The cost of war for the DOJ

The cost of war for the DOJ

The US Department of Justice (DOJ) has finally found a charge against Microsoft that has political resonance, which means it may well stick: "Predatory intent." It seems unlikely that Microsoft will effectively refute this charge. A default strategy would be for Microsoft to show that its competitors are equally predatory. Thus the company's machinations to limit rivals' market access or share may be argued as an ultimately self-protective response. Not a great defense.

That firms in many industries act deliberately and persistently to thwart their competitors is, of course, considered common business practice. But when these actions don't involve lying, stealing, or other forms of direct force, does the Government have grounds for prosecution? If the goal is to safeguard consumers from restricted production and artificially high prices, then no. In other words, not if the goal is the typical "public interest" ploy of today's antitrust crusaders. To me, the more worthwhile question is why companies engage in so-called predatory behaviour at all.

Some economists have demonstrated that prolonged price-cutting or exclusionary contracts aren't usually rational or efficient ways of expanding or holding market share against competition. Indeed, such practices often cost the perpetrators huge amounts of revenue and profit in return for fleeting gains. In a free market Microsoft can no more meaningfully prevent competition than it can hold back the tide. Why, then, does an allegedly smart executive like Bill Gates spend precious time and energy devising marginally beneficial schemes such as the one that strong-armed Apple Computer into an exclusive browser and Java-development deal just to frustrate Sun Microsystems?

Some gain

Part of the answer is that provided there's some gain (however impermanent), such manoeuvres will be desirable. Short-term gain also motivates many immoral or unethical actions. Understand that I'm not labelling Microsoft's actions described in the DOJ's testimony as immoral or unethical. I merely point out that commercial predation and immoral behaviour have something in common - a short-term view. The other part of the answer is that predatory behaviour is encouraged in companies with a "business-as-war" culture. These firms have internalised the popular liberal belief that the economy is a static pie, with haves and have-nots. Therefore, capitalism is a zero-sum game, where "winners" should extract maximum revenue from every business relationship. Worse still, business-as-war managers tend to encourage hyper-competitiveness and rival smearing. They are loath to let "the other side" in a competitive bid walk away with its dignity and humour intact.

Similarly, such managers find it easy to justify breaking agreements and alliances whenever it's advantageous. Interestingly, Microsoft has avoided most, but not all, of these managerial pathologies. Too bad our industry can't avoid the public-relations disaster caused by the implicit support that Microsoft's warlike conduct lends to another popular belief: the supposed inherent conflict between what is profitable and what is moral. In companies, as in societies, moral principles serve to guide our decisions in ways that promote long-term welfare. Avoiding business-as-war conduct, for example, makes us all wealthier by reducing the resources we must devote to contract negotiation and enforcement. The relevant trade-off, then, is not what's right versus what's profitable. The only trade-off is between short-term and long-term profitability. A sad irony is that the interests behind this antitrust suit are decidedly short-term, too.

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