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Klein, Assistant U.S. Attorney General in charge of the Justice Department’s Anti-Trust Division, vigorously defended his division’s enforcement record during a presentation at Wharton as part of the Gruss Public Policy Forum Series.
Among the successful anti-trust actions cited by Klein were the prosecution of Archer Daniels Midland for price fixing, the requirement that WorldCom divest itself of significant Internet resources as the price of merger with MCI Communications, and the recent battle with Microsoft over inclusion of a browser in its Windows operating system.
As Klein sees it, pursuing actions such as these is doing exactly what is needed – no more and no less – to keep the American economy rolling.
"A mere decade ago," Klein notes, "we were awash in debt, the economy was sluggish. We could not imagine, then, a period of sustained growth, with no unemployment to speak of, no inflation, and politicians fighting over how to spend the budget surplus. Here and elsewhere it was presumed that the 21st Century would be ‘The Asian Century.’
"Instead," said Klein, "the U.S. has become an economic juggernaut unparalleled in the world. Our greatest fear today is resentment by other countries because of the economic power we represent."
What drives this current prosperity? "The answer," said Klein, "is one word: competition. We now realize an evident truth: that the way to organize markets most dynamically is through competitive markets. In America, that has meant deregulation to an extent once unimaginable. And that genie won’t be put back in the bottle."
However, Klein immediately added, "The fact that free markets work well does not mean there is no role for government to play. If anti-trust enforcement were abandoned, the market would not remain competitive." He acknowledged that government intervention always brings with it the "potential for error. But the alternative – no enforcement — is unacceptable."
The three areas in which the anti-trust division intervenes, said Klein, are cartels, anti-competitive mergers, and the misuse of a dominant position in the market.
Companies dealing in commodities have an incentive to form a cartel, he notes, because commodity prices can be driven down in many ways. "If there were no enforcement, price-fixing would go on with a vengeance. How do I know this? Because even with enforcement, it goes on with a vengeance … in a very sophisticated manner.
"In the case involving Archer Daniels Midland, we got the evidence on video tape because we had an informant among the conspirators. On that tape, executives of a Japanese firm, a European firm, and the American firm are seen. One says: ‘The problem is that we don’t trust each other. If I say the price is $80, my customer will tell me I can get it for $75 from you. And we’ll fall for that if we don’t trust each other.’ One of the Archer Daniels Midland executives says: ‘This is crucial to the way we do business. The customer is the enemy. The competition is your friend.’
"The vitamin price-fixing cartel involving Hoffman-La Roche of Switzerland, BASF of Germany and Rhone-Poulenc of France continued even after we had fined Hoffman-La Roche for price fixing in an earlier case. And cartels continue to exist even though executives from ADM and foreign nationals were sent to prison. We have some 30-35 grand juries looking into them at this time," Klein said.
Klein acknowledges that the Justice Department has been criticized for allowing too many mergers to go through, among them the takeover of McDonnell Douglas Aircraft by Boeing.
"We concluded that Douglas was not viable competition any longer," he said. "I don’t believe you need tons of competition. Having two big companies like Europe’s Airbus and Boeing can provide a robust market. No one thinks Airbus and Boeing should merge. Just as no one thinks all domestic or all global airlines should merge into a single airline. But I take the view that big is not bad. In fact, big may be exactly the right size to create a sure-footed organization."
According to Klein, only 10% of proposed mergers require scrutiny and only 2%-3% raise serious concerns. The merger of WorldCom with MCI Communications raised serious concern because the merged company would have controlled so much of the Internet backbone. It was allowed to go through only after MCI agreed to a $2 billion divestiture of Internet backbone clients.
The third area of anti-trust enforcement – the scrutiny of single firm behavior – is the most controversial, Klein notes. "People say: ‘What’s the problem? Allowing a company to become successful is an incentive for innovation.’ "
The Justice Department is not opposed to a single company such as Microsoft achieving market dominance, Klein adds. Microsoft benefits from what is called the "network effect" in which success reinforces success. "Positive feedback about its operating system leads to other companies writing applications for that system. And the many applications written for the system leads consumers to prefer it. Nothing wrong with that. It is not illegal to have a winner-take-all market.
"But," he continues, "once you have it, what do you do with it? That’s the issue." If, as was argued in the Microsoft case, a company uses its dominant power to bar new entrants from the middle layer – in this case, those who wanted to build a layer of wares on top of the operating system – the government must intervene to assure competition.
"I don’t know if other browsers or a cross-platform such as Java would catch on," said Klein. "What I do know is that incorporating a browser into the program, exclusionary pricing contracts and maintaining a desktop monopoly prevents competition."
Klein concluded his talk by saying that the kind of anti-trust enforcement he had described has gained significant bi-partisan support in the U.S. Congress and is beginning to catch on globally. It’s simply a matter of "insisting that the way to gain market power is to earn it through superior product or service, innovation, and marketing, rather than predatory practices."
