The Heritage Foundation

Backgrounder #344 on Regulation

April 18, 1984

April 18, 1984 | Backgrounder on Regulation

Bringing Antitrust Laws into the Twentieth Century

(Archived document, may contain errors)

344 April 18, 1984 INTRODUCTI BRINGING INTO ON ANTITRUST THE TWENTIETH LAWS CENTURY Growing tr ade deficits are focusing attention on problems faced by U.S. producers in world markets. Having once enjoyed what appeared to be an unassailable position as the world's commercial leaders U.S. companies hold.decreasing shares of the market, which is caus ing serious trouble for businessmen, labor leaders, and politicians.

The answers most commonly proposed are protectionist. Foreign competitors are said to enjoy an unfair advantage because of the availability of cheap labor or subsidies provided by their governments. Thus, domestic content legislation, tariffs, import quot a s, and other trade barriers are urged on Congress and the Administration. Yet such solutions at best would provide very short-term relief for the industries targeted. In the long run, such policies would cost many more jobs than they saved. true challenge before Congress is not to erect barriers to foreign goods but to identify the structural problems and treat the causes of U.S. competitive difficulties.

One major structural problem is America's antiquated web of antitrust laws. The enforcement of these laws has inhibited the adjustment of American industry to changing world market conditions in several important ways.

Recently, efforts by the LTV Corporation and Republic Steel to merge, forming a single firm better able to meet foreign com- petition, wer e hindered by Justice Department objections. If there is a textbook example of a declining U.S. industry that should be allowed to consolidate its resources in order to mod- ernize and survive it is the U.S. steel industry-l Fortunately The Naturally, thi s streamlined steel industry should also be forced to forgo current protections against foreign competitors. is the consumers' best guard against abuses of market power.

An open market 2 the Justice Department and the affected firms were able to reach an a greement that will allow the merger to go forward. But the costs involved--in time, legal fees, forgone opportunities--seem an unnecessary additional burden for an already troubled industry. And the resultant delays are bound to produce a chilling effect on other possible mergers within the industry.

Besides this excessive concern about domestic market shares in an era of stiff international competition, the antitrust laws have further hindered U.S. competitive success by sending a clear signal that it doe s not pay to be.too successful. Since the Sherman Act was first passed, industry leaders have frequently found themselves subject to expensive, time-consuming antitrust battles brought on by their market success. This has been true where leadership was ga i ned through more efficient production and lower prices for consumers as well as cases of innovative accom plishment. Indeed, in a 1980 Federal Trade Commission case, DuPont was charged with "attempting to monopolize" because its research staff had discove r ed and patented a less expensive means of recovering a particular chemical, and DuPont had the audacity to pass the savings along to its customers. charged the FTC legal staff. By forcing its competitors to match its price cuts, DuPont was preventing them from generating funds with which to pursue their own research in the area greatest offender in this area. Private antitrust cases account for the lion's share of those brought, and these private litigants are often more interested in obstructing and delay i ng actions by their competitors than they are in righting any real wrongs. Thus, the antitrust laws can be shown to discourage both product and process innovation and inhibit firms attempting to achieve economies of scale. The incentive structure thus cre a ted punishes Americans as consumers first, and as a labor force second. By inhibiting increased efficiency, delaying expanded research and development, and retarding continued modernization U.S. antitrust laws have left American industry ill-prepared to c ompete in an international market Vnfair competition,"

Surprisingly, however, the federal government is not the Current antitrust policies, therefore, should be reconsidered to enable firms to undertake orderly reorganization and expansion.

By failing to recognize the growing importance of today's world market, the antitrust laws make it unnecessarily difficult for U.S. firms to compete with foreign firms. Market realities and the sophistication of economic analysis have changed substantially since 1890 w h en the Sherman Act was passed. These changes now must be reflected by revising the statutes Betty Bock, The Innovator as an Antitrust Target, Information Bulletin No. 174, The Conference Board, 1980. 3 The Sherman, Clayton, and Federal Trade Commission Ac t s, the three pillars of antitrust law, should all be modified to protect the competitive process and consumers rather than individual competitors. Furthermore, existing incentives for private antitrust nuisance cases should be removed. Finally, conflicts between laws encouraging creativity and innovation and the antitrust laws should be resolved with a tilt toward innovation THE THEORY OF ANTITRUST POLICY which sought to prohibit monopolies and activities that constrained trade in 1914.

