Is there a clear legal precedent for the successful prosecution of Microsoft? Robert H. Bork seems to think so. He has stated emphatically that Lorain Journal Co. v. U.S., a relatively obscure 1951 exclusive dealing case, is “established antitrust doctrine” and that the restrictive agreements in that case “parallel” in an “exact” way those allegedly employed by Microsoft.1
A close look at that case tells a different story. Far from being a parallel case to that being pursued against Microsoft, the facts of, and legal questions raised by, Lorain Journal were vastly different. If the Microsoft case is to be prosecuted successfully it will have to be based upon novel and untested theory, not “established antitrust doctrine.”
Background. The background facts in Lorain are straightforward. In the late 1940’s Lorain, Ohio, a city of about 52,000, had one daily newspaper, the Lorain Journal. (The Sunday News, with a circulation of 3,000, appeared only once a week). Approximately 99 percent of the families in Lorain received the Journal and many local merchants used the newspaper for advertising their services.
In 1948, radio station WEOL was licensed to operate in Elyria, Ohio, eight miles south of Lorain. When WEOL began soliciting advertising, the Lorain Journal decided that it would refuse to deal with any Lorain business choosing to advertise with the rival radio station. Local firms advertising on the radio station had their newspaper advertising contracts terminated; they could renew only if they stopped all advertising with WEOL. As a direct result of the publisher’s policy, numerous Lorain merchants ceased or abandoned their plans to advertise over WEOL. The government then brought a civil suit against the newspaper to end the restrictive arrangement.
The government alleged that the newspaper’s practice of “forcing advertisers to boycott a competing radio station” constituted a “conspiracy” and an attempt to monopolize interstate commerce in violation of Section 2 of the Sherman Act. After a trial the District Court agreed and enjoined the newspaper from its “bold, relentless, and predatory commercial behavior.”2 An appeal to the Supreme Court affirmed the lower court decision.3 The High Court concurred that the newspaper had attempted to “destroy and eliminate WEOL” as a competitor in order to maintain its own near monopoly over advertising. All of this was in violation of settled antitrust law.
Issues Raised in Lorain. Most antitrust scholars agree that Lorain was correctly decided. According to the conventional wisdom, the Lorain Journal had a (near) “monopoly” over local advertising and used its “monopoly power” to force a boycott of a competitor. Yet there are several considerations that bear on the correctness of the decision and on its relevance to the current Microsoft litigation.
The District Court’s Lorain decision is not really about exclusive dealing per se. Rather, it is about whether an attempt at monopolization by one newspaper can constitute a “conspiracy” in restraint of trade (it can, said Judge Freed) and whether attempting to monopolize local advertising necessarily encompasses “interstate” commerce (it does, said Judge Freed). Judge Freed also dismissed the notion that injunctive relief against the restrictive agreements would interfere with freedom of the press. And it was these issues that brought the case on appeal to the Supreme Court.
Is there an “efficiency” justification for the behavior of Lorain Publishing? In the published decisions, there was no economic examination of the pros and cons of exclusive dealing, nor any serious analysis of the newspaper’s argument in defense of its practices.
Robert Bork suggests that any such defense in this case “would have seemed implausible”4 and that the lower court described such attempts as “incredible.”5 Yet the appellants did attempt an economic explanation of sorts to justify their exclusive dealing arrangements. They argued that their conduct was part of a program for the protection of the Lorain market from outside competition. The publisher claimed that the Journal had consistently refused advertising from Elyria merchants (where the radio station was located) in order to “protect” local (Lorain) merchants from competition. And since WEOL was now the newspaper’s “competitor,” it seemed appropriate (to the appellants) that the local merchants be asked to protect the newspaper by boycotting the radio station.
This quid pro quo rationalization for exclusive dealing is not entirely implausible. Some local merchants faced out-of-town competitors and, presumably, did more business because their markets were protected by the publisher’s refusal to take out-of-town ads. They were clearly better off as a consequence of the ad boycott. Similarly, if the local merchants agreed to boycott the out-of-town radio station, then the Lorain newspaper was also better off. Exclusive dealing contracts were necessary to lower monitoring costs and to prevent specific advertisers from “free riding” on the general benefit provided by the publisher. Thus, both the newspaper and some of its advertisers may well have benefited from the “restrictions,” although local consumers, the radio station, and out-of-town merchants did not benefit.6
Relevant to Microsoft? But what has any of this to do with the allegations made by the government in the current Microsoft case? The government alleges that Microsoft uses its near monopoly share of the market in operating systems to restrict the choices of PC makers with respect to competitive software and that those restrictions injure competitors and consumers. These “restrictive agreements” require that PC makers (Dell, Compaq, etc.) not remove specific programs (such as Microsoft’s Web browser, Explorer) or point-and-click icons that now come integrated into Microsoft’s Windows 98 operating system. The Department of Justice seeks to enjoin the integration of Explorer with Windows or, alternatively, to require that Microsoft include the Netscape browser in Windows 98.
