Antitrust in a Global High-Tech Economy

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American Bar Association, Law Practice Management Section, Women Rainmakers and The Women's Bar Association of the District of Columbia, The 8th National Forum for Women Corporate Counsel, The Westin Grand Hotel

Washington, D.C.

Date:
By: 
Debra A. Valentine, Former General Counsel

There is nothing constant except change. Not surprisingly then, my topic today is the challenges that you and I face in addressing competition problems in this fast-changing global, high tech economy. Somewhat surprisingly, however, I would like to start my discussion with some numbers that are designed to illustrate that change. I used to think that numbers were boring - probably because my father had an advanced degree in mathematics. I am still not convinced that numbers are sexy, but they can be stunning.

Background: Some Statistical Measurements of Increasing Globalization

First, let's look at some numbers that capture the growth in international trade, a growth that I believe will continue in the coming years. If we take just the decade from 1987 to1997, exports as a percentage of gross domestic product nearly doubled, jumping from 7.2% to 13.5%. During those same years, imports also climbed by more than half, increasing from 10% to 15.4% as a percentage of U.S. gross domestic product.(1) What that means is that in 1997, trade across our borders was more than one quarter of the value created within the U.S. domestic economy -- indeed, it was approaching 30% of it. As I hope to explain later, the sheer volume of cross-border trade and the pace of its recent growth itself changes the competitive landscape. It affects who your competitors are, it may affect the scope of markets, it affects who reviews your transactions and conduct, and it may even change the nature of competition.

Even more striking, this cross-border trade pales in comparison to the increase in cross-border financial investment. Let's start with last decade. From 1983 to 1989, total worldwide foreign direct investment outflows -- your investments in foreign affiliates -- are estimated to have grown at an annual rate of 28.9%. This rate is over three times the projected annual growth rate of world exports and four times the growth in world GDP.(2) In 1996, the foreign direct investment inflows set a new record of around $ 350 billion.(3) Not surprisingly, cross-border mergers and acquisitions play a significant role in driving foreign direct investment.

One can see this by returning to numbers I know well. Last year, the Federal Trade Commission and Department of Justice reviewed a record 4,728 Hart-Scott-Rodino premerger filings, over three times the number reviewed just six years earlier. More striking, the total value of reportable transactions in 1998 increased to almost $1.5 trillion - seven times the 1991 level. Not all of this represents cross-border investment, of course. But it is no surprise that 25% of those mergers involved parties or assets in at least two different countries, and sometimes as many as eight or ten countries. And of the mergers that went to full-phase investigations - the mergers that present the more complicated competitive issues and tend to be the more substantial ones - at least 50% have involved a foreign party or assets or information located abroad. What I find particularly interesting is that industries such as supermarkets and funeral homes, which not only operate in local markets, but have long been viewed as local or regional players, are now caught up in cross-border mergers.(4) Few of us doubt that, notwithstanding some shocks and scares to the international economic system, transactions with a cross-border dimension will increase more rapidly than those whose effects are wholly confined within the borders of a single country.

Matching this growth in cross-border trade and transactions is a corresponding growth in competition agencies throughout the world. Just ten years ago, no more than 30 countries had competition laws and only about ten countries had any meaningful antitrust enforcement. Today, there are 83 countries with a competition law - that is, more than 50 were enacted in the past decade. Since your deals, investments and conduct are increasingly cross-border, and there are increasing numbers of competition officials looking at whether those transactions and practices are anticompetitive, you have a serious interest in the sound and economically informed development and convergence of competition laws. This is a problem to which I will return later, after we have finished setting the stage to explain the different competition problems you face today.

Forces Driving Globalization

What is driving this globalization? Two powerful forces behind the opening, expansion and increased accessibility of markets are innovation and deregulation. Improvements in technology have brought down the costs of transportation and communication dramatically, making cross-border trade and investment more feasible. Deregulation and privatization have opened up former monopolies, state-owned enterprises and other limited entry markets, increasing your firms' competitive opportunities. The challenge of antitrust today is to encourage innovation and deregulation and the market-opening changes that they have brought. The dilemma is whether our antitrust principles that go back to the days of the Robber Barons and smokestack industries can keep pace with the new problems that emerge in the context of high-tech markets and deregulating industries.

