FTC Chairman Pitofsky Addresses Antitrust Law and High-Tech

(March 2, 1999) FTC Chairman Robert Pitofsky addressed an American Bar Association meeting on antitrust law and high-tech industries on February 25. Pitofsky stated that "I believe antitrust should - indeed must - continue to apply," to high-tech industries. He also said that "breaking up" and "mandating access" to competitors are possible remedies.

Robert Pitofsky is Chairman of the Federal Trade Commission. He spoke at an American Bar Association Workshop on Antitrust Issues in High-Tech Industries, in Scottsdale, Arizona, on Thursday, February 25. His carefully worded address was titled "Antitrust Analysis in High-Tech Industries: A 19th Century Discipline Addresses 21st Century Problems."

Pitofsky acknowledged that "public attention has focused upon the Department of Justice's proceedings against Microsoft and the Federal Trade Commission's challenge to behavior by Intel." However, he did not discuss either of those cases directly. He did discuss issues that are applicable in those cases. For example, in several instances he vaguely touched upon intellectual property rights, which are at the core of the Intel case. He also addressed at length the theory of network efficiencies, which is most often cited in connection with Microsoft.

Pitofsky asked the question, "should antitrust apply in comparable ways to high-tech industries, particularly those industries where the products or services are primarily the embodiment of intellectual property?" He answered his question, ""I believe antitrust should - indeed must - continue to apply," to high-tech industries.

Pitofsky said that there are six differences between high-tech industries and the "smoke stack industries" that regulators should take into consideration. Those six differences are as follows:

1. "Technical Issues: Many high-tech industries involve questions that are challenging for lawyers and judges who typically lack a technical background."
2. "Speed of Market Transition. New generations of products, undermining existing market power, appear more frequently in high-tech than in mature industries."
3. "Need for Collaborative Activities. In high-tech industries, joint research and development is often essential to share the risks of innovation and to combine complementary technologies."
4. " Barriers to Entry." Pitofsky stated that there are often low barriers to entry because "competition in high-tech industries so often depends upon the implementation of ideas, and ideas have little respect for geographic borders or entrenched market power ..."
5. "Output and Price Effects" Pitofsky said that the traditional profile of a monopolist as "a firm that will curtail output in order to raise price" often does not hold in high-tech markets.
6. "Network Efficiencies." Pitofsky stated that these occur in high-tech industries "when the value of a product or service is positively correlated with the number of individuals who use the product or service." A high-tech company can obtain dominance through network efficiencies, said Pitofsky, and then "perpetuate its domination over substantial period of time" and "extract very substantial monopoly rents from consumers."

Pitofsky then addressed these "network efficiencies" at considerable length. He said that they can occur "when a product's value is determined by the number of users in the network" or "where a product achieves dominance and producers of essential complementary products (for example, application software firms that write programs for a dominant platform) overwhelmingly devote their resources in a way that is useable only with the dominant system."

Then, once a company "achieves dominance through network efficiencies, [it] can preclude competition for extended periods." He described the potential consequences of network monopolies as follows:

"A network monopolist may have the ability to monopolize successive generations of product, or complementary products or services, simply by adopting a policy of allowing only those products manufactured by it to connect with the existing network. One result may be that over time, the best products or services may not win out. Also, potential competitors, recognizing the enormous difficulties of challenging an incumbent network monopolist, may lose incentives to compete."

Pitofsky speculated on the appropriate role for antitrust regulators to play. "One possible approach," he said, "would be to break up the network. Assuming that is not feasible, or that diseconomies (and resultant injury to consumer welfare) are substantial, another possible approach is to mandate access to the network for all qualified suppliers, customers and competitors on fair, reasonable and non-discriminatory terms."

He continued that in deciding whether or not to mandate access, "two questions that need to be addressed are, first, what are the pros and cons of a mandated access remedy and, second, assuming some sort of remedy is appropriate for some but not all network situations, what is the rule of law that distinguishes between beneficial and benign network positions on the one hand, and counter-productive network situations on the other?"

Pitofsky said that the cons of mandating access are:

• It creates a disincentive for companies to set up their own competitive networks.
• "Profits derived from dominating a network may be a fair return to innovators," while mandating access would encourage "free-riders."
• It would be difficult for regulators and judges to enforce and supervise.
• It constitutes confiscation of property.

Pitofsky said that the argument in favor of mandating access is that network monopolists use network efficiencies to perpetuate their market dominance, and to extract monopoly rents.

Pitofsky concluded that "my own tentative view in light of these pros and cons is that antitrust enforcers should proceed cautiously in breaking up or mandating access to an existing network, even when that network is dominant." He elaborated that "a cautious approach would be to reject any possibility of mandatory access except where it is 'essential' to the existence of competition."

"A second approach," said Pitofsky, "would be to ask the controllers of access to the network why they have refused access on reasonable terms. If they could assert a plausible efficiency, and if there were no evidence of a primary purpose to exclude, then access would not be required. In effect, the burden of explaining exclusionary behavior would shift to the party or parties controlling the network."

Pitofsky noted that he was not speaking on behalf of other Commissioners, or the Commission.