William & Mary Law Review Volume 44 (2002-2003) Issue 1 Article 3 October 2002 A Proposed Antitrust Approach to High Technology Competition Thomas A. Piraino Jr. Follow this and additional works at: https://scholarship.law.wm.edu/wmlr Part of the Antitrust and Trade Regulation Commons Repository Citation Thomas A. Piraino Jr., A Proposed Antitrust Approach to High Technology Competition, 44 Wm. & Mary L. Rev. 65 (2002), https://scholarship.law.wm.edu/wmlr/vol44/iss1/3 Copyright c 2002 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmlr A PROPOSED ANTITRUST APPROACH TO HIGH TECHNOLOGY COMPETITION THOMAS A. PIRAINO, JR.* TABLE OF CONTENTS INTRODUCTION ...................................... 67 I. THE ECONOMIC CHARACTERISTICS OF HIGH TECHNOLOGY MARKETS ..................... 74 A. Initial Competition for the Market ................. 74 B. The Trend to Monopoly in Mature Markets .......... 77 C. High Technology Monopolies' Effects on Consumers ... 81 D. The Persistenceof High Technology Monopolies ...... 84 II. THE ECONOMIC EFFECTS OF HIGH TECHNOLOGY JOINT VENTURES .................................. 90 A. Beneficial Competitive Effects ..................... 92 B. Adverse Competitive Effects ...................... 94 III. A PROPOSED APPROACH TO HIGH TECHNOLOGY COMPETITION ......................... 95 IV. APPLYING THE PROPOSED APPROACH TO HIGH TECHNOLOGY MONOPOLIES .......................... 98 A. PrecludingFirms From Extending or PerpetuatingMonopoly Power .................... 98 B. Tying Arrangements ........................... 101 1. The Courts' Confused Approach to Tying ........ 101 2. Applying the ProposedApproach ............... 104 C. Access Restrictions ............................. 107 1. The EssentialFacilities Approach .............. 107 2. Access to Telecommunications Networks ......... 109 3. Access to the Windows OperatingSystem ........ 111 * Vice President, General Counsel and Secretary, Parker-Hannifin Corporation, Cleveland, Ohio. Distinguished Adjunct Lecturer, Case Western Reserve University Law School. .ID.,Cornell Law School, 1974. The opinions expressed in this Article are personal to the author and do not reflect the opinions of Parker-Hannifin Corporation. WILLIAM AND MARY LAW REVIEW [Vol. 44:65 a. Microsoft's Denial of Access to Windows ...... 112 b. Remedies for EnsuringAccess to Windows .... 117 i. The Final Judgment ................... 117 ii. Deficiencies in the Final Judgment ....... 119 D. Exclusive Dealing ............................. 124 E. PredatoryPricing ............................. 126 V. APPLYING THE PROPOSED APPROACH TO HIGH TECHNOLOGY COLLABORATIONS ..................... 128 A. Deficiencies in the CurrentApproach .............. 128 1. Inconsistent Standardsfor Section 1 Restraints ... 131 2. Confusion Over Analyzing Joint Ventures as Single or Multiple Entities ................... 134 B. Resolving the Deficiencies of Joint Venture Analysis .. 136 1. Analyzing the Legality of Joint Ventures ........ 136 2. Analyzing RestraintsAmong Joint Venture Partners...................... 138 3. Analyzing the Conduct of Monopoly Joint Ventures ............................ 139 VI. JUDGING THE LEGALITY OF JOINT VENTURES ........... 141 A. Upstream Joint Ventures ....................... 141 B. Downstream Joint Ventures ..................... 145 1. ProductionJoint Ventures .................... 145 2. Marketing Joint Ventures .................... 149 VII. ANALYZING RESTRAINTS AMONG JOINT VENTURE PARTNERS .............................. 152 A. Price Fixing Agreements ........................ 153 B. TerritorialAllocations .......................... 156 VIII. ANALYZING THE MONOPOLY CONDUCT OF JOINT VENTURES ................................ 156 A. Access Restriction ............................. 157 B. Exclusive Dealing ............................. 161 C. Standards-Setting ............................. 164 D. Monopsony Conduct ........................... 165 CONCLUSION ....................................... 166 2002] HIGH TECHNOLOGY COMPETITION INTRODUCTION This Article discusses the most critical antitrust issue of the new century: how to regulate competition in Internet, medical, media, telecommunications, computer hardware and software, and other high technology markets. The form of such regulation will have implications beyond the high technology sector. During the 1990s, high technology innovations became the greatest drivers of U.S. economic growth. Traditional industrial firms began to use high technology to enhance their productivity.1 New Internet software allowed firms to adapt their purchasing and production schedules to meet changing demand, thus smoothing out the peaks and valleys of the economic cycle. Linchpins of the "old economy," such