My vote is an optimistic yes for two reasons. First, the antitrust laws - whether the Sherman Act or the FTC Act - are written with constitution-like breadth; they are flexible enough to accommodate myriad circumstances. Likewise, economic principles - not just of supply and demand, but of market power, market barriers, and the costs of information - are fundamental and durable. Thus, while markets grow and technology races, I believe that the laws and economics of antitrust are supple and sound enough to address these changing circumstances. I utter only one caution. The benefits of correct antitrust enforcement are huge, because proper enforcement will positively affect the possibilities for innovation today and the quality and prices of products tomorrow. But because the path of innovation is fraught with uncertainty and technology is changing with lightning speed, the potential costs of enforcement errors can loom large. It is in the best interests of both business and consumers that we get it right.

The Antitrust Analytical Framework

So let's look a bit more closely at some of the challenges that we face. The first question that antitrust always asks is what are the markets in which your products and services compete? Antitrust constantly seeks to define which products compete with each other. After all, we can't determine whether a firm exercises market power unless we know to what other products and to what other geographic areas consumers would turn if Firm A tried to raise price or reduce output. Our intuition may well be that globalization and innovation open up both the product and geographic dimensions of a market, but things aren't always as simple as they appear. Globalization cannot eliminate peculiarities of national taste overnight or alter the business need for just-in-time delivery. Sometimes the guy next door is still the best. Likewise, innovation does not mean that substitutable products will necessarily appear to challenge the power of market incumbents. Often, for example, in the biotech or computer industries, the products that might curtail the market power of a dominant firm are somewhere on the horizon or in the final phases of testing. But even if we know that new generations of products and better quality products are appearing more frequently than in the past as a general matter, we cannot simply assume that a particular dominant firm's product will be displaced. We need to know when the FDA is likely to approve an improved version of a drug, when satellite transmission will become a competitive force in the cable market, and when electric utilities will be able to offer telecommunication services into homes. Markets, in a sense, are moving targets. When we review mergers, your help and your attorneys' and economists' help in getting market definition right ultimately ensures the best outcome for your firms and for consumers.

Once a relevant market is defined, we next ask whether barriers prevent other firms from entering the market, thus leaving dominant firms free to raise prices or reduce output. While deregulation and trade liberalization have brought down some significant barriers, those tend to be governmental barriers, not ones flowing from private anticompetitive conduct. And, again, our intuition is that because competition in the high-tech world depends critically on new ideas, which often have no respect for geographic borders or current products and dominant firms, innovation has the potential to bring down entry barriers as well. But innovation can be a two-edged sword. Many products in high-tech industries are based on intellectual property, and patents and copyright laws can provide a protective barrier - usually totally legitimate - that other firms can not easily surmount. Likewise, the Internet has a Janus-faced aspect. On the one hand, firms using the Internet incur few sunk costs in reaching consumers worldwide - there is no need for bricks and mortar, no need to develop a costly distributional system. On the other hand, it can be hard for newcomers to gain customer awareness and, if others get there first, they may lock in customers whose loyalty in turn attracts advertisers and dollars in a constantly reinforcing and expanding circle of market power.

The Applicability of Antitrust in a Deregulating Environment

Now let's add to the complexities of high-tech, global markets the challenges that we face in a deregulating environment, whether it be in telecommunications, international credit and finance, electricity or transportation. First, deregulated industries are often emerging from a protective cocoon - the incumbent firms were accustomed to coordinating with each other or enjoying the protection of regulators who guaranteed them a monopoly franchise. Thus, it is not surprising that established firms want to keep new entrants out of their once-protected territory and occasionally resort to anticompetitive practices to do so. Obviously, it is not in your interests or consumers' interests to replace the straightjacket of regulation with private anticompetitive restraints.

Second, the transition from regulation to deregulation is not immediate. There is a transition period when a patchwork of state, federal or international law that restricts competition continues to apply. Worse yet, the regulatory patchwork may apply to some firms in the industry but not others, which can lead to strategic behavior that stymies robust competition among all.