Sherman and attempts to restrain the growth of monopoly in its Ilincipiencyll (i. e before Sherman violations can develop).

Early proponents of such restrictions also felt an agency should be created, with competence in business affairs, to perform investigatory and adjudic ative functions. The result was the Federal Trade Commission Act. It established the FTC and outlawed unfair and deceptive methods of competition,Il leaving the Com mission, and ultimately the courts, to determine exactly what practices fit this descripti o n Federal antitrust policy beqan in 1890 with the Sherman Act The Clayton and Federal Trade Commission Acts were added Clayton outlaws specific trade practices not covered by Inadequacies of the "Perfect Competitioni1 Approach to Anti trust The FTC, the J u stice Department, and the antitrust courts long have used the economic model of "perfect competition1' as an ideal when interpreting the antitrust laws tive market must meet several criteria. It must contain a large number of buyers and sellers all with p e rfect information about market conditions--especially prices. The products sold by the various firms must be identical, so customers will have no firm preferences or brand loyalties relative to the market as a whole so that the entry or exit of any one fi r m will have no effect on market price. Under these conditions, no firm can charge more than the prevailing market price because it will lose all its customers. Likewise, there is no reason to charge less than the market price, because each firm can sell a ll it wants at the prevailing rate Firms earn just enough profit to stay in business, but no more.

They use their resources efficiently or incur losses that, if allowed to continue, will drive them from business. Thus, con sumers are well served, receiving goods competitively produced at the lowest price possible, given the cost and availability of resources A perfectly competi And each firm must be small Theoretically, perfectly competitive markets are appealing.

While useful in the academic world, howeve r, this model has The perfect competition model may portray serious shortcomings when applied to actual markets as a benchmark for antitrust policy. 4 a market's state at a given point in time, but like a photograph, it does not reveal how the market got w here it is or indicate where it is going. Examples What happens if one firm discovers a better production process or makes a significant improvement in the product? How are consumers able to obtain complete price information, and what happens if they have incomplete data? How does the market change if one firm begins offering additional service with its product or if there is a sudden shift in the demand for the product or in the supply of inputs?

How a Bad Model Leads to Bad Decisions Given the static nat ure of the perfect competition model and its stringent requirements, it is not surprising that antitrust courts have found almost no examples of the ideal industry. Most U.S. firms enjoy some "market power that is, they have some control over the price an d quality of the products they sell. In fact, any sort of product differentiation can give a firm this power The firm's location may provide such an advantage. Consumers without instant access to information concerning prices charged by all sellers also pr o vide firms with market power. And brand or firm loyalty increases a businessman's control over the price of his product 9 The acceptance by the antitrust courts 'of perfect competition as a goal and the subsequent observation of some market power in almos t all industries have led antitrust enforcers to challenge a wide variety of seemingly insignificant actions.

Horizontal Concentration: In 1966, for example, the Supreme Court struck down a merger between two grocery chains in Los Angeles, which would have produced a firm with 1.4 ercent of the stores and 7.5 percent of the sales in that market.! The decision was based on the observation that the number of single-store owners had declined substantially as grocery chains became increas ingly imp~rtant its i n cipiency the Von Grocer it could have created e to compete more effectively against other grocery chains mergers, in the view of some courts, are vertical arrangements that provide an advantage over competitors. For example, mergers between manufacturers a nd retailers leading to more efficient product distribution have been suspect because the industry might become more concentrated--especially if other firms are driven out of business because of the merger or find similar arrangements necessary if they ar e to compete effectively. In Brown Shoe, for To derail this trend toward concentration in merger was denied--even though iciencies that allowed the merged firm Vertical Concentration: Almost as dangerous as horizontal Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself New York: Basic Books, 1978 p. 217.

