December 1st, 2005 01:21 AM
Antitrust laws and the New Economy
In 2000, Lawrence Summers (Treasure Secretary) stated in The Wall Street Journal that "The constant pursuit of [that temporary] monopoly power becomes the central driving thrust of the New Economy."
The statement is the total opposite of what the recent antitrust rulings against Microsoft concluded.
What Summers is saying is that monopolies are necessary for innovation, and that the government should never intervene with, for example, Microsoft or Intel and their dominant positions.
His reasoning, and with him dozens of other experts, is that the New Economy's costs are almost exclusively upfront, in the development phase, and the manufacturing and distribution costs are close to zero. New Economy companies get rewarded for innovating extremely quickly and then grabbing a huge share of the market before some other innovation comes along and destroys them. Once they are in that position, they build a barrier and discourage new entry, creating a monopoly position. Current antitrust regulation is in place to prevent that, but Summers argues that that is the wrong action to take... If it weren't for that monopoly, a product's price would go down to whatever the marginal cost is, the high fixed costs from the development phase cannot be recovered, thus factually limiting and almost destroying innovation.
An excellent example is a browser: the more people own a particular browser, the more attractive that browser gets, and the higher the "switching costs" get (that is, the cost to switch to another browser). It quickly gets to a point where a quasi-monopoly is created, and where it is virtually impossible for others to enter the browser market. If the government intervenes with antitrust regulations (like what happened in the Internet Explorer case), though, innovation will be slowed down to a crawl (MS doesn't want to spend a bunch of money on IE anymore, since they don't have that monopoly anymore).
Who knows... maybe without the government's intervention, we would have actually had a secure Internet Explorer