust and were at most a non-coercive monopoly. [9] They argued that users choose to run Windows OS on their computers. In fact, consumers have demonstrated a strong preference for Windows due to its convenience. Secondly, users are also able to uninstall IE if they would rather use a competitor’s software.

On the other side, the Department of Justice argued that browsers and OS are in different product markets and therefore do not have to be offered together. [10] It would be sufficient if MS offered IE by itself, like how it does with Microsoft Office today. Secondly, by bundling IE with its OS, it was essentially forcing consumers and PC manufacturers to have IE on their products.

In June 2000, the judge ruled against Microsoft and required them to divide into two companies (also known as "Baby Bills"), separating the OS and software division. However, Microsoft immediately appealed it. [11] In November 2001, a settlement was reached between Microsoft and the DoJ. Microsoft is required to share its APIs with third-parties so they can make their applications work better on Windows OS. [12] However, it is interesting to note that there wasn’t a clause in the settlement that would prevent Microsoft from including other software with its OS in the future, which was the initial objective of this lawsuit.


Evolution of Baby Bells [13]

AT&T v. U.S. Department of Justice (1982)

Before the 1980s, AT&T was the only telecom provider in much of the US. They were able to achieve a monopoly status through vertical integration.[14] As shown below, AT&T branches off into Bell Operating Companies, which provides local telephone services, Bell System, which provides more long distance services, Western electric who supplies Bell System with phones and equipment, and finally Bell Labs, an R&D lab co-owned by Western Electric and AT&T. The antitrust lawsuit filed by the U.S. Department of Justice wanted AT&T to divest itself from Western Electric.


As the case progressed, AT&T knew they were going to lose the case. Instead of separating its operations from Western Electric, they proposed to break up its local phone monopolies into 7 smaller companies (aka “Baby Bells”) instead. [15] This proposal allows them to keep its long-distance operations, which includes Western Electric and Bell Labs.


Baby Bells

Despite being broken up, you can see that most of the baby bells ended up consolidating amongst themselves and ended up in AT&T once again, or as Verizon. To this day, AT&T is still one of the world’s largest telecommunication companies.[16]

This was the last example of a giant company being broken up by antitrust, but they ended up getting back together anyways. It is questionable whether it is worth the time and resources to break up giant companies like AT&T. However, we should note that although the Baby Bells consolidated decades later, the break-up gave smaller companies, such as Sprint and MCI, a fair chance to compete. [17] Many believe that this was the reason why Sprint was able to survive to what it is today.

Key Issues with Antitrust

Interpretation

The antitrust acts were made centuries ago, when none of the technology we have today existed and markets were easier to define. As a result, the acts were intentionally defined in a way that was broad and vague so that they would be applicable to a wide range of situations and industries. However, in modern times, this creates problems with interpreting the legislation.

In the past 40 years, there has been a real shift in the interpretation of antitrust. Antitrust started out in simple terms - big is bad, and the more players in the market, the better. But now the focus is on consumer welfare. Which creates two problems:

  1. Price
    Most of the time, improved consumer welfare has been interpreted as “lowering prices of goods for customers”. Generally, this makes sense, as monopolies are able to artificially raise prices above market demand. However, for many technology companies, the definition is more ambiguous. For example, companies such as Google and Facebook offer their services for free in exchange for user data, which they use for their advertising businesses. In this case, price theory fails.
  1. Definition
    The use of the term “consumer welfare” has been widely debated. The piece of literature “the Antitrust Paradox”, which originated the term, never specifically defined how to measure consumer welfare. As a result, the argument of "consumer welfare" has been applied many times in inconsistent ways throughout history. In general, it’s usually on the plaintiffs to prove that consumers have been hurt in a tangible way. But technology is unique because of its increasingly intangible impact on consumers. It’s hard to quantify the effects of things like privacy violations and excessive surveillance.

Case Example - Amazon

Amazon made $230 billion in 2019, which accounts for over 50% of e-commerce sales. But CEO Jeff Bezos argues that Amazon is not only competing with e-commerce companies but also retail giants such as Walmart. In terms of total retail sales, $230 billion is only worth less than 5% of the market size.

This really begs the question of how regulators should define the market for big tech when they provide such a wide range of services.