Ibid p. 219. 5 instance, the Supreme Court ruled in 1962 that this suspicion applied even to firms with seemingly insignificant shares of the market. The Brown Shoe Co primarily a shoe manufacturer, was prohibited from acquiring G. R. Kinney Co primarily a shoe retailer, even though Brown controlled only 4 percent of the nation's shoe output, and Kinney had 1.2 percent of total national retail shoe sales. In writing the decision, Chief Justice Earl Warren made it clear that small producers were to be prote cted from the presumed possibility of market manipulation--even at the expense of consumers who would have gained from efficiencies resulting from mergers.

Oli o olies Especially troubling to antitrust enforcers have I een o igopolies that is, industries c ontaining only a few large firms. When perfect competition is the benchmark, highly concentrated industries present serious potential problems. Not only are the individual firms suspected of exercising substantial market power, but they also present the a dded danger of cartels. Indeed, in those industries where one or two firms are clearly dominant a formal agreement is assumed to be unnecessary for restraint of trade to occur.

This presumption that concentrated industries are almost inherently evil has led to a number of antitrust cases against industry leaders-even when those firms clearly attained their positions through greater efficiency or ambitious innovation.

Examples include the Standard Oil of New Jersey case (1911 the United States Steel Corpora tion case 1920 the Alcoa case 1945 the United Shoe Machinery Corporation case (1953, 1968 and the IBM case (settled out of court in 1982 In each of these instances, prosecutors attempted to prove that the accused firm was monopolizing or attempting to mon opolize its industry. But in his book Antitrust and Monopoly D. T.

Armentano, a University of Hartiord economist, shows that the defendants had gained their large market shares by offering lower prices and improved quality products to consumers.6 Even for those firms eventually successful in defending their actions Armentano notes, the costs in terms of legal fees and management time were substantial. Thus, the message sent to potential industry leaders was Compete, but not too successfully the useful theo r etical model of perfect competition with a realiz- able policy goal. As a result, they have distrusted corporate actions that placed smaller competitors at a disadvantage, regard- less of how well consumers were served. The failure of even inefficient com petitors would lead the industry further away from In their decisions, the antitrust courts often have confused Ibid p. 211.

Dominick T. Arementano, Antitrust and Monopoly Failure New York: John Wiley and Sons, 1982).

Anatomy of 3 Policy 6 the stringent r equirements of perfect competition. In short, the I courts have sought to protect competitors rather than competition AN ALTERNATIVE MODEL: EFFECTIVE COMPETITION Shortcomings of the Pure Competition Model I Assumptions in the "perfect competition" model a b out homo- qeneous products and complete information among buyers and sellers imply that firms compete only on the basis of price reality, even practically identical products (toothpastes, for example) are perceived by consumers as having widely different characteristics. Furthermore, retailers' locations and the services they offer can be important means of differentiating products or credit terms offered retailers and consumers, as well as through price.

In practice, actual markets are anything but the st atic creatures pictured by the pure competition model. information, business managers and consumers continually revise past decisions and attempt to correct earlier errors. Firms enter and leave the industry, new production and marketing processes are dis c overed, and consumer demand adjusts to new fashions, fads, economic conditions, and products relatively concentrated industries, however, is that investors are constantly searching for a greater return on their funds. Thus, any industry that begins to ear n an unusually high rate of profit will attract attention from individuals seeking to start new businesses and from existing firms wanting to expand their markets. Depending on the industry, new competitors may appear overseas as well.

