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Settle for Less

Article published in TCS on November 25, 2005.

Microsoft announced this month that it had settled its antitrust dispute with RealNetworks by paying $761 million. It’s the latest in a string of settlements Microsoft has made with competitors, including AOL Time Warner and IBM. Reaction to the news has been interesting. John Kay, Britain’s leading economist, argues that « Whatever feuding businesses may agree among themselves, the consumer interest should remain tantamount, » (Financial Times, 30 November 2004). While it is true that consumer satisfaction is very important, I disagree with Kay’s conclusions and believe one might consider such settlements between firms good news for the consumer.

Kay claims competition policy has become divorced from its original purposes, as more and more disputes are settled between the parties rather than fought out in the courts. He would argue that these settlements do not result in the disappearance of the supposed monopoly and thus harm the consumer. This would certainly be true if it were given that political action can defend the interest of the consumers against « greedy producers ».

But the problem is that antitrust policy is flawed. If one also considers that conciliation might have a positive impact on the final decision of the European Court of Justice, then it’s easy to see how these settlements between companies are a better solution for the consumer than a court battle. Indeed, it means that such deals would have helped to « win » a case against a very harmful EU competition policy.

Economists have often helped politicians by providing them with a sophisticated array of concepts. The neoclassical theory of monopoly price is certainly one of the rationalizations that is accepted as true by most economists. John Kay must be convinced by the theory, as he does not even discuss it.

Many things can be said about the monopoly price theory, but I will focus here only on one key element that it emphasizes — and that is misconceived. The theory holds that monopoly is bad in comparison to competition because if there is only one seller, it is in the interest of this unique seller to limit the quantity of the product available and to sell at the highest price to maximize his revenue.

But what is often overlooked is the fact that the model considers the number of buyers as fixed, which is the reason a monopoly can appear. But this cannot apply to laissez-faire economics. Indeed, by definition, everyone is free to enter a free market and by fixing the number of sellers present on the market, the model avoids the deep impact that free entry has on the market (understood as the individual right to produce and sell goods to whoever might want to buy them).

Most economists understand that an entry is « free » if it is easy. A market is all the more competitive if the entry and exit costs are low — if for instance, as Kay argues, Company A cannot respond to Company B’s entry on the market « with offers targeted so aggressively at potential customers of company B that the entrant cannot operate profitably. » Imagining that barriers to entry do not exist in an ideal competition is merely absurd. The common characteristic of all non-legal obstacles (predatory price policies, lower prices because of experience, etc) is that they highlight the threat of losses for potential entrants. The fear of financial losses is not a problem. It is on the contrary the barrier which blocks resources being allocated for the fulfillment of less « urgent » consumer needs.

European law should take into account the fact that in order for the allocation of resources not to be totally arbitrary, some barriers are necessary. Without them, consumer satisfaction, the main concern of antitrust policies defenders, is in for a rough ride. For that reason, one hopes that the settlement between Microsoft and RealNetworks of their legal dispute will empower the European Court of Justice to close a case that should not have raised in the first place.

The author is General Director, Institut Economique Molinari.

Cécile Philippe

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