Tag Archive: Antitrust

Microsoft Exploring the Limits of Antitrust

The battle of the best Internet browser continues not only in the United States, but in the European Union as well.  Microsoft’s campaign to conquer the browser industry in Europe has been halted by EU antitrust laws.  Microsoft has made it difficult for customers to choose other browsers while using their Windows operating system.  Its dominant position in the market concerned the European Commission back in 2009.  The EU “suspected Microsoft of using its dominant market position to foist its Internet Explorer browser on users.”  Microsoft and the European Commission has come to a legal settlement in which “Microsoft agreed to create a screen where users could choose among competitors’ browsers”.

The European Union’s power to govern antitrust, internationally and intranationally is derived from the Treaty on the Functioning of the European Union.  Under Article 101, “agreements between two or more independent market operators which restrict competition are prohibited”.  The second article governing antitrust is Article 102.  Article 102 states that, “firms holding a dominant position on a determined market to abuse that position are prohibited.”  Article 102 governs here as Microsoft’s dominant position was used to abuse that position by denying competitive browsers the opportunity to compete.

Microsoft has failed to meet the requirements of the settlement.  In the three years since the settlement many computers still did not contain the display option between different browsers.  Microsoft claimed a technical error was responsible for the failure; this excuse is an almost acceptable response due to Window’s history of poor performance.

On October 21, 2012 The EU filed a formal complaint against Microsoft for its failure to abide by the settlement.  Microsoft has given a public apology upholding its position that this failure was the result of a technical malfunction and that it will do everything in its power to abide by the settlement.  Unfortunately for Microsoft this is insufficient to the requirements of the settlement.  Microsoft now has four weeks to answer the accusation made by the EU.  If its defense is inadequate, “The company could face a fine of up to 10% of its annual revenue if found in breach of antitrust law.”

The European Union and the European Commission have shown that they are serious when dealing with antitrust laws.  A compromise was created in an effort to show leniency and fairness to Microsoft.  The elements of the settlement were almost insultingly not complied with, and now Microsoft is facing the sterner side of justice.

“On the Merge of Greatness”

Jack Donaghy (Alec Baldwin) goes to Washington in Let’s Stay Together, the 30 Rock episode that aired on Thursday October 7 at 8:30/7:30c. The proposed deal between Cable Town and NBC has raised some political eyebrows, and Jack must represent the company at the Congressional hearings on the subject. Jack explains to Liz (Tina Fey) that he must appear before the fictional House Subcommittee on Baseball, Quiz Shows, Terrorism, and Media” to discuss the concept of vertical integration. 

At the hearing, Jack anticipates that the Subcommittee members will condemn vertical integration on the grounds it is “bad for America, kills innovation, and drives up prices.” Before they have a chance to voice a single concern, however, Jack pipes up with a tribute the the American farmer that seems to convince the Subcommittee members that vertical integration actually drives down prices by streamlining distribution. Jack may have convinced the Subcommittee, but does he have a legal leg to stand on or is his routine all smoke and mirrors?

The episode synopsis reveals that the deal between Cable Town ad NBC is a proposed merger between the two companies. When two businesses intend to consolidate to form a single entity, the planned merger must be submitted to the Antitrust Division of the Department of Justice for prior review. The purpose of the DOJ review is to investigate whether the plan is likely to have anticompetitive effects on the market, which would occur if the two companies, once merged, achieve sufficient market power to restrict product output and drive up consumer prices. Companies with market power are able to maintain a price below competitive levels long enough to put their competitors out of business. These entities are then positioned to exert exclusive control over the market by limiting product availability to drive up consumer demand and raising prices to maximize profits. See here.

The merger between NBC and Cable Town would be classified as a vertical integration because it would result in the “organization of successive production processeswithin a single firm, a firm being an entity that produces goods and services.” NBC, a television network, produces the product that is then distributed downstream to the consumer by Cable Town, a retailer of video programming. This type of consolidation is associated with increased efficiency and decreasedtransaction costs because different steps of the production chain are brought under common ownership and control, eliminating the need for costly contracts with independent suppliers and distributors. Because the DOJ recognizes these advantages, it does not subject vertical mergers to strict scrutinyeven though these types of deals can also have anticompetitive effects. Instead, the DOJ engages in a balancing test analysis to determine whether the efficiency gains achieved by the proposed merger would outweigh the anticompetitive impact. See here.

Jack’s rousing speech in front of the House subcommittee characterizes the American farmer as the perfect example of the efficiency benefits of vertical integration because the farmer owns his farm land, the equipment he uses to cultivate his crops, and the truck he drives to transport his goods to the farmers’ markets where he sells directly to the consumer. This argument won the favor of the Subcommittee members, and is supported by the economic theory underlying DOJ vertical merger enforcement policy. The NBC/Cable Town merger would likely result in cost savings for the two companies, which would ideally be passed on to the consumer. In addition, the consolidation would be unlikely  to create the kind of market power that would raise antitrust concerns because the television production and distribution industries both enjoy an environment of healthy competition among several market participants.  So, Jack probably would have persuaded the Committee members even if he hadn’t accused them of putting a bullet in the brain of the American farmer if they opposed vertical integration!

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