This dynamic view of competition argues that cartels are extremely difficult to establish or maintain. place, the many facets of the competitive process--price, research and development, service after the sale, to name a few--make successful anticompetitive cooperation all b u t impossible. cartel can possibly shut out all potential competition. addition, merely the threat of competition reinforces the diffi- culties of establishing a successful cartel or of firms colluding to exploit domination of the market. Any successful ca r tel will, by definition, earn higher profits than the norm for similar industries entries, therefore, an incentive will exist for new firms to enter. Unless each new entrant can be successfully included in the cartel, something that is highly unlikely, co m petition soon returns to the industry allows one firm to earn unusually high profits causes existing But in And manufacturers often compete through the information Lacking complete Perhaps most important for the existence of competition in In the first No In Barring government intervention preventing additional Similarly, any product or organizational advantage that 7 and potential competitors to scrutinize that firmls behavior to determine its secret. If these successful methods can be copied, they will b e , thus providing consumers with more of the type of service or product they have rewarded with their patronage and reducing the likelihood of market exploitation. Even in those. cases where superior innovation, management techniques, or effi- ciencies can n ot immediately be duplicated, they should be rewarded with higher profits. Such rewards stimulate competition by encouraging other firms to continue searching for similar advantages The Emergence of a New Model Observations of the highly competitive natur e of markets outside the "perfect competitionll mold cause many economists to question the desirability of using perfect competition as a benchmark As the study of competition has become more sophis ticated, evidence has grown that competition is a strong a nd pervasive phenomenon and that its influence is felt even when there are but two or three firms in an industry. For example Dr. Paul Pautler, an economist at the Federal Trade Commission, recently searched economic literature. for the expected correlati o ns between market power and profits. Significantly, no such connec tion could consistently be shown.' This absence of evidence that market concentration implies market control supports the growing realization that active competition exists in open markets --regard less of the degree of concentration.

Implications for Antitrust Policy This appreciation of a powerful and dynamic competitive process has led writers as diverse as M.I.T. economist Lester Thurow and Appellate Court Justice Robert Bork to suggest that U.S. antitrust laws be revised substantially.

The Thurow Prescription In his 1980 book The Zero-Sum Society, Thurow describes the "futility and obsolescence of American antitrust laws. He argues, for example, that the growth of international trade ma kes it impossible to determine whether an effective monopoly exists by examining a firm's domestic market share alone. International competition causes even large U.S. firms to behave competitively so prosecuting a corporation merely because it is large i s likely to do little to promote the consumers' interests. Breaking up an IBM into three or four smaller companies, for instance, would benefit no one, in Thurowls view--except, possibly, foreign computer manufacturers As a result, Thurow sees reduced trad e Paul Pautler A Review of the Economic Basis for Broadbased Horizontal Merger Policy The Antitrust Bulletin, Fall 1983, pp. 571-651 Lester C. Thurow, The Zero-Sum Society (New York: Penguin Books, 1080 pp. 145-150 I 1 I I I i i j I i I 8 barriers as a mor e effective means of ensuring competitive markets than continued reliance on outdated antitrust laws.

Thurow also argues that rising real incomes make it increas ingly difficult to define relevant markets. purchases can hardly be classified as llnecessitie s,l' and a wide range of close substitutes exist for almost every purchase So it is naive to assume that consumers will not react quickly if a manufacturer tries to exploit his domination of a narrowly defined market. The Federal Trade Commission's case a g ainst ready-to-eat breakfast cereal manufacturers, concluded in 1981 after nine years, Thurow believes, was such an example of the market's being defined much too narrowly. In addition to cold cereals, any num ber of products can satisfy a consumer's need for an early morn- ing meal--hot cereals, pastries, or bacon and eggs. These .products should have been considered as competing with ready-to-eat cereals, and the threat of market domination viewed accordingly.

In Thurowls view, the existence of large conglomerate firms also contributes to the obsolescence of most antitrust policy.

