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The “we can’t predict the future” attitude of courts and most antitrust commentators and the resulting focus on the short run, locks us into methodological conservatism. If our only valid benchmarks are the past and the minimally extrapolated near-future, then we tend to see our world as the best of all worlds. For example, in Trust on Trial, Richard McKenzie claims that (I paraphrase) “in every market that Microsoft entered, prices dropped.” That sounds right. I still remember the $499 price tag for WordStar. The chart below compiles some useful historical information on word processor pricing over time. (If anyone has a more recent overview, please let me know. Today, Word sells for around $200).

But who says that prices would not have dropped to even lower levels or more quickly but for Microsoft’s anticompetitive practices? Worse yet, who says that we would not have seen significant new technologies and innovation such as free, web based word processing similar to Writely a decade earlier? My point is that the epistemological humility of post-1970s microeconomics has a decidedly conservative bent in the strict sense of the word: It ennobles the status quo. Take as an example the law of predatory pricing. Successful predation proceeds in two steps. In the investment phase, the predator undersells the competition at a loss. Once the competitors have been vanquished, the predator raises prices above competitive pre-predation levels. That’s the harvest phase, in which consumer exploitation follows competitor exclusion. A focus on the short run makes predatory pricing seem irrational, as the only certain outcome is a short run windfall for the consumer, while the long run harvest is disregarded as speculative. Herein lies one of the more fundamental philosophical differences between US and European antitrust. We, in the US, have confined the time horizon for antitrust analysis to the past and to a minimally extrapolated short run future. The European Commission, in contrast, exhibits much greater confidence in its ability to predict the future and is thus much more willing to trade off short run consumer benefits against long run welfare losses. In the ideological battle between the past and the future, the past usually wins: better the devil you know than the devil you don’t. I’d be interested in any pointers to recent empirical work on the accuracy of microeconomic predictions.

Note: Cross posted at Antitrust Review. Please post any comments over there.

Technorati Tags: antitrust, economics, ideology

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