Third, we antitrust enforcers are not always well-equipped to address some of the more important policy goals of the old regulatory regime during the transition period. For example, before full-bodied competition has taken hold, there may be a need for price caps, such as on cable rates, to prevent stratospheric prices, or for mandated access to local markets, such as in telecommunications, to enable new entry, or for universal service guarantees, such as with electricity, in the interest of fairness. These tasks may require a degree of supervision and monitoring that antitrust is not well-suited to provide. And the unfortunate fact is that there is no magic way to morph from a regulated to a robustly competitive regime overnight.

One thing we can do is to provide well-thought through competition advocacy - to FERC, the FCC, state PUCs and so forth - to improve the transition from regulated to deregulated markets. In part, this is simply encouraging good government principles. For example, during transition periods, regulators should equalize treatment among firms by reducing regulatory burdens on incumbents rather than imposing burdens on new entrants. Likewise, regulators should follow market principles to the greatest extent possible when regulating. We also are able to foster the sharing of ideas, best practices, and experiences among regulators involved in restructuring and deregulating industries. In this vein, the FTC will be holding a two-day workshop in September on market power and consumer protection issues that arise from encouraging competition in the U.S. electric power industry. State regulators, state attorneys general, non-profit research and electricity institutes, and consumers from states active in promoting retail electricity competition will exchange ideas about how best to move states toward electricity competition.

Deregulation, at least in the next decade, is likely to be even more significant on the international level and will open up great possibilities for your firms. We participated in a major regulatory reform project with other developed countries at the OECD - a project, quite interestingly, promoted by Japan, which was seeking outside support for needed changes that are internally difficult to accomplish. The project set forth best practices for deregulating, and economically-based principles for regulating when necessary, in areas like telecommunications, electricity, banking, transportation, and professional services. And this project is not just words on paper. Countries are up for review on a rotating basis to determine whether their deregulatory measures or remaining regulatory regimes are consistent with the principles articulated in the final document. Both the U.S. and Japan have undergone that review, and I will only say that no country is without its blemishes.

Complementary to efforts to deregulate consistent with competitive principles are efforts to prevent the growth of inconsistent, market-inhibiting and overlapping regulations in new markets, such as electronic commerce.

The Challenge to Antitrust of Cooperative Arrangements

Another consequence of a global, high-tech environment is that firms are frequently collaborating to penetrate distant markets or to combine complementary technologies to produce new products that neither firm could have created alone. And the risks and cost of research and development can be so substantial - whether in making aircraft or defense systems, semiconductor plants or new pharmaceuticals - that firms team up to tackle the challenge. Traditionally, antitrust has been viewed as skeptical of cooperative arrangements, precisely because our greatest concern has been anticompetitive collusion between competitors. But, the truth is that antitrust has been quite lenient toward research and development cooperation, and even production cooperation. In fact, the government has challenged only one research joint venture in the over 100 years since the Sherman Act was enacted.(5) Today we are trying to make even more clear the degree to which firms may cooperate in joint ventures. Over the past two years the FTC and the Department of Justice have been working on how to provide additional guidance and clarity to firms contemplating associations with competitors.

While firms may need to collaborate in this increasingly high-tech and global environment, so do antitrust enforcers. The limits of national enforcement of competition laws are becoming more obvious every day. First, as the number of cross-border transactions and the concomitant potential for anticompetitive conduct with foreigners or in foreign countries increases, our need for evidence located in other countries and our need to discipline actors in other countries grows. These needs can be met in different ways. We can pursue joint investigations with foreign authorities, as was done in one US-EC investigation of Microsoft, and as is sometimes done with Canada when investigating possibly criminal cartel cases. We also have the option of referring a case that affects two countries' markets to the authority best-situated to prosecute the case. While this procedure has the potential to assuage other countries' concerns about extraterritorial U.S. antitrust enforcement, it does require us to respect the enforcement timetable and priorities of our competition colleagues overseas. We have tested this process with the European Commission in a very few cases, and while it is by no means a panacea, it may be a useful way to allocate resources, and improve our enforcement possibilities and remedial options in a few, rather unique cases.

