Antitrust’s Messy Breakup Fallacy

In a market economy in which dominance often rests on intellectual property, rather than on an installed base of industrial equipment, breaking up a large firm is as easy as ordering compulsory licensing, and letting markets do the hard work of pulling the rest of the firm apart. Breaking up large firms isn’t hard — it’s easy.

Noah Smith repeats the old fallacy that breaking up big firms, or reversing consummated mergers, is difficult, putting the divider in the position of creating two new companies from scratch. He writes:

It would be great if big companies could simply be divided into the competing rivals that existed before a merger took place. But once two competitors join, they tend to merge their sales departments, their engineering departments, their management structure and almost every other facet of their business. Antitrust regulators can’t easily order the merged company to split itself back into its constituent parts, because those parts no longer really exist.

Noah Smith, Economists Get Serious About the Harm From Monopolies, January 11, 2019.

Economists should know better than to make this mistake, because it involves ignoring markets. To break a firm up, all you have to do is to seize and divide up the asset that is the source of the firm’s advantage over competitors — force the licensing of key intellectual property to a new entity, for example — and the market will take care of the rest of the breakup.

The owners of the pieces of the divided asset will access markets on their own to assemble their own sales departments, engineering departments, management structures, supply chains, and so on — often, but not necessarily, by hiring away staff from the original firm that is the target of the breakup. Antitrust enforcers don’t have to worry about getting their hands dirty figuring out whether Bonnie in sales should go to the new firm, or Mark in accounting should stay with the old one. So long as antitrust enforcers divide the valuable asset properly, to ensure that the new companies are both financially viable, markets will take care of the rest. Bonnie may get a job offer from the new firm, and Mark may choose to stay put.

This messy breakup fallacy got a lot of air time twenty years ago, when a district court ordered the breakup of Microsoft. But Microsoft actually presents an excellent example of why breaking up should be easy to do in a market economy such as our own. The heart of Microsoft’s business wasn’t (and isn’t) its sales department, or even Microsoft Windows, but rather Microsoft Office, a program that had, and continues to have, a lock on virtually the entire word processing market thanks to a combination of consumer familiarity and the difficulty of exporting documents into competing systems. To break Microsoft up, all the court had to do back in 1999 — or, for that matter, would need to do today — was issue an order forcing Microsoft to release the full Microsoft Windows source code and all future iterations. The court could then have just sat back and watched the company be devoured by a million startups, each offering a new flavor improving on the code.

Indeed, the easiest way to break up a big firm is to force licensing of its most valuable intellectual property assets. Because intellectual property doesn’t have a geographic location — ideas live in the ether — the problems of continued regional concentration that Smith also worries about don’t arise from licensing-driven breakups. And the beauty of it all is that in the Data Economy, intellectual property is the key to the dominance of most large firms. The age of behemoths deriving their power from vast installed bases of industrial equipment — the Standard Oils and the AT&T local loops — is gone. And so too any messiness associated with industrial deconcentration.

It’s time to recognize antitrust’s messy breakup fallacy for what it is.