Despite their huge growth in revenue and scale, Amazon adopts a zero-profit strategy which helps it get around antitrust. The company is intentionally hurting their profits and investing in two things: improving customer experience and keeping prices low by taking revenue from segments with high profitability to cover losses in other segments. Both of which are not technically out of line with the “consumer welfare” perspective of antitrust.

Enforcement

How antitrust is enforced or whether it's enforced at all depends heavily on the government, which at the moment includes this guy, though maybe not for much longer. And as always, governments are often driven by politics and are heavily influenced by lobbying, the media, and irrational consumer sentiment. They're also slow to react to change, and unfortunately, technology is an industry that is always changing. Therefore, antitrust is only as effective as its leadership.

Case Example - Under the Trump Administration

Ford, Honda, BMW, Volkswagen

Are being investigated for agreeing with one another to develop more fuel-efficient vehicles. This would have a positive impact on consumer welfare because it improves the quality of life. Despite this, they are getting investigated for "antitrust". As you guys may know, President Trump doesn't believe in climate change and has been looking to lower federal environmental standards.

T-mobile & Sprint merger

Many critics suggest that the merger will not increase competition but rather cause costs to rise. Its believed that the deal will cost customers more than $4.5 billion annually It is strongly suggested that Trump had a role in this merger because T-Mobile has suddenly became a large customer of Trump's hotels as well as the fact that Trump is close friends with Sprint's parent company's chair

The FTC & DOJ

The top 2 antitrust enforcement agencies in the US are squabbling over responsibilities when it comes to probing big tech. Both heads of the respective agencies have testified that if given an opportunity, they wouldn't have built the regulatory system the way it currently is and just have one sole system. FTC and DoJ are dividing oversight of probe for big 4 tech firms (Facebook, Amazon, Google, Apple) However overlapping investigations are draining on resources & wasteful (in event of duplicating actions)


Antitrust & IP

Patents

Modern patent law has its basis in the early United States Constitution. The US Constitution states that Congress has the power to promote the progress of Science and useful Arts by securing for Limited times to authors and inventors the exclusive right to their respective writings and discoveries. The purpose of this was to provide economic incentives that ensured that resources invested in research and development would allow for greater innovations in the marketplace, without inventors having to fear that their product would be taken and ripped off. After the modern patent system was implemented, economic Discovery took off, allowing the United States to take a leading role in scientific discoveries around the world.The patent system also facilitated disclosure of discoveries for public good through licensing, enabling other researchers to build off of innovations developed by other innovators. Should an innovator not have the resources to develop the product or service themselves they could license off the intellectual property to someone who had the capital to do so.

Medicine

Web Basics

New Issues

What's next

Impact

Pros

Cons


Authors

Ally Ghakkar Carmen Li Hilary Li Jordan Skrypnyk
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada


References

  1. https://www.investopedia.com/ask/answers/09/antitrust-law.asp
  2. 2.0 2.1 https://www.theusaonline.com/history/industrialization.htm
  3. https://www.thebalance.com/what-is-a-trust-fund-357254
  4. http://www.businessdictionary.com/definition/trust.html
  5. 5.0 5.1 5.2 https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/monopolies-and-trusts
  6. https://www.cambridge.org/ca/academic/subjects/history/american-history-general-interest/great-merger-movement-american-business-18951904?format=PB&isbn=9780521357654
  7. https://www.fastcompany.com/27743/nothing-netscape
  8. https://www.wired.com/2008/09/the-browser-wars/
  9. https://www.investopedia.com/ask/answers/08/microsoft-antitrust.asp
  10. http://neconomides.stern.nyu.edu/networks/Microsoft_Antitrust.final.pdf
  11. https://www.wired.com/2002/11/u-s-v-microsoft-timeline/
  12. https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1105&context=njtip
  13. https://www.ariasystems.com/blog/baby-bells-grew/
  14. https://www.nationalgeographic.org/thisday/jan1/t-breaks/
  15. https://www.investopedia.com/terms/b/babybells.asp
  16. https://www.ariasystems.com/blog/baby-bells-grew/
  17. https://www.aei.org/technology-and-innovation/lessons-att-break-30-years-later/
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