Most frequently, we are simply cooperating informally with competition authorities overseas. We have only one formal treaty that enables us to share companies' confidential information, which we signed with Australia just this Tuesday. But we are able to share with foreign enforcement colleagues general information about the industry or markets involved, about our enforcement theories and about possible remedies. What we are increasingly finding is that if firms are willing to allow the involved enforcers to share confidential information in problematic mergers, we can come to a resolution both more quickly and in a manner that does not impose conflicting remedies on the parties involved.

Another reason for increased cooperation among competition authorities is to reduce the costs and burdens on business. Here, we will need a push from the business community if we are to make substantial progress in, for example, converging premerger filing forms, so that you are not submitting totally different sets and formats of data to authorities who should be interested in essentially the same information. In striving for convergence, I would encourage you to focus on certain basics first, such as advocating that premerger filings should be necessary only in those countries that the transaction will affect. Surprisingly, some new competition authorities require filings simply based on the worldwide turnover of your operations, regardless of whether any nexus to their jurisdiction exists. You might then try to push for common filing dates and relatively convergent merger review deadlines. The difficulty in achieving more substantial convergence is that antitrust enforcement occurs in very different cultures around the world. It is one thing for an authority that has final decision making powers, such as the EC, to determine within a limited timeframe and based on limited evidence, that a merger is anticompetitive. It is quite another for the FTC or DOJ to make that determination, knowing that we will be taken to court the next day by parties challenging that decision.

Finally, increased cooperation among antitrust authorities worldwide is needed to ensure that anticompetitive private barriers do not replace the old governmental barriers that our trade negotiators were so successful in eliminating. There is not strong empirical evidence that this is yet the case, but as the economy globalizes, the opportunities and temptations may well increase. This possibility is driving some groups of countries, such as the EC, to argue for multilateral competition rules at the WTO. The premise is that if every country is required to have a competition law and required to enforce it, then firms will find it difficult to engage in illegal cartels or anticompetitive vertical restraints that block market access to foreign firms.

I do not believe that at this point in time global rules at the WTO will effectively prevent private anticompetitive restraints that impede market access. While I mentioned that over 80 countries now have competition laws, that leaves at least another 50 countries without such laws. Consequently, any effort to craft generally accepted competition principles and the scope of coverage for such laws in all countries would result at most in agreement upon a few basic, rudimentary requirements. It would not result in any marked improvement in competition enforcement or more open markets. To accomplish those important changes, we need more education and more training of new competition officials. We also need increased advocacy to create a culture of competition in countries throughout the world. The lesson of the Asian financial crisis is not that we need less competition, but that we need more economically sound competition and competent rather than corrupt officials. I hope you agree with me that globalization, deregulation and innovation are the forces moving us into the future and that if they are informed by and infused with robust competition, we will have a better tomorrow for business and consumers.

* The views expressed here are those of the author, and not necessarily of the Federal Trade Commission or any Commissioner

1. United States Department of Commerce, International Trade Administration, Office of Trade & Economic Analysis. These data may be found at " www.ita.doc.gov/industry/usfth/+05.prn ."

2. United Nations Centre on Transnational Corporations, World Investment Report 1991: The Triad in Foreign Direct Investment 14 (1991). See generally OECD, International Direct Investment: Policies and Trends in the 1980s (1992).

3. UNCTAD World Investment Report 1997, Transnational Corportations, Market Structure and Competition Policy, at 6 & Fig. 2.

4. See, e.g. Koninklijke Ahold NV, FTC File o. 981 0254 (Oct. 15, 1998)(consent agreement resolving concerns over acquisition by Ahold, a Dutch company, of Giant).

5. See United States v. Automobile Manufacturers Ass'n, 1969 Trade Cas. (CCH) ¶ 72,902 (C.D. Cal. 1969), modified sub nom. United States v. Motor Vehicle Manufacturers Ass'n, 1982-83 Trade Cas. (CCH) ¶ ¶ 65,088, 65,175 (C.D. Cal. 1982).