Conglomerates, with their diversified resources, are often able to enter a market even when substantial capital expenditures are necessary. This threat places a powerful check on even single- firm industries, and discourages them from engaging in monopoly pricing Most American consumer The Bork View While Justice Bork uses a slightly different analysis book, The Antitrust Paradox, published in 1978, his conclus resemble those of Thurow. Bork maintains that the antitrus in his ions t laws were misinterpreted when early decisions emphasized protecting competitors- rather than protecting consumers. Unfortunately, the importance of precedence in deciding legal cases ensured the perpetuation of this mistake. Bork believes, therefore, that most of the current problems with antitrust enforcement could be resolved by directing the courts to focus on the welfare of consumers. Improved productive or distributive efficiency would then be viewed as enhancing consumer welfare rather than constitut ing an undesirable "barrier to entry" or a pernicious 'Icompeti- tive advantage"--as seems to be the case in some antitrust court Using this more realistic view of antitrust goals, B o rk identifies three categories of behavior with which antitrust enforcement should be concerned 1 agreements by direct competitors or potential rivals to fix prices or divide markets in those cases where the agreements are not necessar,y for the integrati o n of legitimate economic activity Bork, op. cit I 9 2) horizontal mergers leaving fewer than three significant rivals in any market; and 3) deliberate predation, i.e charging prices below the variable cost of production with the specific intent of elimina t ing competitors and achieving monopoly power, though Bork warns against confusing hard competition with predation.1 In the same vein. Thurow concludes that there are only two roles for antitrust policy implicit or explicit cartels that either set prices o r divide markets.ll banning predatory pricing and- banning THE PROBLEM OF INNOVATION While criticism of the antitrust laws in general is growing, Congress has been particularly concerned with the impact of antitrust enforcement on innovation industrial pol i cy1' package legislative proposals have focused primarily on impediments to joint R&D ventures, but antitrust policy has been even more far-reaching in its detrimental effects on.&nerican innovation As part of a loosely defined By seeking to force U.S. in d ustry into an unrealistic, perfect competition mold, antitrust enforcers may be removing the means by which research and development is conducted. economist Joseph Schumpeter who first noted in 1942 that firms in a perfectly competitive industry have neit h er the funds nor the incentive to carry out extensive research and development.12 This phenomenon can be seen in agriculture, the U.S. industry' most closely approaching the perfect competition ideal. Farmers have relied almost exclusively on federal and s tate funds for R&D, and most major innovations have been developed and promoted either by the U.S. Department of Agriculture or the state land grant colleges and county extension services.13 It was More specifically, there exists an inherent conflict betw e en antitrust laws and laws protecting such intellectual property as copyrights and patents. Patents and copyrights are designed to encourage innovation by granting a limited monopoly. But these supposedly legal monopolies have been challenged using the an t i- trust laws, creating uncertainty about the value of Ilprotectedl intellectual property and subjecting those who should be rewarded A, l3 For a more complete discussion of policy in this area, see Bruce Gardner Agriculture's Revealing--and Painful--Less on for Industrial Policy,"

Heritage Foundation Backgrounder No. 320, January 3, 1984. 10 for their creative activity to extensive legal expenses defending their ~1aims.l For the most part, these antitrust challenges have been private suits brought by disgr untled competitors against industry leaders. Since the 1950s the number of private antitrust cases has steadily increased; they amounted to at least 94 percent of the antitrust cases brought every year during the 197Os.l5 The reasons: the court interpreta t ions favoring competitors over com petition, the treble damages available to successful litigants and the advantages to less innovative firms of delaying the introduction of new products and processes. IBM, Xerox, and Eastman-Kodak were all the targets of such private suits, and DuPont faced similar charges brought by the Federal Trade Commis sion.16 I Many antitrust attorneys and judges continue to view patents as undesirable barriers to entry. Betty Bock, Director of Anti trust Research at The Conference Board, notes that in various antitrust cases attacking patent holders it has been argued that innovative leaders should be repired to grant production licenses to competitors' harmed by a significant technological development and that industry leaders sho u ld be required to "predisclose" to competitors new products or processes It has also been argued she says, that leading innovators should not be allowed to pass along cost savings to customers when price reductions would make it more difficult for competi t ors to match R&D investments. l7 Suggestions for Reform A number of proposals have been suggested to reconcile these concerns. Then Assistant Attorney General for Antitrust William Baxter proposed several specific legal changes in his June 29 1983, testim o ny before the Senate Judiciary Committee. First, he suggested, the courts should not condemn any patent or copyright licensing arrangement as a laws l8 er se violation of the antitrust Rather an effort s h ou be made to identify and give l4 The antitrust problem in this area is compounded by loopholes in the patent laws which allow foreign infringements to be sold in this country.

See Milton Copulos Improving Patents to Spur Innovation Heritage Foundation Backgrounder No. 318, December 23 1983 Betty Bock, L' et a1 Antitrust in the Competitive World of the 1980s Research Bulletin No. 112, The Conference Board, 1982, pp. 18-19.

