AEI-Brookings Joint Center

The Failure of Structural Remedies in Sherman Act Monopolization Cases


Executive Summary


Considerable controversy has arisen around the recent U.S. District Court decision that ordered vertical divestiture of Microsoft as a remedy for its violation of Section 2 of the Sherman Act. In this paper, I look back over more than a century of Sherman Act case law to see how frequently structural relief has been imposed in monopolization cases that involve a single firm that has not attained its market position through merger or from conspiring with other firms. I conclude that there are only four or five such cases in the history of Sherman Act enforcement. I then examine intensively the effectiveness of structural relief—vertical or horizontal divestiture—in seven of the most important Section 2 cases and two others. I conclude that with one exception, the break up of AT&T in 1984, there is very little evidence that such relief is successful in increasing competition, raising industry output, and reducing prices to consumers. The exception turns out to be a case of overkill because the same results could have been obtained through a simple regulatory rule, obviating the need for vertical divestiture of AT&T.

Introduction

On June 7, 2000, Judge Thomas Penfield Jackson ordered that Microsoft be broken into two separate companies as the remedy for its monopolization of the market for Intel-based PC software. This ruling marked the first major antitrust divestiture since the 1982 consent decree that broke AT&T into seven operating companies and a long-distance/manufacturing company. It is also one of only a handful of examples of such a break-up of a firm whose growth has not been the result of a series of mergers. Given the size of Microsoft, its position in the U.S. economy, and the drastic nature of the relief ordered by the judge, this case could have a major impact on American consumers. Is there any evidence on the likelihood that such relief can work? In this paper I look at the historical record for such evidence.