EC Competition Commissioner Explains Microsoft Decision, Deflects U.S. Criticism

This posting was written by John W. Arden.

The latest volley in the battle of words between U.S. and European Union antitrust officials comes from Neelie Kroes, EC Commissioner for Competition, who published an article (“Why Microsoft Was Wrong”) in yesterday’s Wall Street Journal online edition.

In explaining last week’s European court ruling that Microsoft Corp. abused its dominant market position and the imposition of a € 497 million fine, Ms. Kroes was clearly answering criticism from the U.S. Department of Justice that the decision “may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.”

Protecting Consumer Welfare

From the top, Ms. Kroes rejects the claim that, unlike U.S. antitrust law, EU competition law is not concerned with protecting consumer welfare.

“U.S. and EU antitrust laws agree on most things, not least the objective of benefiting consumers . . . This is hardly surprising. When Jean Monnet, one of the European Union’s founders, was working on antitrust rules in the draft treaties over 50 years ago, he was heavily influenced by his many U.S. friends . . . Since then, discussion among academics, practitioners and enforcers on both sides of the Atlantic have never stopped. Both in Europe and America the objective is to find the best solution for the consumers, the best way to solve competition problems so as to increase consumer welfare.”

Ms. Kroes enumerates how EU antitrust enforcement has benefited consumers by breaking up international cartels, saving consumers at least $6 billion per year, and by “pushing down” the price of international telephone calls in Europe by more than 40%.

She observes that the EU and U.S. have similar views on a number of issues: the iniquity of cartels, the circumstances when mergers between competitors bring risks to consumers, the importance of spreading the gospel of free markets around the world, and the rare instances when antitrust laws should limit unilateral action by companies, even when those companies are monopolists.

Legal Tests Largely the Same

“When looking at such conduct the legal tests set out in their respective Microsoft cases by the U.S. Court of Appeals in Washington, D.C., on one hand, and the EU Court of First Instance, on the other, is largely the same. Both require a type of rule of reason analysis, looking not just at whether the potential consumer benefits outweigh the harm in the short run, but whether incentives to innovate will be maintained in the long run.”

The DOJ comment on chilling innovation was dispatched with the following observations:

“In the Microsoft case decided last week in the EU, the court noted that not even Microsoft had argued that its incentive to innovate had been undermined by its previous practice of disclosing Windows desktop interoperability information. It is worth remembering that, in common with industry practice, Miscrosoft voluntarily used to provide information permitting interoperarability between services and its Windows desktop. Of course, this was before Microsoft wanted to push its own server software; then the provision stopped. Even after Microsoft was later forced to resume providing certain interoperability information—as part of the settlement it reached with the U.S. Department of Justice—Microsoft stated that its incentives to innovate had not been undermined.”

“Chicago School” Economics

Citing statements by FTC Commissioner J. Thomas Rosch, Ms. Kroes stated that the antitrust policies of both jurisdictions are based on the same philosophical underpinnings. Commissioner Rosch “has recently suggested that U.S. and EU antitrust policies are based, respectively, on “Chicago school” and “post-Chicago school” economics.”

There is some truth to this characterization, she noted. However, “I have difficulty seeing the real cutthroat world of business in the theoretical models of the Chicago school,” she remarked. “They remind me of Dr, Pangloss in Voltaire’s “Candide,” believing that we live in the best of all possible worlds and that all is for the best. In reality, businesses do engage in strategic behavior to undermine their rivals.”

Where a monopolist exploits his position to colonize neighboring markets, “this can scare investors from funding competitors, undermine the incentive and ability of those competitors to invest and innovate, and drive out competitors who are as efficient as the monopolist.”

A discussion of the September 17 decision in Microsoft Corp. v. Commission of the European Communities, and the Department of Justice reaction was posted on this blog on Monday, September 24.