Judge Thomas Penfield Jackson’s ruling last December that Microsoft Corporation must unbundle its "Windows 95" operating system from its Internet browser, "Explorer," was greeted by two predictable responses. The first was from liberal economists, business critics, and most of Microsoft’s competitors. They applauded the decision and urged the Justice Department to initiate an expanded legal action against Microsoft. The second response was from attorneys for Microsoft and several libertarian economists, who argued that Judge Jackson’s decision penalized successful entrepreneurship and ultimately would be harmful to computer and Internet consumers.

What may not have been expected was the reaction of several prominent conservative commentators and politicians whom the media associates with the free market philosophy. Instead of defending Microsoft, they defended tough antitrust enforcement. Instead of arguing that regulating Microsoft would cripple an important innovator, they accepted the antitrust establishment’s spin that the court-ordered unbundling would promote "competition" and the public interest.

Senator Orrin Hatch (R-UT) has been particularly explicit in his support of the most recent regulatory assault on Microsoft. He told a Progress and Freedom Foundation conference in February that he wanted to "debunk the myth that economic conservatives do not believe in antitrust." Hatch, whose Judiciary Committee has antitrust oversight responsibilities, also warned during Senate hearings in March that several of Microsoft’s practices might be "predatory" and that tough antitrust scrutiny now would be preferable to "heavy handed regulation" in the future.

Conservatives have always been ambiguous about antitrust enforcement. Austrian school economists Joseph A. Schumpter, Frederick Hayek, and Ludwig von Mises were all highly skeptical of any formal antitrust policy. Chicago school adherents Henry Simon and George Stigler, on the other hand, expressed strong support for antitrust law and its regulation of monopoly, a position that most economists still follow.

Allegations of dominant firm predatory pricing are fashionable again and some prominent conservatives are championing the cause. In Microsoft’s case, it is alleged that the company charges low prices (or no explicit price at all) for certain of its applications software (including its browser, Explorer) which has the effect of injuring suppliers of competitive products. Presumably, when the competitors have been eliminated, Microsoft will begin charging monopoly prices and/or "tolls" to access the Internet. Allegations of predatory behavior were recently made by former Senate Majority Leader Robert Dole (who has been retained by Microsoft’s competitors) and they are also part of an expanded monopoly case that the Department of Justice has just launched against Microsoft.

Should economic conservatives support antitrust regulation of price competition? Emphatically not. Unbridled price competition is always beneficial to consumers, regardless of how long it lasts. The key is to keep the government out of the marketplace, and to avoid either subsidies on the one hand or restrictions on the other, so that both the level of prices and the success or failure of business reflect true market forces.

There are several stubborn myths concerning predatory practices that must be exploded:

• Predatory pricing is common. Actually, bona fide examples of true predation are rare. The most famous non-case of predation involved the Standard Oil Company in the 19th century oil industry. Economist John McGee, after surveying the 11,000-page trial record of U.S. v. Standard Oil (1911), concluded that he could not find any bona fide instances of predatory pricing on the part of Standard Oil; the Court itself made no specific finding of any predation. Predation is not impossible, but it is extremely rare. We do not need laws against business behavior that almost never occurs and would be beneficial for consumers even if it did occur.
• Predatory practices allow firms to monopolize markets. In legally open free markets, dominant market positions in business have been earned and maintained by extraordinary innovational activity; historically, predation has played no significant role in the process. The reason is that severe price reductions are very expensive and risky for the dominant firm; it must cut prices on its large outputs while the length of any "price war" is always indeterminate. Moreover, even if competitors are eliminated, nothing prevents new firms from returning when prices return to "normal" levels. (If prices do not return to normal levels, then "competitors" are not necessary anyway).
• Predatory pricing is distinguishable from competitive pricing. Not really. Some economists believe that prices below "cost" are predatory, but few can agree what "cost" really means. Prices can temporarily fall below average cost for a number of legitimate reasons (and firms can make losses), but surely that is not always predatory. Prices below marginal costs are predatory for some economists, but is that in the short run or the long run? And since both short and long run marginal costs are almost impossible to measure accurately, such a legal standard would be completely unworkable.

From a consumer perspective, all of this cost discussion is irrelevant anyway. Consumers want low prices for whatever reason and couldn’t care less about historical business "costs." Indeed, it is really the consumers themselves who decide to make price reductions "predatory." If a dominant firm lowers prices to eliminate competitors but consumers ignore the lower prices and support the new firm, then the price reductions cannot be predatory. Only if consumers support the price cutter can any competitor ever be "injured" or "driven out of business." Thus, it is consumers, not dominant suppliers, who ultimately eliminate rivals and determine the market structure of competition. We do not need antitrust regulation to second-guess the decisions of consumers.

Unbridled price competition is part of the free market process. Government regulations to restrict such competition will only restrict freedom and injure consumer welfare. Markets are not perfect, but they are always more efficient and more equitable than government controls.

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