The parallel of these allegations with those in Lorain seem strained. First, an appellate court has recently ruled that Microsoft does have a legitimate right to integrate its software under the terms of a consent decree that it signed with the Justice Department in 1994. Second, Microsoft doesn’t have Lorain-type “exclusive dealing” agreements with PC manufacturers, nor does it explicitly restrict their right to add on “competitive” software beyond the start-up screen. (Microsoft does restrict PC manufacturers from “writing out” Microsoft code, a not uncommon feature in the software market; Microsoft’s rivals impose similar restrictions.) PC makers are contractually free to include Netscape’s browser, Navigator (or anyone else’s) with their machines, and some have done so. In addition, any PC user who wants the Netscape browser (or any other) can purchase it separately or can download it from the Web. This rivalrous state of affairs hardly resembles the situation faced by the local Lorain merchants.
Moreover, while the economic justification for exclusive dealing in Lorain appears weak, Microsoft can make a far stronger efficiency defense for integrating its operating system and browser. Historical evidence suggests that product and software integration in this industry can dramatically reduce production and selling costs and make products much easier to use. PC consumer welfare has clearly been enhanced by standardized and integrated systems that are cheaper and more user friendly than unbundled alternatives. Thus Microsoft and PC manufacturers have strong incentives to deliver integrated software products since PC users overwhelmingly demand them. Again, this situation differs radically from that in Lorain.
There are other dissimilarities. The “attempt to monopolize” allegation in Lorain appeared believable since the newspaper was alleged to have had the bulk of the advertising market and aimed to eliminate one start-up radio competitor. (Actually, the lower court admitted that there were several Cleveland newspaper rivals circulating in Lorain as well as the local Sunday News. Lorain’s actual relevant market share in newspapers was approximately 66 percent, not 99 percent.)7 Further, there were overwhelmingly strong legal barriers to entry in broadcasting that increased the probability that the newspaper’s campaign to eliminate competition would be reasonably successful (at least in the short run). It is clear from other evidence that Lorain Publishing really wanted a radio broadcasting license, and that this was almost certainly the actual focus of the “predation.”
The competitive situation in the computer industry is entirely different. In the first place, the PC manufacturing and browser market (and software markets generally) are all openly competitive with no legal barriers to restrict entry. As a consequence, hundreds of firms compete, and rapid technological change constantly alters the parameters of the competitive process.
In addition, while Microsoft is the market leader in operating systems, it currently holds a smaller market share in browsers than do Netscape and America Online. Indeed, Microsoft’s software integration ought to be seen as an attempt to compete more effectively in the browser market – to expand trade rather that to restrain it. Most economists now agree that a dominant firm in one market cannot readily leverage its “monopoly power” into some secondary market and injure consumers. This is especially obvious in Microsoft’s case; monopolies raise prices, yet Microsoft is giving away its browser to be competitive. Again, the parallels with Lorain are just not apparent.
There may well be other antitrust cases that can serve as a precedent in the case against Microsoft. Lorain, however, appears to be a weak candidate. Robert Bork, an attorney for Netscape, would do well to download Navigator on his PC and surf the Net for a stronger case.
Dominick T. Armentano is Professor Emeritus in Economics at the University of Hartford, the author of Antitrust and Monopoly (Independent Institute, 1990) and an adjunct scholar at CEI.
1Robert H. Bork, Letter to the Editor, Wall Street Journal, May 15, 1998.292 F. Supp. 794, 796 (N.D. Ohio 1950).3342 U.S. 143 (1951).4Robert Bork, Antitrust Paradox (Basic Books, 1978), p. 346.592 F. Supp. at 797.6For further discussion of the possible efficiency defenses in this case, see John E. Lopatka and Andrew M. Kleit, “The Mystery of Lorain Journal and the Quest for Foreclosure in Antitrust,” 73 Texas Law Review 1255 (1995).792 F. Supp. at 796.