It would be nice if you could just watch your "Herfindahls." In simpler times, companies wishing to merge had to do well on something called the Herfindahl-Hirschman Index, which the Justice Dept. used to measure market concentration. Score above 1,800 and the merger was doomed. Below 1,000, it was legal. Say what you will about relying on such an index, it had the virtue of clarity and predictability. Justice's latest antitrust decisions do not. The largest M&A wave this century may require a more active, vigilant government referee to ensure open markets and competition. But it is incumbent on Washington trustbusters to explicitly state their standards and measurements. This they have not yet done.
What are we to make of the following? Boeing Co. is allowed to merge with McDonnell Douglas Corp., effectively sewing up the domestic commercial-airplane manufacturing market, but doubts are cast on WorldCom Inc. buying MCI Communications Corp. because the combined company might control 50% of the Internet "backbone." Southern Pacific can get together with Union Pacific Corp. to control a major share of the rail lines, but Compaq Computer Corp.'s purchase of Digital Equipment Corp. is questioned. Cable-TV companies can control your access to programming, but Microsoft Corp. shouldn't be able to control access to the Internet. What are the criteria for blocking some deals and not others?
We don't know. The truth is that Joel I. Klein, Justice's top antitrust official, and Robert Pitofsky, chairman of the Federal Trade Commission, are crafting the rules and the rationale for them as they go along. Neither one is a paleo-trustbuster who thinks big is necessarily bad. Each is trying to figure out how to maximize competition in a quickly evolving, global, high-tech marketplace, where huge consolidation is occurring and where new monopolies may be taking hold. It's tough work, but the merger boom can't wait while they cogitate.
Back in the Reagan '80s, antitrust was easy. The free-market Chicago school of economics infused policy with a simple theme: The only legitimate subject of antitrust enforcement was price-fixing. For a good decade, this translated into virtually no antitrust action by the government.
Klein and Pitofsky belong to a post-Chicago school that wants to do more. Uneasy over the scale of the current merger wave, they believe that there are justifications above and beyond price-fixing that require antitrust enforcement. These monopolistic tactics include tying, forcing customers to buy one product to get another (the Microsoft case); exclusive dealing, pressuring distributors to dump competitors' wares (the Anheuser-Busch Cos. case); and standard setting (again, Microsoft). In raising objections to the proposed merger between Lockheed Martin Corp. and Northrop Grumman Corp., the Justice Dept. said it was acting to "promote competition, protect consumers, and preserve innovation." Good goals, but the country needs to know precisely why this deal isn't kosher while Lockheed's 19 other acquisitions were fine.
If there is confusion over the competitive rules of the game, the blame must be shared by regulators and politicians. Despite specific legislation, the Baby Bells retain their monopolies in local phone markets by tying up the FCC in court. The cable-TV industry continues to keep out competition from satellite providers, thanks to an alliance with broadcasters and campaign contributions to friends in Congress.
The New Economy thrives in open markets. The government can help at times by playing referee in a competitive game defined by a handful of clear, simple, and transparent rules. Antitrust enforcement must be predictable and not the interpretive whims or theories of unseen bureaucrats. It's time for Klein and Pitofsky to set out their New Economy Herfindahls, their standards of competition.