Current Antitrust Laws Adequate to Address High-Tech Competition Issues: Pitofsky

Federal Trade Commission Chairman Robert Pitofsky today told the American Bar Association that the 19th century antitrust laws on the books today are adequate to address the unique competition issues presented by the high-tech industries of the 21st century. Speaking at an American Bar Association Workshop on Antitrust Issues in High-Tech Industries, in Scottsdale, Arizona, Pitofsky said that while high-tech industries are different from the smokestack businesses antitrust laws were drafted to address, antitrust enforcement that recognizes "special circumstances" of high-tech industries -- many of which depend on intellectual property for their success -- can and should be applied to the high technology marketplace of the 21st century.

Speaking of the high-tech industries that will shape the beginning of the 21st century -- pharmaceuticals, biotechnology, communications, international credit and finance and various delivery systems for entertainment and news, Pitofsky said, "The importance of these industries to the economy, and limited antitrust experience and precedent with regard to some uses of intellectual property, suggests that there ought to be careful antitrust attention to be certain that critical economic growth is not compromised by the abuse of private market power."

Pitofsky said that familiar areas of inquiry will challenge antitrust enforcers to be flexible in the application of antitrust laws to high-tech antitrust review:

• technical issues will involve not only where new entrants might introduce competition -- new, technically superior drugs, for example -- but when;
• speed of market transactions will require federal law enforcers to weigh whether litigation to break up monopolies will be overtaken by new entries into the market;
• regulations restricting collaboration will have to be analyzed in light of the fact that high-tech technologies may depend on collaboration and cooperative standard-setting to advance new technologies;
• barriers to market entry in traditional industries may be "self correcting" in industries that are characterized by "the rapid and seemingly perpetual introduction of new products;"
• output and price effects analysis of the past may be overtaken by new patterns in 21st century businesses, Pitofsky said. For example, "The traditional profile of a monopolist is of a firm that will curtail output in order to raise price. But that model does not hold in high-tech markets. Partly because the front-end investment in new forms of technology is so great, and the marginal cost of additional copies or products modest, high-tech firms often price aggressively at the outset to achieve dominant market positions and ultimately to take advantage of economies of scale."

Pitofsky said that "network efficiency" arguments posed the most challenging issue for regulators. "These efficiencies occur when the value of a product or service is positively correlated with the number of individuals who use the product or service."

Pitofsky said this could occur when many consumers used a product -- like fax machines, or indirectly, such as when applications software firms write programs for a dominant platform. "On the one hand, such networks are efficient and occasionally inevitable; on the other hand, they increase the likelihood that one firm, by achieving a critical mass, will dominate a market or retain market power for an extended period of time."

Pitofsky said that acknowledging the differences between high-tech and more mature industries, "... the essential question remains: should antitrust's conventional role as enforcer of competitive principles be abandoned because it is unnecessary or counterproductive, or should basic antitrust principles apply in a modified form, after taking due notice of different characteristics of the high-tech sector of the economy?"

"I believe antitrust should -- indeed must -- continue to apply. None of the 'high-tech differences' justifies a complete or even substantial exemption," Pitofsky said.

"While it is true that the technology of high-tech industries is often complex, that should be a reason for antitrust officials and judges to understand the technology, not to abandon the field," Pitofsky said. He noted that while change in high-tech industries may be rapid, it often occurs on the margin of the industry, leaving large firms to maintain their dominant positions. "Collaborative efforts are often essential, but antitrust traditionally has taken a very lenient view of research and development cooperation and standard setting across the country," he said, noting that there has been only one federal law enforcement case against a research and development joint venture in the 109 years since the Sherman Act was enacted. Pitofsky said there are situations where "... barriers to entry in high-tech industries are low and where new entrants can leap-frog incumbent technology and quickly come to dominate a market," but said because so much of high-tech industry is based on intellectual property, patent and copyright laws can insulate dominant firms from challengers. He noted that once a network achieves dominance through network efficiencies, it has the capacity to preclude competition for extended periods.

Addressing options about "... what to do about firms that achieve dominant and almost unassailable market positions legally, but maintain those positions for extended periods as a result of network efficiencies," Pitofsky laid out the pros and cons of breaking up the network or imposing mandatory access. "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 said. He concluded by reviewing different approaches to the question of where mandatory access may be justified.

The views expressed by Chairman Pitofsky are his own, and do not necessarily reflect the views of the Commission or any other Commissioner.

Copies of Chairman Pitofsky's speech are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.