Betty Bock, The Innovator as an Antitrust Target, op cit Per se violations" of the antitrust laws refer to those actions histori cal ly deemed to be so potentially harmful with so little chance of exhibit ing redeeming social value that no defense is allowed. If competitors are found guilty of price fixing, for example, they are punished. The court is not interested in hearing any poss i ble justifications for the act ion l5 l6 l7 Ibid l8 11 weight to possible procompetitive effects. Second, Baxter explained that the Ifmisuse doctrine,Il i.e., the standards defining the legally acceptable use of patents, has been used in some courts to un dermine the rights of patent and copyright holders on the flimsy basis of what seems to be unfair, anticompetitive behavior.

He recommended that the courts be prevented from using this doctrine to deny patent or copyright enforcement, except when the condu ct in question is a clear violation of antitrust laws. Finally, Baxter recommended closing the patent law loophole that allows the importation of products made outside this country through the unauthorized use of a patented process. l5 conflict between an t itrust and patent laws is that treble damages be discontinued in antitrust cases. 2g Others have advocated that treble damages be awarded only where a er se imposing treble damages only in cases found to have particularly virulent anticompetitive effects. Some state courts have already moved to reduce the number of private cases by allowing judges to require plaintiffs to reimburse successful defendants for costs involved in defending against nuisance suits A similar practice in cases involving the use of f ederal antitrust laws to challenge patents could.wel1 serve to reduce the number and cost of such cases Among the other suggestions put forward for resolving the unitive involved or that judges be given the option E--f o Pendinq Legislation R eceiving attention on Capitol Hill are proposals to clarify the conditions under which joint R&D ventures may take place.

Successful research and innovation seem to require an increasingly large portion of corporate budgets. Furthermore, given the uncertai nty that a marketable product will actually result, the risk attached to these substantial expenditures can seem overwhelm- ing for a single firm. To encourage firms to undertake the R&D necessary for success in an international setting, Congress is exami ning means by which firms may leqally share the costs and risks of research projects through joint ventures.

The bills that have been introduced to clarify the status of joint R&D ventures take a similar approach. For example, S. 568 introduced by Senator Paul Tsongas (D-MA would provide joint R&D ventures with the option of receiving an affirmative certifi cation from the Justice Department, i.e specific Justice Depart ment approval upon reviewing the specifics of a proposed project l9 2o Statement of Wil liam F. Baxter, Assistant Attorney General, Antitrust Division, before the Senate Judiciary Committee, June 29, 1983.

The law provides that, as a punitive measure, firms found to be guilty of certain antitrust violations will pay those harmed three times t he financial damages suffered. 12 while S. 737 and H.R. 1952, introduced by Senator Charles Mathias R-MD) and Representative Michael Synar D-OK) respectively, would provide automatic certification upon notification that the venture meets certain specified standards. The standards for certification in the Tsongas bill are generally more flexible than those contained in the Mathias bill.

The conditions with which acceptable joint ventures must comply are also addressed in the proposed legislation. For exampl e, the length of the program, its organization, the eligibi- lity requirements for participants, and the procedures under which resulting patents would be licensed are outlined, though the bills vary somewhat in the specifics. some protections for covered ventures from private antitrust actions and federal criminal charges.

All the bills provide While many.analysts welcome the discussion of these changes as a step in the right direction toward broader antitrust reform, there appear to be problems with thes e specific proposals his June 1983 testimony, former Reagan Assistant Attorney General William Baxter, for instance, has criticized much of the pending leuislation as too narrowly focused and riskinu unnecessary In regulatory burdens through- the oversigh t provisi noted that the Administration's approach rejects route, arguing that all joint research ventures ons the full Baxtgr y disclosed certification to the government should-receive protection from private suits and criminal charges by federal enforcer s . Further, there is a fear that the mandatory licensinq provisions will impair rather than promote competition.21 Similarly, Thomas B. Leary of the National Foreign Trade Council warns that, to be sure proposed changes are effective and do not provide dis incentives to innova- tions, care must be taken to keep certification standards as flexible as possible.