as Ford and General Motors, began to collaborate in business- to-business (B2B) e-commerce ventures that allowed them to sell products and purchase supplies online.2 A 1999 survey found that 1. High technology products caused most of the improvement in American workers' productivity during the latter half of the 1990s. Many economists believe that such productivity is "the single most important factor affecting our economic well-being." Willow A. Sheremata, Barriersto Innovation:A Monopoly, Network Externalities,and the Speed of Innovation, 42 ANTITRUST BULL. 937, 937 (1997) (quoting PAUL KRUGMAN, THE AGE OF DIMINISHED EXPECTATIONS: ECONOMIC POLICY IN THE 1990s, at 17 (1990)); see also Louis Uchitelle, Notions of New Economy Hinge on Pace of Productivity Growth, N.Y. TIMES, Sept. 3, 2001, at Al ("Productivity is the principal contributor to economic growth."). As one commentator recently pointed out, 'There is little doubt that technology is somehow responsible for it all." Steve Liesman, Productivity Gains Extend Beyond Technology Area, WALL ST. J., Jan. 8,2001, at A3; see also Richard W. Stevenson, The Boom is Over: What's Next, N.Y. TIMES, Nov. 4, 2001, § 4 (Week in Review), at 3. According to Stevenson: [T]echnology [in the 1990s] really was transforming the economy in concrete ways-in particular by helping to drive a resurgence in productivity, or the ability to produce more for less. After languishing for two decades, the growth rate of productivity-the single best indicator of an economy's ability to expand in a sustainable way-began accelerating around 1995. Id. 2. Michael Totty, The Next Phase, WALL ST. J., May 21, 2001, at R8 (describing B2B among automobile companies and supply-chain management improvements made possible by the Internet and by new software); see David Leonhardt, Wall Street Still Sees No Wolves in its Midst, N.Y. TIMES, Aug. 12, 2001, § 3 (Money & Business), at 4 ("[Clompanies are making decisions more quickly as a result of computer systems that give them up-to-date information about their business.... [C]ompanies have used this knowledge to cut jobs and hours more rapidly than in the past, laying the groundwork for a fast recovery."). A B2B involves a collaboration among competitors to develop and operate an Internet website for the sale of the parties' products or for the purchase of raw materials and other inputs used in the manufacturing process. Robert B. Bell & William F. Adkinson, Antitrust Issues Raised WILLIAM AND MARY LAW REVIEW [Vol. 44:65 American executives believed that they had exploited "only half of the potential of high-tech."' Thus, continued productivity gains across the breadth of the U.S. economy could be at risk if antitrust policy does not create an environment conducive to high technology investments. There is currently considerable debate about whether aggressive antitrust enforcement helps or hinders the development of high technology. That debate will be joined sharply in two cases whose outcome could determine the future control of the Internet: AOL Time Warner's pending monopolization suit against Microsoft' (AOL) and the final remedial phase of the most recent of three cases brought by the government against Microsoft5 (Microsoft III). A recent Wall Street Journal editorial posed the high technology dilemma as follows: It's increasingly clear that products whose primary value lies in intellectual property-products such as software, pharma- ceuticals, movies, records and many of the other things that drive today's economy-are fundamentally different from staples of the industrial economy such as autos and steel, or service- by B2B Exchanges, 15 ANTITRUST, Fall 2000, at 18, 18; see also David H. Evans, B2Bs---A Technical Perspective, 15 ANTITRUST, Fall 2000, at 45, 45 (describing B2B as "a place in cyberspace where buyers and sellers come together to trade in goods and services"). 3. Greg ip & Jacob M. Schlesinger, Did Greenspan Push High-Tech Optimism on Growth too Far?,WALL ST. J., Dec. 28, 2001, at Al. 4. AOL Time Warner filed its complaint against Microsoft through its subsidiary, Netscape Communications Corporation, which it acquired in 1999. See Complaint in Netscape Communications Corp. v. Microsoft Corp., Related to Civil Action Nos. 98-1232 and 98-1233 (D.D.C. filed Jan. 22, 2002). 5. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) thereinafter Microsoft III]. As the District of Columbia Circuit Court pointed out in Microsoft III, "We decide this case against a backdrop of significant debate amongst academics and practitioners over the extent to which 'old economy' ... [antitrust) doctrines should apply to firms competing in dynamic technological markets .... " Id. at 49. There were two earlier