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August 1998
Volume 16, Number 8

Blocking Prosperity
by Thomas J. DiLorenzo

Former FTC Chairman James C. Miller III, tells the story of how, in the early 1980s, Chrysler head Lee Iacocca requested that the FTC block a proposed joint venture between General Motors and Toyota. The request was denied. GM and Toyota formed the New United Motor Manufacturing Corporation. Iacocca entered into his own joint venture with Mitsubishi.

This episode is a case study of what Princeton University economist William Baumol calls "The Use of Antitrust to Subvert Competition." Iacocca knew that the GM-Toyota joint venture would enhance competition in the industry (which it did), which is exactly why he wanted the FTC to stop it. He attempted to use antitrust to subvert competition.

An even more obvious attempt to subvert competition through the antitrust laws is the current campaign being orchestrated by GTE, several of the regional Bell companies, and the Communications Workers of America to have the antitrust authorities block a proposed merger between MCI and WorldCom. If the merger is permitted, these two companies plan to quadruple the capacity of local telecommunications facilities, a fact that goes a long way toward explaining why the "baby bells" are opposed to it. It would provide them with added competition.

GTE's opposition to the merger is a transparent ruse. Just last October GTE Chairman Charles L. Lee proposed merging his company with MCI. In a letter to MCI Chairman Bert C. Roberts, Jr. (placed on the GTE website), Mr. Lee wrote, "I am more convinced than ever that the combinations of our companies would serve the best interests of our shareholders, employees, business partners, and creating a dynamic competitive force."

Mr. Lee went on to detail myriad competitive benefits of the merger, including managerial synergies, access to combined markets in over 75 countries, and greater access to investment capital that would lead to "significantly enhanced operating efficiency."

But, alas, Mr. Lees offer was shunned by MCI, which believes a merger with WorldCom would be an even better fit. Taking his cue from what one might call the "Iacocca School of Antitrust," Mr. Lee responded by organizing a political coalition to attempt to stop the creation of the very efficiencies he described in his letter!

GTE is currently in the middle of a dust-in-your-eyes public relations campaign to persuade politicians that the MCI/WorldCom merger would be "monopolistic." The main charge is that the MCI/WorldCom merger would "monopolize" the internet by leaving the new company with some 60 percent of all internet service provider connections that pass over lines (or through computers) owned by MCI/WorldCom.

The problem with this type of analysis is that it is static, whereas real-world competition is an ongoing, dynamic process. That is, ev>en if MCI/WorldCom would have 60 percent of all service connections, that would not give it the "power" to charge monopolistic prices. The new company would still face fierce competition from AT&T and Sprint; from Quest and IXC, which are currently constructing fiber optic transmission lines; and from four other companies--Level 3, Williams, GTE, and Frontier--which have announced plans to construct additional lines.

On April 20, AT&T announced it will invest more than $300 million this year alone to expand its internet "backbone capacity." Even more companies will enter the business if there is a profit to be made. IBM and Microsoft come to mind.

The fact that MCI and WorldCom combined currently have about 60 percent of the internet connections market is a testament to the good-quality products and service these companies have provided in the past, not to any "monopoly power" they may exert in the future.

Neither MCI nor WorldCom is unionized, but GTE is. The fact that the Communications Workers of America is opposed to the merger is further evidence (if not proof) that the merger would lead to better service and lower prices. The superior efficiency of MCI/WorldCom would allow it to take customers away from its less efficient, unionized rivals, such as GTE. A smaller customer base for GTE would also mean less job growth in the unionized sector of the industry. The unions bosses are primarily concerned about their membership levels and dues revenues and are effectively engaged in a price-fixing conspiracy with GTE and the regional Bell companies.

Antitrust does not promote the public interest, but rather the private interests of selected corporations and unions. It does not protect competition, but competitors. If the MCI/WorldCom merger is blocked, it will constitute the latest example among many of the use of antitrust to subvert competition.


Thomas J. DiLorenzo is professor of economics at Loyola College.


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