Work continues on the wording of the bills to be reported out of the Committees. Attempts are being made to incorporate some of the criticisms raised by the testimony on the earlier versions of the proposed legislation.

RECOMMENDATIONS There are clearly a wide range of actions that may be taken A general revision of the to provide needed antitrust reform.23 antitrust laws should 21 Baxter statement, op. cit. 22 Statement of Thomas B. Leary, the National Foreign Trade Council, on Bills to Provide Antitrust Exemption for Joint Research Ventures June 29, 19

83. A number of authors have called for the complete repeal of all antitrust laws. See, for example, Armentano, Antitrust and Monopoly and Fred L. Smith, Jr Why Not Abolish Antitrust Regulation, January/February 1983 pp. 23-28, 33 23 13 Modify Section 2 of the Sherman Act to ensure that competitive success is not considered a violation of the antitrust l aws. Active competition cannot exist without hurting some competitors. Indeed, the very essence of competition is to benefit consumers by eliminating the less efficient producers. by consumers for providing better quality a lower price, or enhanced servic e certainly should not be punished by the Justice Department'or the Federal Trade Commission Firms rewarded Spell out and narrow the "unfair methods of competitioni1 provision of Section 5 of the Federal Trade Commission Act. The vague nature of the curren t law unnecessarily increases the risk faced by businessmen as they are subjected to ex ost facto determinations of what is a legitimate orill P- egitimate way of doing business. The only clearly "unfair methods of competitioni1 are those that involve ille gal practices like enforcing a patent fraudently obtained or threatening physical violence to deter competitors.

Modify Section 7 of the Clayton Act to ensure neither firm size nor concentration of the industry are presumed to be anticompetitive practices. mergers have been denied on the basis of "concentration ratiosi1 that often have little or nothing to do with m o nopoly power. to consolidate declinina industries or achieve economies Using Section 7 This has made it unnecessarily difficult of scale necessary to cimpete effectively on world markets. Attention should, therefore, be directed more toward government imp osed barriers to entry rather than market determined firm size.

Abolish the automatic trebling of damages in antitrust violations and adopt a "rule of reason1' in establishing assessable damages. With more than 90 percent of the antitrust cases being broug ht by private litigants, a changed attitude at the FTC or Justice has little effec tive impact on the chances that a particular firm will face a court battle. To help ensure that those cases brought by private litigants are brought for sound reasons and n o t merely to harass successful competitors treble damages should not be guaranteed even where violations are discovered.24 Remove current disincentives to innovation and research by making it clear that no use of a patent or copyright lawful under the Ilin t ellectual propertyi1 laws should be 24 For a more complete discussion of these first four and similar suggestions see Richard B. McKenzie, editor, A Blueprint for Jobs and Industrial Growth Washington, D.C The Heritage Foundation, 1984 pp. 15-23. 14 consi dered a cause for action under the antitrust laws.

In addition, immunity should be provided from all private I antitrust suits and from government antitrust damage suits in the case of all joint R&D ventures fully dis closed to the government CONCLUSION Be fore accepting the argument that foreign competitors have unfair advantages because of government subsidies or a cheap labor supply, Congress should examine the impact of U.S. antitrust policies on firms attempting to compete in world markets enforcement of U.S. antitrust laws often has discouraged innova tion, decreased efficiency, and thereby weakened the ability of U.S. firms to compete. This, in turn, has encouraged companies to seek an alternative strategy-protectionism.

Moreover, successful innovator s or firms that prospered by offering consumers better quality products at lower prices often have found themselves the target of antitrust suits precisely because consumers have rewarded their efficiency by purchasing their products and increasing their m arket share actual divestitures on these grounds have discouraged growth often at the expense of consumers Strict Threatened and It is time to reexamine antitrust policies-for the good of the American consumers and to create a climate that allows U.S firm s to become more effective competitors in international markets.

In short, before blaming American industry for its failure to compete effectively or fairly, the federal government should recognize its own contribution to the problem in basing antitrust po licy on a theory of the marketplace that bears little resemblance to the reality of competition.

Catherine England Policy Analyst

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